Trademark

Early-stage investors performing due diligence can often find themselves lost in the world of patents. While patents are undeniably crucial to intellectual property (IP), they come with distinct challenges. Patents can be costly, time-consuming, and challenging to enforce or assert. However, investors and founders can extract themselves from the web of patents and examine quicker and less expensive forms of IP as part of their due diligence,­­­­

Brad Frazer is a Partner at Hawley Troxell Ennis & Hawley and serves as the Chair of the Intellectual Property & Internet practice group. With over 3 decades of experience in Internet law, Intellectual Property law, and Information Technology law, he works with clients in transactional matters and legal disputes. Here’s what we learned from his Keiretsu Forum Keynote on going beyond patents.

Intellectual Property for Startups

Preparations for a strong IP portfolio should be made well in advance, up to six months before a company's launch and ideally at the time of inception. IP isn't just about protecting inventions; it's also about fortifying brand identity. IP is a way to tackle the unauthorized replication of creative works or business solutions. It helps ensure that competitors can challenge your company fairly. As Brad says time and again, IP is not limited to patents.

Let’s take a look at different types of IPs investors and entrepreneurs can consider:

1. Patents grant a lawful monopoly to the owner for new, useful, and non-obvious inventions, allowing exclusive rights to sell the innovation for a defined period. However, patents only become effective when issued; a process that can take years.

2. Copyright is when a creative idea is translated into a tangible medium. The photographs on your phone, for instance, are items you have copyrights to. Computer code, website content, user manuals, novels, and other creative works are accompanied by copyright ownership.

3. Trademark is a commercial source identifier. Notable examples of trademarks are the Golden Arches of McDonald's and the MGM Lion Roar. A word, phrase, design, or symbol can all be registered as trademarks.

4. Trade secrets derive their value from the very fact that they are confidential in nature. They encompass an extensive range of proprietary information that is not yet protected by patent law.

When a client tells Brad that they have no IP whatsoever, they often mean they don’t have a patent (or even a patent application). But in many instances, especially in the 21st century, IP value doesn't come solely from patents but also from brands, copyrights, and trade secrets – often in that order.

Employing the "bucket metaphor" is useful for identifying IP assets. A thorough analysis of a company’s website, inventions, and documents is the first step in the process. Once this is done, the Patent bucket can be populated with things like know-how, inventions, filed applications, and issued patents. Next, the Copyrights bucket can include marketing material, data or graphics. The Trademarks and Social Media bucket might contain any symbols, logos, or other brand identifiers, while the Trade Secrets bucket contains any advantages the company possesses over competitors.

To IP or not to IP

“I always like to tell clients that if they build a robust IP portfolio considering all forms of IP.. they can add a zero to their exit,” says Brad. Crafting a robust IP portfolio builds asset value and adds wings to the brand. As an investor, if your target company boasts such a  portfolio, you are effectively purchasing a lawful monopoly, enabling you to assert IP rights against competitors. So, what strategies should investors contemplate during the due diligence process?

1. Identify Your IP: Thorough due diligence means verifying that the target company has identified all its IP assets, not merely patents.

2. Own Your IP: Ownership constructs in IP law are anything but straightforward. It is essential to ensure that companies genuinely own the intellectual property they claim to own.

Brad adds, “One of my favorite exercises is to ask clients who have a SaaS application or software if they own the code and invariably they say, ‘Sure we do, we have paid for it.’ That, of course, is legally incorrect. Payment has nothing to do with ownership of IP.”

3. File Patents Early and Often: Initiating patent applications early is advisable; so is achieving the ‘patent pending’ status.

4. Choose Strong Brands/Trademarks: Craft a distinctive brand presence and choose powerful trademarks to establish your identity.

5. Register Copyrights Timely: Much like filing patents, timely copyright registration is helpful and essential.

6. Use NDAs for Trade Secrets: Until an issued patent is secured, all information is considered a trade secret. Robust and enforceable Non-Disclosure Agreements (NDAs) are vital to safeguard proprietary information.

In 2023, owning an iconic ‘brand’ or domain name is a guaranteed path to IP excellence, followed closely by a strong portfolio of copyrights, trade secrets, and patents. A myopic focus on patents will prove insufficient. Instead, a comprehensive evaluation of all IP forms is critical for early-stage angel investors and entrepreneurs.

IP is an extensive and valuable facet of the business landscape. For investors, a holistic exploration of IP during due diligence can potentially elevate asset value, strengthen branding, and provide remedies against unfair competition. To maximize brand potential, it is crucial to broaden one’s perspective beyond patents and consider the diversity in intellectual property. When presented with early-stage investment opportunities, it is incumbent upon investors to recognize and monetize their target’s IP assets. Intellectual property, in its many forms, can wield significant influence over the value and prosperity of an early-stage business.

About the Speaker

Brad Frazer is a Partner with Hawley Troxell Ennis & Hawley and is Chair of the firm’s Intellectual Property & Internet practice group. In addition to emphasizing and focusing on all facets of Internet law, Intellectual Property law, and Information Technology law, he also helps clients with related transactional work and litigation.

A Boise native, Brad began his legal career in 1989 as an intellectual property attorney and commercial litigator at a Boise-based law firm. In 1997 he accepted an in-house position as Senior Intellectual Property Counsel with Fortune 1000 company, Micron Electronics, Inc., and remained there through the company’s merger with Interland, Inc. (now Web.com), then the nation’s largest Web hosting company. He eventually became Deputy General Counsel for Micron Electronics, Inc., and Interland, Inc. From June 2003 to February 2006, Mr. Frazer served as Deputy General Counsel to MPC Computers, LLC, in Nampa, Idaho.

To watch Brad’s entire keynote on Keiretsu Forum TV, visit: https://keiretsuforum.tv/intellectual-property-strategies-for-businesses/

Investors are often interested in businesses with strong Intellectual Property (IP) protection because it can provide a competitive advantage by granting the creator exclusive rights over their creations, which can be valuable assets for a business. In addition, IPs are also important as they strengthen the brand by building its asset value for an exit or funding round. They act as remedies against unauthorized copying and unfair competition, providing the company with a lawful monopoly in key business areas. But is acquiring patents the only important aspect of a full-proof IP strategy?

Before getting into the process of acquiring patents, businesses need to lay down a clear roadmap for their IP strategy that includes identifying and owning the relevant IPs. Patents need to be filed early and strong brand trademarks need to be chosen. Trade secrets need to be guarded by enforcing NDAs and Copyrights need to be registered in advance. Brad Frazer, commercial litigator, author, and partner at Hawley Troxell, shares from his vast experience as a Senior IP Counsel about the different IP buckets investors need to consider as part of their due diligence before writing a check. 

The need for more than just Patents

Although patents add immense value to a company, they are expensive and can take a long time to acquire. Patent filing in the U.S. is divided into three categories; Utility Patents (Inventions), Design Patents, and Plant Patents. The graph below represents the total patent applications received by the U.S. Patent and Trademark Office (USPTO) for each category between 2016-2020. While Utility Patents accounted for the highest number of applications among all patent categories, with nearly 600,000 applications each year, the USPTO granted patent rights to only 50% (approx) of the total applications it received.

Source: U.S. Patent Statistics Report, U.S. Patent and Trademark Office (USPTO)

This disparity in patent applications vs patents granted does not make filing for patents any less important. It just means businesses need to focus on other forms of IP as well to catch the interest of investors. So using Frazer's bucket metaphor, let's look at what are these other forms of IP that are equally if not more important than patents.

Legal ownership of creations with Copyrights

Copyrights are a form of IP protection that grants the creator exclusive rights to their original works of authorship, such as books, music, software, and artwork. Investors may be interested in businesses with strong copyrights because they can provide a competitive advantage and increase the value of the business. For example, a software company with copyrighted code can prevent competitors from using the same code, giving them an advantage in the market. The Google v. Oracle Supreme Court case study is an outstanding example that explains nuanced details associated with copyright protection laws in the US and the importance of registering for copyrights.

Establish brand recognition and loyalty with Trademarks

 Trademarks are symbols, logos, or even social media accounts used to identify and distinguish a brand's products or services from those of others. Trademarks can be registered with the USPTO to obtain exclusive rights to the mark. Investors are often interested in businesses that own strong trademarks because they can create brand recognition and loyalty, which leads to increased sales and revenue. Let us consider the popular social media platform, Instagram as an example. Founded in 2010, Instagram's success was largely attributed to its trademarked logo and patented filters that allowed users to enhance their photos. This IP protection gave Instagram a competitive advantage in the market, as competitors could not replicate the brand recognition and photo filters without permission. In 2012, Instagram was acquired by Facebook for $1 billion, highlighting the significant value that IP protection can provide for early-stage investors.

Protect the winning formula with Trade Secrets

Trade secrets are a form of IP that protect valuable confidential information, such as formulas, processes, recipes, and other proprietary information that give a business a competitive edge in the market. From an investor's perspective, trade secrets can be a crucial asset for a company, providing a significant advantage over competitors and potentially increasing the company's value.

i) Coca-Cola Recipe: The formula for Coca-Cola has been kept confidential since its creation in 1886. The recipe for the popular soda is a well-known trade secret, known only to a select group of people at the Coca-Cola Company, and they take great measures to protect it.

ii) KFC's 11 Herbs and Spices: The recipe for Kentucky Fried Chicken's original fried chicken is another famous trade secret that has been kept confidential since the company's creation in 1952. The recipe allegedly contains a secret blend of 11 herbs and spices, which has never been publicly revealed.

iii) Google's Search Algorithm: Google's search algorithm is a valuable trade secret that the company has never disclosed. The algorithm is what makes Google's search engine so effective, and its confidentiality is key to maintaining Google's dominant position in the search engine market.

Whether you are a CEO of a company that is at a pre-launch stage or an investor carrying out due diligence, it is important to be aware of the various IP strategies. Most early-stage companies' valuation arises from all the intellectual property they possess in addition to the issued patents.

About the Speaker: Brad Frazer is a 1985 cum laude graduate of Brigham Young University (Provo; National Merit Scholar) and a 1988 graduate of the University of California, Hastings College of the Law. Brad is now a partner at Hawley Troxell, Idaho's largest law firm. His practice areas include cybersecurity, privacy, social media, internet law, e-commerce, technology and software licensing, patent counseling, trademarks and domain names, copyright, Information Technology (IT), media law, computer law, trade secrets, and related transactional work and litigation.