Protecting The Idea and Other Legal Issues For The Entrepreneur

Chapter 06 – Protecting the Idea and Other Legal Issues for the Entrepreneur
Chapter 06
PROTECTING THE IDEA AND OTHER LEGAL
ISSUES FOR THE ENTREPRENEUR
LEARNING OBJECTIVES
01: To identify and distinguish intellectual property assets of a new venture including software and
websites.
02: To understand the nature of patents, the rights they provide, and the filing process.
03: To understand the purpose of a trademark and the procedure for filing.
04: To learn the purpose of a copyright and how to file for one.
05: To identify procedures that can protect a venture’s trade secrets.
06: To understand the value of licensing to either expand a business or start a new venture.
07: To recognize the implications of new legislation that affects board of directors and internal
auditing processes for public companies.
08: To illustrate important issues related to contracts, insurance, and product safety and liability.
6-1
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
CHAPTER OUTLINE AND TEACHING NOTES

OPENING PROFILE – Martin Floreani
Learning Objective 01
I. WHAT IS INTELLECTUAL To identify and distinguish intellectual
PROPERTY? property assets of a new venture
including software and websites.
A. Intellectual property, which includes patents,
trademarks, copyrights, and trade secrets, K EY
TER M
represents important assets to the entrepreneur.

Intellectual property
B. Because entrepreneurs often do not understand Any patents, trademarks, copyrights, or
intellectual property, they ignore steps that trade secrets held by the entrepreneur
should be taken to protect these assets.
II. NEED FOR A LAWYER

A. All business is regulated by law. Discussion point: The American Bar
Association (http://www.abanet.org)
1. The entrepreneur needs to be aware of offers links that may be helpful to a
regulations that affect the new venture. small business.
2. At different stages of company growth, the

entrepreneur will need legal advice.
3. The legal expertise required will vary based
on such factors as whether the new venture is
a franchise, an independent startup, or a
buyout etc.
B. The entrepreneur should carefully evaluate his or
her needs before hiring a lawyer.
6-2
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
III. HOW TO SELECT A LAWYER

A. Why Hire a Lawyer In the Press: Some general rules about
dealing with lawyers:
1. The entrepreneur does not usually have the 1. If you are being sued, it’s too late to
expertise to handle possible risks associated start looking for an attorney.
2. Larger law firms tend to charge
with difficult laws and regulations.
more, BUT they are likely to offer
2. A competent attorney is in a better position services in nearly all areas you might
need as you grow your business.
to understand all outcomes related to any
Some questions to ask your attorney or
legal action. yourself before selecting an attorney:
1. Are you experienced in small
B. Fees
businesses?
1. The lawyer may work on a retainer basis 2. Are you well-connected to be able
to refer me to another expert if
(stated amount per month) which provides
needed?
office and consulting time. 3. Do you have other clients in my
industry?
2. This does not include court time or other
4. Are you a good teacher?
legal fees. 5. Will you be flexible in your billing?
6. Does this person communicate A patent attorney may be hired as a
3. The lawyer may be hired for a one-time fee,
well? specialist to help obtain a patent.
i.e. filing for a patent. 7. Are the offices conveniently
located?
C. Choosing a lawyer is like hiring an employee—
8. Do I like this person?
the lawyer you work with should be someone to (Ennico, Cliff “How to Hire an Attorney”
whom you can relate personally. Entrepreneur January 20, 2006,
http://www.entrepreneur.com AS SEEN IN BUSINESS NEWS:
D. When resources are limited, the entrepreneur /howto/attorney/index.html) Can a Halloween Costume Actually
may offer the lawyer stock in exchange for his or Infringe on Someone’s Intellectual
her services. Property?
IV. LEGAL ISSUES IN SETTING UP THE

ORGANIZATION
6-3
A. Since there are many options an entrepreneur

can choose in setting up an organization, it will The form of organization as well as
franchise agreements are discussed in
be necessary to understand all the advantages
Chapters 09 and 14.
and disadvantages of each option.
B. Legal advice is necessary to ensure that the most
appropriate decisions have been made.
V. PATENTS
To understand the nature of patents, the
A. A patent is a contract between the government Discussion point: The United States rights they provide, and the filing
government offers information through process.
and an inventor.
their Patent and Trademark Office
1. The government grants the inventor website http://www.uspto.gov. K EY
TER M
exclusivity for a specified amount of time.
Patent
2. At the end, the government publishes the Grants holder protection from others
invention, and it becomes part of the public making, using, or selling a similar idea
domain.
3. The patent gives the owners a negative right,
preventing anyone from making, using, or
selling the invention.
B. Types of Patents
1. Utility Patents
a. A utility patent has a term of 20 years,
beginning on the date of filing with the
Patent and Trademark Office (PTO).
b. Patents on any invention requiring FDA
approval are extended by the amount of
6-4
time it takes the FDA to review the

Entrepreneur in Action: Chip Wilson
invention. started yoga in 1997 and decided that
c. Initial filing fees for a utility patent for a Lycra wasn’t made for “average people.”
From this observation sprung
small entity can vary $70 electronically Lululemon, a clothing design company
and $140 by mail. Additional fees exist specializing in yoga clothing. Seams are
depending on the number of claims made less chafing; hoodies have “pony-tail
holes.” There’s even an iPod pouch on
in the patent application. some versions. Many of their ideas are
d. The patent grants the owner protection trade-mark protected. (Anderson, Diane
“Stretching for Success” Business 2.0
from anyone making, using, and/or October 2006 pg. 58
selling the invention. http://money.cnn.com/magazines
/business2/business2_archive/
2. Design Patents 2006/05/01/8375911/index.htm)
a. Covering new, original, ornamental, and
unobvious designs for articles of
manufacture, a design patent reflects an
object’s appearance.
b. These are for a 14-year term and provide
a negative right, excluding others from
making, using, or selling an article
having the same ornamental appearance.
c. Initial filing fees are lower than for utility
patents - $90 for a small entity.
Examples are shoe companies such as
d. Although design patents have Reebok and Nike who are interested in
traditionally been viewed as useless, obtaining design patents as a means of
there has been renewed interest recently. protecting their ornamental designs.
3. Plant patents are issued under the same
6-5
provisions as utility patents and are for new

varieties of plants.
C. Patents are issued by the Patent and Trademark
Office (PTO).
1. This office also administers other programs
and many online services for the
entrepreneur, such as software for filing
patents and forms for trademarks and
In the Press: The USPTO offers
copyrights. extensive advice on how to apply for a
2. In 2011, the America Invents Act, designed patent.
1.Make sure your product isn’t infringing
to streamline the USPTO system, passed. on someone else’s patent.
3. The new legislation changed the system to a 2.Be prepared to establish the novelty of
your product.
first-to-file system that rewards firms that 3.Hire a patent attorney or agent.
can file quickly. 4.Consider patenting your method of
doing business.
D. International Patents https://www.uspto.gov/patent
1. The concerns over imitations and knock-offs
resulted in International Patenting become a
significant IP strategy for many startups.
2. The USPTO has established the Office of
International Patent Cooperation in order to
establish a more harmonized patent system.
3. Joint efforts between the USPTO and the
European Patent Office has established a
common classification process.
4. The Global Dossier allows applicants to have
6-6
one stop access for applications in five of the

largest patent offices in the world.
4. The major efforts by the USPO have been
with the European Patent Office, the Japan
Patent Office, and the Korean Patent Office.
K EY
E. The Provisional Application TER M
1. The entrepreneur should first file a Provisional Patent Application

The initial application to the U.S. Patent
provisional patent application to establish a
and Trademark Office providing
date of conception of the invention. evidence of first to market
2. The provisional application is consistent with
European procedures and can be critical In the Press: How different is different
when there is a foreign company involved in enough when it comes to obtaining
trademarks, patents, and copyrights?
the patent application.  For a trademark, the key is
4. In addition to the written material, drawings “likelihood of confusion.” If someone
sees your mark, are they likely to
may be included, if deemed necessary to think it’s some other firm’s mark?
understand the invention.  With copyrights, there are two
considerations. First, have you
5. The actual filing of the patent in its final
borrowed so much that the original is
form must occur no later than 12 months not worth reading for more
after the provisional disclosure document if information? Second, is your work
based on someone else’s work
filed.
commonly known as “derivative”
F. The Patent Application (e.g., a sequel)? The copyright
holder has the rights to his/her
1. The patent application must contain a original and all derivative works.
complete history and description of the  For a patent, are the claims in your
work essentially equal to someone
invention as well as claims for its usefulness.
else’s patent?
2. The application is divided into sections: (Monosoff, Tamara “Top Legal FAQs for
Inventors” Entrepreneur July 10, 2006
6-7
a. The Introduction Section contains the http://www.entrepreneur.com/

startingabusiness/inventing/
background and advantages of the inventionscolumnisttamaramonosoff
invention and the nature of problems it /article159562.html)
overcomes.
b. Description of Invention Section
i. This section contains a brief
description of the drawings, which
must comply with PTO
requirements.
ii. A description of the invention
Entrepreneur in Action: AutoCart is
follows, including engineering making shopping more automated.
specifications, materials, and They have set up a drive-through
components. superstore. Customers place their
orders online, by phone or onsite using
c. Claims Section. a touch screen. Merchandise travels by
high speed conveyor to a consolidating
i. Claims are the criteria by which any zone. The products are delivered to the
infringements will be determined. car by conveyor belt where the
consumer pays and leaves without
ii. Essential parts of the invention ever setting foot in the store. (Flight,
should be described in broad terms. Georgia “A Speedier Superstore”
Business 2.0 December 2005, pg. 38
iii. The claims must not be so general http://money.cnn.com/magazines
that they hide the invention’s /business2/business2_archive/
uniqueness and advantages. 2005/12/01/8364582/index.htm)
3. The application should contain a declaration A current (2018) search for AutoCart
signed by the inventor. finds nothing. With most larger stores
offering curbside pickup now, this
4. When the application is sent, the status of the concept is no longer needed.
invention becomes “patent pending,”
6-8
providing complete confidential protection

until the application is approved.
5. A carefully written patent should provide
protection and prevent competitors from
working around it, but is also an invitation to
sue or be sued if there is any infringement.
6. The fees for filing an application will vary,
depending on the patent search and on claims
made in the application.
7. Applicants may also file online using
the EFS web service provided by the PTO. Figure 6.1
G. Patent Infringement “Options to Avoid Infringement”
Illustrates the steps needed to follow
1. The entrepreneur must be sensitive about when considering marketing a product
whether they are infringing on someone that may infringe on an existing patent.
else’s patents.
2. Many inventions are the result of
Table 6.1
improvements in existing products. “Checklist for Minimizing Patent Risks”
a. Copying and improving a product may be A simple checklist to follow to minimize
any patent risks.
legal and a good business strategy.
b. If copying and improving is impossible,
it may be possible to license the product
from the patent holder.
3. To ascertain the existence of a patent, the
entrepreneur can use the Internet.
a. If there is possible infringement on an
6-9
existing patent, consider licensing.

b. If in doubt, hire a patent attorney.
VI. BUSINESS METHOD PATENTS

A. With the growth of Internet use and software
development has emerged the use of business
method patents.
1. Amazon.com owns a business method patent
for the single click buying feature to order
products on its website.
2. Priceline.com claims it holds a patent to a
service where a buyer can submit a price bid
for a particular service.
B. Many firms have used these patents to assault
competitors and provide a stream of royalties.
C. The PTO has changed the review process for
business method patents and reviews are now
conducted by the Patent Trial and Appeal Board.
D. The growth of the use of tablets and smartphones
has necessitated these changes.
See Chapters 07 and 08 to understand

VII. STARTUP WITHOUT A PATENT
the competitive environment.
A. Not all startups will have a product or concept Learning Objective 03
To understand the purpose of a
that is patentable
trademark and the procedure for filing.
B. Using a unique marketing plan and striking Discussion point: Present a dozen or
so trademarks from products. Select
6-10
early may provide a competitive advantage. “obvious” ones (Nike Swoosh, K EY

TER M
McDonald’s golden arches) to less
VIII. TRADEMARKS obvious (airline logos, perhaps). See
Trademark
which ones they can identify. The same
A. A trademark may be a word, symbol, design, or can be done for protected advertising
A distinguishing word, name, or symbol
used to identify a product
some combination which identifies the source or tag lines (“Just do it”).
sponsorship of certain goods.
1. A trademark can last indefinitely, as long as
Discussion point: Marketing News lists
it continues to perform its indicated function.
the best known brand names,
Trademark examples are the red tab
a. Trademarks now are given an initial 10- advertising icons, symbols, etc. and
attached to the left rear pocket of Levi
estimates the value of these brands.
year registration with 10-year renewable Strauss jeans, the Dutch Boy is
These lists are published irregularly,
terms. data is never more than a year or so old.
recognized in paints, the McDonald’s
arch is internationally recognized in the
Other marketing or advertising
b. In the fifth to sixth year, the registrant fast food industry, the roar of a lion
publications often do the same. Forbes
must file an affidavit with the PTO has a list of brands and their values for
identifies the motion pictures of Metro-
Goldwyn-Mayer, and the apple with a bit
indicating that the patent is in 2018.
missing is well recognized with Apple
commercial use. Computer.
c. If no affidavit is filed, the registration is

canceled. Between the ninth and tenth
year after registration, and every 10 years
thereafter, the owner must file an
application for renewal of the trademark.
Otherwise, the registration is canceled.
d. Trademark law allows filing a trademark
solely on the intent to use the trademark
in interstate or foreign commerce.
e. There are benefits to registering a mark
that has already been in use.
6-11
B. Registering the Trademark

1. The PTO is responsible for federal
registration of trademarks.
Table 6.2
2. To file, the entrepreneur must complete a “Benefits of a Registered Trademark”
downloadable form, submitted by mail or Table 6.2 summarizes the benefits of
registering a trademark.
filed electronically using the TEAS available
on the PTO website.
Entrepreneur in Action: Can you
3. Filing of the trademark registration involves brand a commodity item? Niman Ranch
four requirements: has found a way to brand beef. They
follow several other notables that
a. Completion of the written form. branded “unbrandable” items. Ever
b. A drawing of the mark. heard of Evian water, Tiffany glass, Intel
semi-conductors, or Chiquita bananas?
c. Five specimens showing actual use of the (Kaihla, Paul “Marketing designer meat”
mark. Business 2.0 April 2006, pg. 72
http://money.cnn.com/magazines
d. The fee. /business2/business2_archive/
2006/04/01/8372802/index.htm)
4. An examining attorney at the PTO
determines whether the mark is suitable for
registration.
5. Once accepted, the trademark is published in
the Trademark Official Gazette to allow any
party 30 days to oppose.
6. If the trademark is refused, the entrepreneur
still has the right to appeal to the PTO.
7. If no opposition is filed, the registration is
issued.
6-12
8. The entire process usually takes about 13

months from the initial filing.
Discussion point: The United States Learning Objective 04
IX . COPYRIGHTS
Copyright Office can be found at To learn the purpose of a copyright and
A. A copyright protects original works of http://www.copyright.gov how to file for one.
authorship.
1. The protection does not protect the idea K EY
TER M
itself.
Copyright
2. It allows someone else to use the idea in a Right given to prevent others from
different manner. printing, copying, or publishing any
original works of authorship
B. Online Issues
1. The copyright law has become especially
relevant because of the tremendous growth In the Press: Cilija, a chain of pizza
parlors in Lithuania and Latvia has
of the use of the Internet especially to AS SEEN IN BUSINESS NEWS:
applied for a copyright on the scent of
download music, pictures, and videos. fresh-baked pizza. No word yet as to
Music Streaming and Copyright
Protection: Where Are We Headed?
whether they’ll get it, but for publicity
2. The music streaming business has been
power, the ploy was undeniably good.
particularly relevant in any discussion of (Anonymous “Lithuanian Restaurant
copyright protection. However, social media Seeks to Copyright Special Scent.”
Marketing News June 15, 2006, pg. 13
has become a copyright issue.
http://www.marketingpower.com/
a. Every social media can be considered a resourceLibrary/MarketingNews/Pages/
2006/40/11/21147265.aspx)
type of publication.
b. With businesses using social media,
needed protection may be more relevant.
c. It may be difficult to copyright a Tweet
but Facebook postings by businesses may
6-13
be considered original works.

3. Copyright protection related to the Internet
will continue to be a concern until precedents
and regulations are made clear.
C. Copyrights are registered with the Library of
Congress and usually requires no attorney.
1. All that is needed is the application, two
copies of the work, and the $35 fee if filed
online or $45 if filed by mail.
2. The term of the copyright is the life of the
author plus 70 years.
D. In some instances, several forms of protection
may be available. For example: the name of the
board game may be protected by trademark, the
game itself protected by utility patent, the board
protected by a copyright, and the playing pieces
covered by a design patent.
X. TRADE SECRETS AND
To identify procedures that can protect a
NONCOMPETITION AGREEMENTS venture’s trade secrets.
A. In certain instances, an entrepreneur may prefer K EY

to maintain an idea or process as confidential TER M
and to sell or license it as a trade secret. Trade secret

1. Noncompete agreements are documents Protection against others revealing or
disclosing information that could be
prepared by an employer and signed by an damaging to business
6-14
employee.
2. The agreement is signed in order for the
company to protect valuable assets ranging
Table 6.3
from product information to clients, “A Simple Trade Secret Nondisclosure
marketing ideas and unique strategies. Agreement”
B. A trade secret is not covered by federal law but

is recognized under common laws in each state.
1. Employees may be asked to sign a
confidential information agreement.
2. The holder of the trade secret has the right to
sue any signee who breaches the agreement.
ETHICS
C. How much information to give to employees is Noncompete Agreements:
determined by the entrepreneur’s judgment. Do Employees
Have An Ethical
1. Historically, entrepreneurs tended to restrict Responsibility To
access to confidential information. Restrain From Revealing Trade
Secrets To A New Employer?
2. Today there is a tendency to share more
information with employees, to make them
more effective and creative.
D. Non-protected ideas could become a serious
problem in the future unless the entrepreneur
takes proper precautions.
E. To maintain secrecy:
1. Train employees to refer sensitive questions
to one person.
6-15
2. Provide escorts for all office visitors.

3. Avoid discussing business in public places.
4. Keep important travel plans secret.
5. Control information that might be presented
by employees at conferences or in journals.
6. Use simple security such as locked file
cabinets, passwords, and shredders.
7. Have employees and consultants sign non-
disclosure agreements.
8. Debrief departing employees on any
confidential information.
9. Avoid faxing any sensitive information.
10. Mark documents “confidential” when
needed.
F. Protection against the leaking of trade secrets is
difficult to enforce, and legal action can be taken
only after the secret has been revealed.
G. A few good points are worth considering when
preparing a noncompetition agreement:
1. Determine if the employee can harm the
company if he or she left.
2. Hire a competent labor law attorney to make
sure the agreement is fair and can be
enforced.
6-16
3. Provide incentives for the employee at hiring

for signing a noncompete agreement.
4. Specify what is included in the noncompete
information.
5. Consider other options besides a
noncompete, such as nonpiracy or non-
disclosure documents.
XI. LICENSING
To understand the value of licensing to
A. Licensing is an arrangement between two either expand a business or start a new
venture.
parties, where one party has proprietary rights
over some information process or technology In the Press: Movies have a habit for K EY
TER M
protected by a patent, trademark, or copyright. shutting down fan sites – which usually
have a lot of protected contents –
1. This requires the licensee to pay a royalty to pictures, graphics, plots, dialog, etc.
Licensing
Contractual agreement giving rights to
the holder of the proprietary rights in They have a good reason for doing so:
others to use intellectual property in
(licensor) return for permission to copy the they can, instead, license this same
return for a royalty or fee
information and make quite a bit of
patent, trademark, or copyright. money. When Lord of the Rings was
2. Licensing has significant value as a about to be released, Gordon Paddison,
a senior vice president of New Line
marketing strategy to holders of patents. Cinema, decided to co-operate with
B. Procedure these sites. Now many films are selling
based on their prerelease Internet hype
1. A patent license agreement specifies how the – or viral marketing as it is often called.
licensee would have access to the patent. (Weingarten, Marc “Get Your Buzz to
Breed Like Hobbits” Business 2.0
2. The agreement must be carefully worded and January 2002, pg. 96)
should involve a lawyer.
C. Licensing a trademark generally involves a
6-17
franchising agreement.
1. The entrepreneur operates a business using
the trademark and agrees to pay a fixed sum
Entrepreneur in Action: In 1998, Mike
for use of the trademark. Becker resurrected the bobblehead and
2. The franchisee also pays a royalty based on Wacky Wobblers was born. His success
is based on being able to license a
sales volume, buys supplies from the
character such as Big Boy (from the Big
franchiser, or some combination of these. Boy Restaurant chain), Bozo the Clown,
Lucky Charms, and Pink Panther. His
D. Copyrights are also popular licensed property.
biggest coupe? Getting the licensing
1. They involve the right to use or copy books, rights to Austin Powers. (Anonymous
“Got ID” Entrepreneur November 2002
software, music, photos, and plays.
www.entrepreneur.com/article/56270)
2. Celebrities will often license the right to use
his or her name or image in a product.
3. Licensing is also popular around special
sports events such as the Olympics.
4. Licensing represents opportunities for many Microsoft and IBM continue to generate
firms to expand into new markets, expand significant revenues from its licensing
strategies.
product line, or simply reach more customers
within its existing target markets.
5. Disney is by far the world leader in
licensing.
E. Benefits
1. Licensing can increase revenues, without the
risk and costly startup investment.
2. Licensing can also be a way to start a new
venture when the idea may infringe on
6-18
someone else’s patent.
XII. PRODUCT SAFETY AND LIABILITY
To illustrate important issues related to
A. The Consumer Product Safety Act, passed in contracts, insurance, and product safety
and liability.
1972, amended in 1990 and again in 2008,
created a five-member commission that has the K EY
TER M
power to prescribe safety standards for products.
Product safety and Liability
1. Large fines and recalls of any products that Responsibility of a company to meet any
are deemed unsafe are the typical outcome of legal specifications regarding a new
any action enforced by the commission. product covered by the Consumer
Product Safety Act
2. McDonald’s had to recall 33 million StepIT
wristbands due to skin irritation or burns to
children and IKEA had to recall 27 million
children’s dressers that easily tipped over
causing the death of two children.
3. Entrepreneurs must be aware of the threats of
these recalls, especially with any high-risk
products. Food and toys especially should be
evaluated prior to any development.
XIII. INSURANCE
A. The entrepreneur should purchase insurance in
the event that problems do occur.
Discussion point: Consider bringing in
Table 6.4
B. Most firms should consider coverage in specific an insurance agent who insures small
“Types of Insurance and Possible
business to talk more about this topic.
areas as a means of managing risk in the Coverage”
business. Most firms should consider coverage for
situations described in Table 6.4.
6-19
1. Some insurance, such as disability and

vehicle coverage, is required by law and
cannot be avoided.
2. There have been many changes to the
Affordable Care Act of 2010 and should be
reviewed carefully before deciding on an
insurance plan or program.
3. Advice and information on insurance is
available at universities or the Small
Business Administration.
XIV. SARBANES-OXLEY ACT
To recognize the implications of new
A. After many reports of corporate misconduct, legislation that affects board of directors
Congress passed the Sarbanes-Oxley Act in 2002 and internal auditing processes for
public companies.
and amended it in 2010.
1. Although it provides greater control over
financial activities of public companies, it
has created some difficulties for small
businesses and startups.
2. Recently, Congress provided some relief for
small businesses by making them exempt In the Press: Deloitte offers these 10
threats to Sarbanes-Oxley compliance:
from section 404 requiring them to attest to
1 Lack of a firm-wide, top
the soundness of the firm’s internal controls management driven internal
and financial statements. control system.
2 Lack of a formal program.
3. The law contains many provisions not 3 Inadequate controls.
covered here, but an overview of the law’s 4 Ineffective post-merger integration.
5 Lack of effective controls over IT.
6-20
requirements is provided. 6 Ineffective financial reporting.

7 Lack of forma control over financial
a. CEOs are required to vouch for financial closing.
statements through a series of internal 8 Lack of current, consistent,
complete accounting policies.
control mechanisms and reports. 9 Inability to evaluate and test
b. Directors must meet background controls over outsourced
processes.
requirements and responsibilities 10 Inadequate board and audit
regarding internal auditing and control. committee understanding of risk
and control.
c. Any attempt to influence the auditor or (From a “Sarbanes-Oxley Section 404”
impede the internal auditing process booklet provided by Deloitte Touche
would be considered a criminal act. Tohmatsu (2004)
http://www.deloitte.com/us/tenthreats#)
3. There is some concern that this law will
discourage qualified individuals from being
members of important boards.
4. Foreign companies that trade on U.S. stock
exchanges have been forced to delist because
the provisions of the law conflicted with the
laws of that foreign country.
5. Private companies were not included in this
act, but are subject to control if they consult
to public companies.
6. The other option is for the entrepreneur to set
up a board of advisors instead of an extended
board of directors.
XV. CONTRACTS
To illustrate important issues related to
6-21
A. A contract is a legally enforceable agreement contracts, insurance, and product safety

and liability.
between two parties as long as certain conditions
are met. K EY
TER M
B. Often, business deals are informal, concluded

with a handshake. Contract
A legally binding agreement between
1. When things are going smoothly, this two parties
procedure is sufficient.
2. If there are disagreements, the entrepreneur
may find that there is no deal and that they
Table 6.5
may be liable for something never intended. “Contract Conditions and Results of a
3. Never rely on a handshake if the deal cannot Breach of Contract”
Table 6.5 identifies conditions and
be completed within one year. outcomes should one party not live up to
the terms of the contract.
4. The courts insist that a written contract exist
for all transactions over $500.
C. The safest way to conduct business deals is with
a written contract.
1. Any deal involving real estate must be in
writing to be valid.
2. Leases, rentals, and purchases all need
written agreements.
D. It is helpful for the entrepreneur to understand
that before signing a contract he or she should do
the following:
1. Understand the terms and conditions in the
contract.
6-22
2. Cross out anything that you do not agree to.

3. Do not sign if there are blank spaces (these
can be crossed out).
4. Make a copy for your files after signing.
XVI. IN REVIEW: SUMMARY.

See “Learning Objectives Revisited” below.
6-23
LEARNING OBJECTIVES REVISITED
Learning Objective 01: To identify and distinguish intellectual property assets of a new
venture including software and websites.
● Intellectual property includes patents, software, websites, trademarks,
copyrights, and trade secrets.
● These represent important assets.
Learning Objective 02: To understand the nature of a patent, the rights they provide,
and the filing process.
● A patent is a contract between the government and an inventor.
● The government grants the inventor exclusivity for a specified amount of
time.
● The patent gives the owners a negative right, preventing anyone from
making, using, or selling the invention.
● There are three types of patents: utility patents, design patents, and plant
patents.
● The patent application must contain a complete history and description of
the invention as well as claims for its usefulness.
● The application includes: the introduction section, description of invention
section, and claims section.
● When the application is sent, the status of the invention becomes “patent
pending,” providing protection until the application is approved.
● The entrepreneur must be sensitive about whether he or she is infringing
on someone else’s patent.
● With the growth of Internet use and software development has emerged
the use of business method patents.
Learning Objective 03: To understand the purpose of a trademark and the procedure
for filing.
● A trademark may be a word, symbol, design, or some combination which
identifies the source of certain goods.
6-24
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
● A trademark can last indefinitely, as long as it continues to perform its

indicated function.
● To file, the entrepreneur must complete the application form, including the
four basic requirements.
● An examining attorney at the PTO determines whether the mark is suitable
for registration.
● Once accepted, the trademark is published in the Trademark Official
Gazette to allow any party 30 days to oppose.
● If no opposition is filed, the registration is issued.
Learning Objective 04: To learn the purpose of a copyright and how to file for one.
● A copyright protects original works of authorship.
● Although software was added to copyright law in 1980, there are
continuing issues regarding access to materials on the Internet.
● Copyrights are registered with the Library of Congress.
● The term of the copyright is the life of the author plus 70 years.
Learning Objective 05: To identify procedures that can protect a venture’s trade
secrets.
● Train employees to refer sensitive questions to one person.
● Provide escorts for all office visitors.
● Avoid discussing business in public places.
● Keep important travel plans secret.
● Control information presented by employees at conferences or in journals.
● Use simple security such as locked file cabinets and shredders.
● Have employees and consultants sign non-disclosure agreements.
● Debrief departing employees.
● Avoid faxing and emailing any sensitive information.
● Mark documents “confidential” that need to be.
Learning Objective 06: To understand the value of licensing to either expand a

business or start a new venture.
6-25
● Licensing is an arrangement between two parties, where one party has

proprietary rights protected by a patent, trademark, or copyright.
● Licensing a trademark generally involves a franchising agreement.
● Licensing can increase revenues, without the risk and costly startup
investment.
● It can be a way to start a new venture when the idea may infringe on
someone else’s patent.
Learning Objective 07: To recognize the implications of new legislation that affects
board of directors and internal auditing processes for public
companies.
● After many reports of corporate misconduct, Congress passed the
Sarbanes-Oxley Act.
● CEOs are required to vouch for financial statements.
● Directors must meet background requirements and responsibilities
regarding internal auditing and control.
● Any attempt to influence the auditor or impede the internal auditing
process would be considered a criminal act.
● There is some concern that this law will discourage qualified individuals
from being members of important boards.
Learning Objective 08: To illustrate important issues related to contracts, insurance,

and product safety and liability.
● The entrepreneur should purchase insurance in the event that problems do
occur.
● Most firms should consider coverage in specific areas as a means of
managing risk in the business.
● Any new product should be assessed as to whether it falls under the
Consumer Product Safety Act.
● A contract is a legally enforceable agreement between two parties as long
as certain conditions are met.
 The safest way to conduct business deals is with a written contract,
although oral contracts are legal and enforceable.
 There are four essential items that provide legal protection.
6-26
 Understand the terms and conditions in the contract.

 Cross out anything that you do not agree to.
 Do not sign if there are blank spaces.
 Make a copy of the files after signing.
KEY TERMS
Contract: A legally binding agreement between two parties

Copyright: Right given to prevent others from printing, copying, or publishing any
original works of authorship
Intellectual property: Any patents, trademarks, copyrights, or trade secrets held by the
entrepreneur
Licensing: Contractual agreement giving rights to others to use intellectual property in
return for a royalty or fee
Patent: Grants holder protection from others making, using, or selling a similar idea
Product safety and liability: Responsibility of the company to meet any legal
specifications regarding a new product covered by the Consumer Product Safety Act
Provisional patent application: The initial application to the U.S. Patent and Trademark
Office providing evidence of first to market
Trademark: A distinguishing word, name, or symbol used to identify a product
Trade secret: Protection against others revealing or disclosing information that could be
damaging to business
RESEARCH TASKS AND CLASS DISCUSSIONS
The text includes several topics for student research and class discussions. These are open-
ended questions and the answers will differ for each student. There are no “correct” answers.
Research tasks:
1. Using the Internet, obtain copies of three patents that are at least three
years old. What are the elements that are common across these patents?
What are the differences? Which do you believe will be the greatest
success? Can you find any evidence of products that are now on the
market that incorporate any of these patented technologies?
6-27
2. Search press reports for patent infringement cases. Describe the process
and the outcome. Of particular value are examples that list the legal costs
of defending patent infringements and the amount awarded for a
successful defense.
3. What are some of the world’s most famous trademarks? Use data to back
up your answer.
4. Provide a real-life example for each of the following different types of
product liability: (a) negligence, (b) warranty, (c) strict liability, and (d)
misrepresentation. When possible, report both the details and the payouts.
5. Identify five major sources of support for an entrepreneur in an application
for a patent.
Class Discussions
1. Provide three examples of situations where a noncompete agreement would be
necessary. In each of these three examples what should be included in the
noncompete agreement to protect the venture?
Answer:
Employees involved in working with an idea or process may be asked to
first sign a noncompete agreement. Well-written agreements will hold up
in court if they are fair to all parties and have a reasonable duration and
geographic coverage. Following are few points to be noted while
preparing a noncompetition agreement:
a) Determine if the employee can harm the company if he or she left.
b) Hire a competent labor law attorney to make sure the agreement is
fair and likely to be enforced.
c) Specify what is included in the noncompete such as client lists,
confidential software code, or product information, and
d) Consider other options besides a noncompete such as a non-piracy
or nondisclosure of confidential information.
2. What are the major issues in the constant battle over music streaming rights?
How do you think these issues should be resolved?
Answer:
The discussion should focus on the fact that the protection in a copyright
does not protect the idea itself, and thus it allows someone else to use the
6-28
idea or concept in a different manner. Copyright protection related to the

Internet will continue to be a gray area until regulations are made clearer.
3. To what extent should the government be involved in creating and enforcing

safety laws and to what extent should companies (and industries) be
responsible for creating their own standards and self-policing those standards?
Answer:
In general most firms should consider coverage for various situations such
as casualty, life, and compensation among others. According to the
government, the company is responsible for regulating safety or health
measures.
6-29

Protecting The Idea and Other Legal Issues For The Entrepreneur

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Protecting The Idea and Other Legal Issues For The Entrepreneur

Uploaded by

Copyright:

Available Formats

Chapter 06 – Protecting the Idea and Other Legal Issues for the Entrepreneur

05: To identify procedures that can protect a venture’s trade secrets.

CHAPTER OUTLINE AND TEACHING NOTES

represents important assets to the entrepreneur.

II. NEED FOR A LAWYER

2. At different stages of company growth, the

III. HOW TO SELECT A LAWYER

IV. LEGAL ISSUES IN SETTING UP THE

A. Since there are many options an entrepreneur

time it takes the FDA to review the

3. Plant patents are issued under the same

provisions as utility patents and are for new

one stop access for applications in five of the

1. The entrepreneur should first file a Provisional Patent Application

a. The Introduction Section contains the http://www.entrepreneur.com/

providing complete confidential protection

existing patent, consider licensing.

VI. BUSINESS METHOD PATENTS

See Chapters 07 and 08 to understand

early may provide a competitive advantage. “obvious” ones (Nike Swoosh, K EY

c. If no affidavit is filed, the registration is

B. Registering the Trademark

8. The entire process usually takes about 13

be considered original works.

A. In certain instances, an entrepreneur may prefer K EY

and to sell or license it as a trade secret. Trade secret

B. A trade secret is not covered by federal law but

2. Provide escorts for all office visitors.

3. Provide incentives for the employee at hiring

someone else’s patent.

1. Some insurance, such as disability and

requirements is provided. 6 Ineffective financial reporting.

A. A contract is a legally enforceable agreement contracts, insurance, and product safety

B. Often, business deals are informal, concluded

2. Cross out anything that you do not agree to.

XVI. IN REVIEW: SUMMARY.

LEARNING OBJECTIVES REVISITED

● A trademark can last indefinitely, as long as it continues to perform its

Learning Objective 06: To understand the value of licensing to either expand a

● Licensing is an arrangement between two parties, where one party has

Learning Objective 08: To illustrate important issues related to contracts, insurance,

 Understand the terms and conditions in the contract.

Contract: A legally binding agreement between two parties

RESEARCH TASKS AND CLASS DISCUSSIONS

idea or concept in a different manner. Copyright protection related to the

3. To what extent should the government be involved in creating and enforcing

You might also like