Chapter 6

Protecting the idea and other legal issues for

the entrepreneur

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What is Intellectual Property?
It includes patents, trademarks, copyrights, and trade
secrets.
These represents important assets to the entrepreneur.
Intellectual property should be understood even before
engaging the services of an attorney.

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How to Select a Lawyer
An entrepreneur needs to be aware of any regulations
that may affect a venture.
A lawyer may work on a fee basis or may be hired for a
one-time fee.
A good working relationship with a lawyer:
Eases some of the risk in starting a new business.
Gives the entrepreneur necessary confidence.
Entrepreneur can offer the lawyer stock in exchange for
services.

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Patents
Patent - Grants holder protection from others making,
using, or selling similar idea; issued by the Patent and
Trademark Office (PTO).
Utility patent – Protection of new, useful, and
unobvious processes, machines, compositions of matter,
and articles of manufacture; term of 20 years.
Design patent – Covers new, original, ornamental, and
unobvious designs for articles of manufacture; term of 14
years.
Plant patent - Given for new varieties of plants.

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 Patents (cont.)

International Patents
The Patent Cooperation Treaty (PCT) was established to
facilitate patent filings in multiple countries in one office.
It is administered by the World Intellectual Property
Organization (WIPO) in Geneva, Switzerland; has over
100 participants.
It provides a preliminary search that assesses whether the
filing firm will face infringements in any country.
Differences may exists in the patent laws of each of these
countries.

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 Patents (cont.)

The Provisional Application

It is the initial application to the PTO providing evidence
of first to market.
Replaces the disclosure document that was previously
accepted by the PTO.
Gives the rights to the patent based on the concept of
first to file.
The actual filing of the patent in its final form must occur
no later than 12 months after the provisional disclosure
document if filed.

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 Patents (cont.)

The Patent Application

Introduction – Consists of the background and
advantages of the invention, the problems that it
overcomes, and how the invention differs from existing
offerings.
Description of invention – Includes a detailed
description of the invention and of the drawings that
accompany it.
Claims - Specify what the entrepreneur is trying to
patent.
The application should contain a declaration signed by
the inventor(s).

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 Patents (cont.)

Patent Infringement
Many businesses, inventions, or innovations are results of
improvements on, or modifications of, existing products.
Copying and improving on a product may be perfectly
legal and a good business strategy.
If patent infringement is unavoidable, the entrepreneur
may try to license the product from the patent holder.
It is advisable to hire a patent attorney to ensure there is
no possibility of infringement.

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Business Method Patents
The growth of Internet use and software development
has given rise to business method patents.
Firms use these patents to attack competitors and
subsequently provide income from royalties or
licensing fees.
Concerns have evolved regarding these patents.
Not all start-ups will have a product or concept that is
patentable.

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Trademarks
A distinguishing word, name, or symbol used to
identify a product.
It can last for an indefinite period.
It can be filed solely on the intent to use the trademark in
interstate or foreign business; also with the intent to use
in the future.
Categories:
 Coined marks.
 Arbitrary marks.

 Suggestive marks.

 Descriptive marks.

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 Trademarks (cont.)

Registering the Trademark

Filing must meet four requirements:
 Completion of the written form.
 A drawing of the mark.

 Five specimens showing actual use of the mark.

 The fee.

Initial determination of suitability takes 3 months.

Objections must be raise within six months, or
application is considered abandoned.
The entrepreneur has the right to appeal in case of
refusal.
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Trademarks (cont.)

Once accepted, trademark is published in the Trademark

Official Gazette to allow any party 30 days to oppose or
request an extension to oppose.
Registration is issued if no opposition is filed.
Procedure takes about 13 months from initial filing.

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Table 6.2 - Benefits of a
Registered Trademark

Table 6.2 6-13

Copyrights
Right given to prevent others from printing, copying,
or publishing any original works of authorship.
Issues surrounding access to material on the Internet
have led to major legal battles for the entertainment
industry.
Copyrights are registered with the Library of Congress.
Term of the copyright is the life of the author plus 70
years.

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Trade Secrets
Provides protection against others revealing or
disclosing information that could be damaging to
business.
Trade secrets have a life as long as the idea or process
remains a secret.
It is not covered by any federal law but is recognized
under a governing body of common laws in each state.
Employees may be asked to sign a confidential
information agreement.
Entrepreneur needs to take proper precautions.
Legal action is possible only after the secret has been
revealed.

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Licensing
A contractual agreement giving rights to others to use
intellectual property in return for a royalty or fee.
Types of licensing:
Patent license agreements - Specify how the licensee
would have access to the patent.
Trademark license agreements - Involve a franchising
agreement.
Copyright license agreements - Involve rights to use or
copy books, software, music, photographs, plays, etc.

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 Licensing (cont.)

Factors to be considered:
Customers’ recognition of licensed property.
Whether licensed property complements existing
products or services.
Entrepreneur’s experience with the licensed property.
Long-term outlook for the licensed property.
Kind of protection provided by the agreement.
Commitments in terms of payment of royalties, sales
quotas, and so on.
Renewal options.

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Product Safety and Liability
It is the responsibility of a company to meet any legal
specifications regarding a new product covered by the
Consumer Product Safety Act.
The Act created a commission with the responsibility of
prescribing safety standards.
The development of stricter regulations regarding
labeling and advertising is also part of the commission’s
responsibility.
Large fines as well as product recalls are the typical
outcomes of any action enforced by the commission.

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Insurance
It provides a means of managing risk in the new
business.
Some insurances are required by law and cannot be
avoided while others are may be necessary to protect
the financial net worth of the venture.
Skyrocketing medical costs can have a significant
impact on insurance premiums.
Entrepreneurs also have to consider health care
coverage.

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Table 6.4 - Types of Insurance
and Possible Coverage

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Sarbanes-Oxley Act
Congress passed the Act in 2002.
Provides a mechanism for greater control over the
financial activities of public companies.
Under this law:
CEOs need to assure for financial statements through a
series of internal control mechanisms and reports.
Directors must meet background, length of service, and
responsibilities requirements regarding internal auditing
and control.

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 Sarbanes-Oxley Act (cont.)

Attempts to influence or delay the internal auditing

process is a criminal act.
Law covers bank fraud, securities fraud, and fraud by
wire, radio, or TV.
There has been some concern as to the interpretation
of this law and subsequent directors’ liability.
There are conflicts with the provisions of the new law
and the laws of foreign countries.

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 Sarbanes-Oxley Act (cont.)

Though private companies are not included, they are

subject to control if they:
Consult with a public company.
Influence that public company in any wrong doing
established by the Sarbanes-Oxley Act.
Entrepreneurs can set up a board of advisors instead of
an extended board of directors.

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Contracts
A legally binding agreement between two parties.
Often business deals are concluded with a handshake.
The rule is to not to rely on a handshake if a deal
cannot be completed within one year.
Courts insist on a written contract for all transactions
over $500.

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Table 6.5 - Contract Conditions
and Results of a Breach of
Contract

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 Contracts (cont.)

Four essential items in an agreement to provide the

best legal protection:
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 (these can be
crossed out).
Make a copy for your files after signing.

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