I’ve previously discussed many times what trademarks — which also include service marks (marks that identify a service rather than a product) and trade dress (the packaging or look of a product or service — think of the design, colors, and even uniforms, in every McDonald’s restaurant) — do. Although they are a right held by a person or entity engaging in commerce, they are intended to prevent confusion in consumers as to the source of a product or service. The Ford trademark is helpful because it lets you know that an automobile is manufactured by Ford Motor Company, and not another auto manufacturer. Therefore, one of the primary questions in any case of trademark infringement is whether any similarity in marks causes confusions for consumers — if a consumer is likely to believe that a product or service bearing a mark similar to a prior mark actually comes from the company that owns that prior mark, there is likely trademark infringement. It is important to again note that registration is not necessary for trademark ownership — a trademark is established by using the mark in commerce. Even without a registration, a company can assert legal rights to a trademark it uses. But registration offers several benefits, including access to the federal courts to assert a trademark infringement claim, statutory and other damages (rather than simply actual damages), nationwide ownership of the mark (rather than just the geographic area where the mark is used), notice to others of your ownership of the mark, and, after certain conditions are met, the incontestability of a mark. I’m sometimes asked what makes a good trademark. Made-up, nonsensical terms make the strongest trademarks — no one else is likely using a term that you’ve made up. Descriptive, generic terms make the weakest trademarks, and if they are too generic, may not be eligible for trademark protection at all. Calling your computer repair company “Fast Computer Repair” may not be eligible for trademark protection, since it merely describes the service. Like with all other forms of intellectual property, if a trademark holder does not take active steps to protect its mark, it may lose its protection. Trademark registration requires subsequent filings for a period after the initial registration to inform the Trademark Office that a mark is still in use. If a registered trademark holder fails to do that, or enforce its mark against other similar or confusing marks, it may lose the money and effort it has spent obtaining a trademark and registering it.
Lots of entrepreneurs feel the need to protect their business ideas and (what they feel are) their competitive advantages. As a result, whenever they go into meetings with people where they will have to discuss the details of their business, they feel it necessary to obtain a non-disclosure agreement beforehand. This often occurs in the context of meetings with investors, but it can also occur with other groups of professions such as attorneys (speaking from personal experience). The fact of the matter is that these entrepreneurs hell-bent on protecting their ideas are asking for NDAs at the wrong time and, frankly, can look a little amateurish for doing so. For example, there’s really no need to ask for a NDA from an attorney — attorneys are generally *required* by the ethical rules of their profession to keep the subject matter of discussions with clients confidential. An attorney isn’t interested in stealing a startup’s ideas, nor is an attorney willing to open themselves up to the risk of litigation in the event they end up working for a similar company. Absent a compelling reason, attorneys generally won’t sign NDAs because they are ultimately redundant, so please don’t ask us. Perhaps more importantly, it is largely becoming a faux paux to ask for a NDA prior to an initial meeting with an investor. Professional investors meet with dozens, hundreds, even sometimes thousands of entrepreneurs every year — some of these entrepreneurs’ business will be very similar to one another, and like attorneys, investors are not going to take the risk of litigation for a NDA violation by talking to someone with a substantially similar or identical business idea. And because investors may talk to numerous entrepreneurs, they have the luxury of refusing to speak with anyone who demands a NDA from the outset — there will be plenty more entrepreneurs who are happy to have an initial meeting without one. So when should you ask for a NDA? NDAs become useful when you actually have trade secrets to protect — these include formulas, software or other computer programs, product designs, or algorithms, and can also include business plans, supplier lists, customer lists, marketing plans, or finances. Trade secrets must not only be secret — that is, not publicly known or derivable from public information, but also provide value and/or competitive advantage to the trade secret holder *because* of their confidential nature. You can ask for a NDA when you begin disclosing the specifics of these types of information to an investor, which usually only occurs when a deal begins to seriously move forward. You don’t disclose the “secret sauce” of your business within the first couple of meetings with an investor, so there is little need for a NDA in the beginning. Once both sides begin to get serious about a deal, and once specifics start to be discloses, then might be the appropriate time to ask for a NDA.
Last week, the Massachusetts State Senate approved a proposal to modify the law regarding noncompete agreements. The bill would, among other things, render all noncompetes with a duration up to six months presumptively reasonable, while all noncompetes longer than six months would be presumptively unreasonable. Noncompetes limited to the geographic area where the employee worked or had “material presence or influences”, as well as limited to the type of services provided by the employee are also presumptively reasonable. The proposal also requires noncompetes to state that the employee has the right to counsel before signing, to be provided five days prior to hire or other formal offer, to have a 10-day waiting period before becoming effective, and must only be entered into to protect trade secrets, other confidential information, and goodwill. The proposal also permits courts to reform overbroad or unreasonable provisions as long as the provision was presumptively reasonable, or if the employer made reasonable efforts to draft a presumptively reasonable provisions; otherwise, the provision must be struck by the court. Noncompetes may also not choose another state’s law if the employee resides or works in Massachusetts. Noncompetes entered into as part of the sale of a business or in connection with severance/separation agreements, as well as “garden leave” agreements, are exempt from the bill’s definition of noncompetes. Perhaps most importantly, the bill also prohibits noncompetes for any employees who are non-exempt from the minimum wage and overtime requirements of the Fair Labor Standards Act, which would include most hourly employees. The bill now goes to conference committee between the Massachusetts House and Senate, although it remains to be seen whether the proposal or one substantially similar comes out of conference and is supported by Governor Deval Patrick, who had come out last year in favor of the abolition of noncompetes in the Commonwealth.
Entrepreneurs who are interested in protecting their startup’s trademarks should be aware that merely incorporating their company under the name they wish to have as a trademark does not necessarily mean that name is clear for a trademark. When you register a company with the state secretary, all the office is concerned with in regards to the company name is whether another company is registered with the state secretary under the same name. However, because there are fifty states, there could be fifty companies in the U.S. with the same name. That also does not include sole proprietorships, which normally only register at the municipal level. Therefore, while you might be able to incorporate under a particular name, someone else may have trademark rights to that name. Of course, two companies may hold rights to the same trademark — the famous example is of Apple Records, the Beatles’ record company, and Apple, the computer/consumer electronics company. Both companies use the “Apple” name in connection with a logo of an apple. Apple Records originally sued Apple for trademark infringement. Apple countered that no infringement was occurring, since the two companies operated in different industries. After several years of protracted litigation, the two companies ultimately settled by agreeing to respect each other’s trademarks as long as Apple Records did not enter the computer industry, and Apple did not enter the music industry (of course, when Apple launched the iPod and iTunes in 2001, it set off another round of conflict that lasted several years!) Trademarks can also be limited by geography, so that a local or state-wide business may only be able to claim a trademark within those boundaries. So before investing time and goodwill into a particular name, it is important to see if another company may have trademark rights to the name. Law firms and search companies can provide reports that identify trademark registrations, domain name registrations, company registrations, etc. However, if spending money on a search is not an option, even performing a thorough internet search may be able to give you a good idea of whether there are other users of the name, and whether you might have a conflicting trademark use.
Last year, the Supreme Court in Octane Fitness, LLC v. ICON Health & Fitness, Inc. changed the legal standard by which courts could grant fee-shifting in patent infringement cases, or the awarding of the attorneys’ fees of the prevailing party, pursuant to the Patent Act’s fee-shifting provision. Prior to Octane Fitness, the Act permitted courts to award fee-shifting in “exceptional” cases, although the Federal Circuit had defined an “exceptional” case as one that involved “material inappropriate conduct”, or was both “objectively baseless” and “brought in subjective bad faith”, and required parties seeking fee shifting to prove the exceptional nature of the case under this standard by “clear and convincing evidence”. The Court rejected this standard in Octane Fitness, holding that the fee-shifting statute in the Patent Act only imposed one constraint on courts — that the case be “exceptional”, which should be construed by its ordinary meaning of “uncommon” or “rare” — which means that the case should be one that simply stands out from others in regards to the strength of the party’s case, or in regards to the unreasonable manner in which the case is litigated. Courts could determine whether a case was “exceptional” based on the “totality of the circumstances” You may recall that a startup by the name of FindTheBest was sued by Lumen View Technology last year, and FTB’s CEO pledged to fight back with $1 million of his own money. FTB won the legal victory against Lumen in short order, with the court invalidating the patent in November of last year. However, FTB had already spent hundreds of thousand of dollars in legal fees, not to mention the time and money company executives had to spend to focus on the case. Fortunately, the court last week awarded FTB compensation from Lumen for FTB’s fees and costs in defending the suit. The court found that this was the prototypical “exceptional” case, noting Lumen’s structuring as a shell company, the voluminous litigation Lumen had been involved in over the past two years, the lack of due diligence performed by Lumen prior to initiating legal action, and their tactic of threatening expensive litigation and escalating settlement demands if FTB attempted to defend the suit, and finding that Lumen brought suit solely to extract a settlement from FTB, hoping that it would rather pay a smaller settlement than engage in costly litigation. Hopefully this case signals the beginning of the end of patent troll litigation. However, entrepreneurs shouldn’t take it as a green light to go ahead and fight every troll demand with the expectation that the court will award you your costs at the end. The court awarded costs in Octane Fitness because it was a prototypical “exceptional” case — Lumen had conducted minimal, if any, due diligence, and had a pattern of engaging in clear harassment through patent litigation. If anything, patent trolls are likely to be much more careful pursuing future litigation, including conducting better due diligence, reducing the aggressiveness and threatening nature of their settlement demands, and creating further corporate layers and shells to obfuscate the extent of their litigation activities. However, startups with the resources to fight a patent troll now may have a little more incentive to do so, knowing that there is the likelihood at the end of the fight of recouping those expenses.