Topics: Intellectual Property, creation and

protection
Intellectual property

Introduction
Many entrepreneurial firms have valuable intellectual property. In fact, virtually all businesses, including start-ups, have
knowledge, information, and ideas that are critical to their success. For at least three reasons, it is important for
businesses to recognize what intellectual property is and how to protect it. First, the intellectual property of a business
often represents its most valuable asset. Think of the value of the Facebook and Google trademarks, the Nike “swoosh”
logo, or the design of the Apple iPhone. All of these are examples of intellectual property, and because of intellectual
property laws, they are the exclusive properties of the firms that own them. Second, it is important to understand what
intellectual property is and how to protect it to avoid unintentional violations of intellectual property laws. For example,
imagine the hardship facing an entrepreneurial start-up if it selected a name for its business, heavily advertised that
name, and was later forced to change the name because it was infringing on a trademark. Finally, intellectual property
can be licensed or sold, providing valuable licensing income.
Importance of Intellectual property
Intellectual property is any product of human intellect that is intangible but has value in the marketplace. It is called
“intellectual” property because it is the product of human imagination, creativity, and inventiveness. Traditionally,
businesses have thought of their physical assets such as land, buildings, and equipment as their most important assets.
Increasingly, however, a company’s intellectual assets are the most valuable. In the case of MetroLeap Media, the
firm’s intellectual property consists of intangible assets such as its process for identifying trends in song lyrics (an
invention), its logo, and its Internet domain names. All these assets can provide a business with a competitive advantage
in the marketplace, and the loss of such assets can be just as costly (if not more so) to a business as the loss of physical
property or equipment.

Not all firms are as intellectual property savvy as MetroLeap Media. In fact, common mistakes that entrepreneurial
firms make are not properly identifying all their intellectual property, not fully recognizing the value of their intellectual
property, not using their intellectual property as part of their overall plan of success, and not taking sufficient steps to
protect it. These challenges are presented in Figure 12.1.(next slide) It can be difficult, however, to determine what
qualifies as intellectual property and whether it should be legally protected. Every facet of a company’s operations
probably owns intellectual property that should be protected. To illustrate this point, Table 12.1(6 th slide)provides
examples of the intellectual property that typically resides within the departments of midsize entrepreneurial firms.
The USPTO feels that small businesses are particularly susceptible to not being diligent enough in protecting
intellectual property because they frequently lack the resources and expertise available to large firms. As a result, the
USPTO has set up a Web site, www.uspto.gov/smallbusiness, to provide small businesses with information about
intellectual property protection. If you currently have what you believe may be a patentable idea, go to this Web site to
learn more about actions you may take to investigate this possibility.
Determining What Intellectual Property to Legally Protect?
There are two primary rules of thumb for deciding if intellectual property protection should be pursued for a particular
intellectual asset. First, a firm should determine if the intellectual property in question is directly related to its competitive
advantage. For example, Amazon.com has a business method patent on its “one-click” ordering system, which is a nice
feature of its Web site and is arguably directly related to its competitive advantage.

The second primary criterion for deciding if intellectual property protection should be pursued is to determine whether an
item has value in the marketplace. A common mistake that young companies make is to invent a product, spend a
considerable amount of money to patent it, and find that the market for the product does not exist or that the existing market
is too small to be worthy of pursuit.
 The Four Key Forms of Intellectual Property
1. Patents,
2. trademarks,
3. copyrights, and
4. trade secrets are the four key forms of intellectual property
Intellectual property laws exist to encourage creativity and innovation by granting individuals who risk their time and
money in creative endeavors exclusive rights to the fruits of their labors for a period of time. Intellectual property laws
also help individuals make well-informed choices. For example, when a consumer sees a Panera Bread restaurant, she
knows exactly what to expect because only Panera Bread is permitted to use the Panera Bread trademark for soups,
signature sandwiches, and bakery products.
One special note about intellectual property laws is that it is up to entrepreneurs to take advantage of them and to
safeguard their intellectual property once it is legally protected. Police forces and fire departments are available to
quickly respond if an entrepreneur’s buildings or other physical assets are threatened, but there are no intellectual
property police forces or fire departments in existence. The courts prosecute individuals and companies that break
intellectual property laws. However, the individual entrepreneur must understand intellectual property laws, safeguard
intellectual property assets, and initiate litigation if intellectual property rights are infringed upon or violated. There is a
government-sponsored Web site (www.stopfakes.gov) that provides information about how to file a complaint if a
business feels that a “knock off” product is infringing on its intellectual property. Increasingly, counterfeit goods are a
problem for firms that have spent considerable resources to brand their products in ways that create value for customers.
Counterfeit Callaway golf clubs and “fake” Louis Vuitton purses are examples of goods that counterfeiters target. Check
out the blog IP Law For Startups (www.iplawforstartups.com) to keep up to date on all aspects of intellectual property
law
1. Patents
A patent is a grant from the federal government conferring the rights to exclude others from making, selling, or using an
invention for the term of the patent. The owner of the patent is granted a legal monopoly for a limited amount of time.
However, a patent does not give its owner the right to make, use, or sell the invention; it gives the owner only the right to
exclude others from doing so. This is a confusing issue for many entrepreneurs. If a company is granted a patent for an
item, it is natural to assume that it could start making and selling the item immediately. But it cannot. A patent owner can
legally make or sell the patented invention only if no other patents are infringed on by doing so.

Patent protection has deep roots in U.S. history and is the only form of intellectual property right expressly mentioned in
the original articles of the U.S. Constitution. The first patent was granted in 1790 for a process of making potash, an
ingredient in fertilizer. The patent was signed by George Washington and was issued to a Vermont inventor named
Samuel Hopkins. Patents are important because they grant inventors temporary, exclusive rights to market their
inventions.
Since the first patent was granted in 1790, the USPTO has granted over 7 million patents including 233,127 in 2010 alone.
The number of patents granted in 2010 was 31 percent more than the number granted in 2009 and 29 percent more than
granted in 2007, the next busiest year for the USPTO. These data suggest that entrepreneurship in the United States
remains strong. Interestingly, the USPTO, the sole entity responsible for granting patents in the United States, is strained.
At the end of 2010, there were 1,245,574 patent applications pending, and it took an average of 35.3 months to get a
patent application approved. The USPTO has 6,255 full-time patent examiners to handle its patent caseload.
Types of Patents
There are three types of patents:
utility patents,
design patents, and
plant patents.

Utility patents
Utility patents are the most common type of patent and cover what we generally think of as new inventions. Of the
509,367 patent applications filed in 2010, 94 percent were for utility patents. Patents in this category may be granted to
anyone who “invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any
new and useful improvement thereof.” The term of a utility patent is 20 years from the date of the initial application. After
20 years, the patent expires, and the invention falls into the public domain, which means that anyone can produce and sell
the invention without paying the prior patent holder.

A utility patent cannot be obtained for an “idea” or a “suggestion” for a new product or process. A complete description of
the invention for which a utility patent is sought is required, including drawings and technical details. In addition, a patent
must be applied for within one year of when a product or process was first offered for sale, put into public use.
Recently, utility patent law has added business method patents, which have been of particular interest to Internet firms. A
business method patent is a patent that protects an invention that is or facilitates a method of doing business. Patents for
these purposes were not allowed until 1998, when a federal circuit court issued an opinion allowing a patent for a business
method, holding that business methods, mathematical algorithms, and software are patentable as long as they produce
useful, tangible, and concrete results.
Since 1998, the most notable business method patents awarded have been Amazon.com’s one-click ordering system,
Priceline.com’s “name-your-price” business model, and Netflix’s method for allowing customers to set up a rental list of
movies they want mailed to them or that they wish to download for streaming purposes. Activities associated with a
business method patent can be an important source of competitive advantage for a firm.

Design Patents
Design patents are the second most common type of patent and cover the invention of new, original, and ornamental
designs for manufactured products. Of the 509,367 patent applications filed in 2010, 5.6 percent were for design patents. A
design patent is good for 14 years from the grant date. While a utility patent protects the way an invention is used and
works, a design patent protects the way it looks. As a result, if an entrepreneur invented a new version of the computer
mouse, it would be prudent to apply for a utility patent to cover the way the mouse works and for a design patent to protect
the way the mouse looks. As long as each new design is considered by the USPTO to be novel and nonobvious, it is
eligible for design patent protection. This is not a trivial issue in that product design is increasingly becoming an important
source of competitive advantage for many firms producing many different types of products

Plant Patents
Plant patents protect new varieties of plants that can be reproduced asexually. While less than 1 percent of patent
applications filed in 2010 were for plant patents, these patents provide essential protection for companies specializing in
plant genetics and related areas. Plants that can be reproduced asexually are reproduced by grafting or crossbreeding rather
than by planting seeds. The new variety can be different from previous plants in its resistance to disease or drought or in
its scent, appearance, color, or productivity. Thus, a new color for a rose or a new type of hybrid vegetable would be
eligible for plant patent protection. The term for plant patent protection is 20 years from the date of the original
application.
Who Can Apply for a Patent?
Only the inventor of a product can apply for a patent. If two or more people make an invention jointly, they must
apply for the patent together. Someone who simply heard about the design of a product or is trying to patent
something that is in the public domain may not apply for a patent. There are notable exceptions to these rules. First, if
an invention is made during the course of the inventor’s employment, the employer typically is assigned the right to
apply for the patent through an assignment of invention agreement signed by the employee as part of the employment
agreement. A second exception is that the rights to apply for an invention can be sold. This option can be an important
source of revenue for entrepreneurial firms. If a firm has an invention that it doesn’t want to pursue on its own, the
rights to apply for a patent on the invention can be sold to another party.

The Process of Obtaining a Patent

Obtaining a patent is a six-step process, as illustrated in Figure 12.3 (14th slide) and as we discuss here. The costs
involved include attorney fees, fees for drawings (which are sometimes lumped together with the attorney fees), and
USPTO filing fees. For an individual or business with fewer than 500 employees, it costs about $1,300 in fees,
assuming the application is fairly standard and is successful. Attorney fees vary depending on the complexity of the
technology involved. An estimate of attorney fees to obtain a patent is provided in Table 12.4. The majority of
inventions independent inventors create range from relatively simple to moderately complex. Businesses are across
the board. For a high complex technology, such as a semiconductor product, the costs could substantially exceed
$15,000.
The six-step process for obtaining a patent is shown here.

Step 1 Make sure the invention is practical.

As mentioned earlier, there are two rules of thumb for making the decision to patent. Intellectual property that is worth
protecting typically is directly related to the competitive advantage of the firm seeking the protection or has
independent value in the marketplace.

Step 2 Document when the invention was made.

Put together a set of documents clearly stating when the invention was first thought of, dates on which experiments
were conducted in perfecting it, and the date it was first used and found to operate satisfactorily. Inventors should get in
the habit of filling out an “invention logbook” on a daily basis to record their activities. An invention logbook
documents the dates and activities related to the development of a particular invention. As soon as an inventor has an
idea for an invention, a complete description of the invention should be written down, sketches should be made of it,
and how it works should be described in detail. The inventor should then sign and date the documents and indicate that
he or she is the inventor. If possible, a notary or another party without a financial interest in the invention should
witness the inventor’s signature. This step is important because if two inventors independently develop essentially the
same invention, the right to apply for the patent belongs to the person who came up with it first. The United States
adheres to the first-to-invent rule rather than the first-to-file rule, meaning that the first person to invent an item or
process is given preference over another person who is first to file a patent application. If there is a dispute regarding
who was first to invent a product, the dispute is resolved in an administrative proceeding known as an interference that
a judge at the USPTO presides over.
Step 3 Hire a patent attorney.
It is highly recommended that an inventor work with a patent attorney. Even though there are “patent-it-yourself” books
and Web sites on the market, it is generally naïve for an entrepreneur to think that the patent process can be successfully
navigated without expert help. As an indication of the difficulty of writing a patent application, the USPTO requires all
attorneys and agents to pass a tough exam before they can interact with the agency on behalf of a client.

Step 4 Conduct a patent search.

To be patentable, an invention must be novel and different enough from what already exists. A patent attorney typically
spends several hours searching the USPTO’s database (which is available online at www.uspto.gov) to study similar
patents. After the search is completed and the patents that are similar to the invention in question have been carefully
studied, the patent attorney renders an opinion regarding the probability of obtaining a patent on the new invention.

Step 5 File a patent application.

The fifth step, if the inventor decides to proceed, is to file a patent application with the USPTO in Washington, D.C.
Applications can be filed electronically or by mail. Unlike copyright and trademark applications, which can be prepared
and filed easily by their owners, patent applications are highly technical and almost always require expert assistance.
Approximately 80 percent of inventors retain patent attorneys or agents to prepare and file their patent applications.
Step 6 Obtain a decision from the USPTO.
When the USPTO receives a patent application, it is given a serial number, assigned to an examiner, and then waits to
be examined. The patent examiner investigates the application and issues a written report (“Office Action”) to the
applicant’s patent attorney, often asking for modifications to the application. Most of the interactions that applicants
have with the USPTO are by mail. Occasionally, an inventor and a lawyer will meet face to face with a patent examiner
to discuss the invention and the written report. There is room to negotiate with the patent office to try to make an
invention patentable. Eventually, a yes-or-no decision will be rendered. A rejected application can be appealed, but
appeals are rare and expensive.

One provision of patent law that is particularly important to entrepreneurs is that the USPTO allows inventors to file a
provisional patent application for utility patents, pending the preparation and filing of a complete application. A
provisional patent application provides the means to establish an early effective filing date for a nonprovisional patent
application, and allows the term “Patent Pending” to be applied. There is often confusion regarding what a provisional
patent application is. It’s not a provisional patent—there is no such thing. It’s merely a provisional application for a
patent, and is used to establish an early filing date for a subsequently filed full utility patent. It can actually give an
entrepreneur a false sense of security if not filed correctly.
In some instances, entrepreneurs license their patents to larger firms, which have nationwide distribution channels to
market a product. In fact, consumer product companies like Procter &Gamble (P&G) and General Mills, which at one
time relied strictly on their own scientists to develop new products, now have formal programs for inventors and
entrepreneurs to submit product ideas, as illustrated in the “Partnering for Success” feature. The arrangements described
in the “Partnering for Success” feature represent a win-win for both inventors and larger firms. The inventor receives
distribution for his or her product and potential licensing income, and the large firm receives an innovative new product to
place in its distribution channels. One requirement most large firms have is that an idea must be patented or a patent must
be applied for before they will consider licensing it.
Patent Infringement

Patent infringement takes place when one party engages in the unauthorized use of another party’s patent. A typical
example of an infringement claim was that initiated by Alacritech, a start-up firm, which claimed that Microsoft violated
two of its patents on technology used to speed the performance of computers connected to networks. According to court
documents, Alacritech showed its technology to Microsoft, hoping that Microsoft would license it.

But Microsoft passed on the offer and later announced a surprisingly similar technology, called Chimney. Alacritech
again offered to license the technology to Microsoft but was rebuffed. In response, Alacritech filed suit against
Microsoft. Microsoft claimed that its technology was developed independently. After hearing the case, the U.S. District
Court in San Francisco sided with Alacritech and filed a preliminary injunction against Microsoft, preventing it from
shipping products that contained the contested technology. Later, the suit was settled out of court, with Microsoft
agreeing to license Alacritech’s technology.The tough part about patent infringement cases is that they are costly to
litigate, which puts start-up firms and their entrepreneurs at quite a disadvantage. While there is no way of knowing how
much it cost Alacritech to sue Microsoft, a typical patent-infringement suit, according to Fortune Small Business, costs
each side at least $500,000 to litigate.
Remaining types of intellectual
properties to be continued in the
next class