A start-up and its intellectual property – a timeline

While IP may not be the main focus of the management of the company, there are definite times during the life of a technology-based company when handling the IP is of paramount importance.

By HEIDI BRUN
September 28, 2015 21:33
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Amir and Yossi have a new idea for an interesting mobile app, one they think will go viral within a few months of launch. They are very excited about it and they corral a few friends into helping them write their demo and prepare their business plan. After a few exciting months of late nights (after regular work hours) and many ups and downs, they finally have a working demo which they can show to a few initial customers. The first company they approach is thrilled with the product but asks them if they have filed a patent application on it. To which, of course, the answer is “not yet.” Upon their return, Amir and Yossi immediately find a patent attorney and begin working on the patent application.

This was the first time Amir and Yossi realized that they had “IP” – Intellectual Property – in their company.

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As they grow their company, they will have many other times when they will have to take time from developing and marketing their product to manage their IP.

The following is a list of milestones in the life of a company when IP comes to the forefront.

When you first realize you have something BIG. This is the most important time, since it is the time when the IP is created. For inventions, the process involves realizing that the company has an invention and then writing the patent application. Later on, the company will have to decide where to file the application (for Israeli companies, this usually means filing it abroad in multiple countries where it has competitors and/or markets), after which each application will go through examination and then, hopefully, allowance. During examination, the patent examiner usually has some rejections or comments to the claims which can be overcome by either amending the claims or showing the examiner how s/he has misunderstood the invention.

Returning to the initial application: at the time of its filing, the patent attorney usually asks who the inventors are. In Amir and Yossi’s case, this question is easy to answer – they are. But this question is not always simple. It depends on the situation in which the invention arose. The more complicated situations are those where a great idea came up during a meeting. Oftentimes it is hard to determine whose idea it was, since many people added insights to build the final concept.

For these situations, there will be many inventors on the patent application. Another question the patent attorney has to ask is how did the company come to own the invention? Sometimes this is straightforward.

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If the inventors are employees of the company, then, most of the time, the answer is by law. According to Israeli law, an employee’s inventions, which are invented as part of his work for the company, belong to the company, as long as there is no agreement to the contrary.

Occasionally, when the patent attorney probes the inventorship question, s/he will discover that one of the inventors is actually a contractor to the company.

Not a problem; the contractor just needs to assign his/ her rights to the company. Usually, his/her contract includes a standard clause or two covering this.

Sometimes, the contractor works through a sub-contracting company, in which case the contract under which the work was done, between the company and the sub-contracting company, should include a standard clause covering the assignment of IP rights to the main company.

When there is no proper contract, an assignment has to be drawn up. This should be done at the time of filing of any application, while the contractor is still excited to be part of the process.

Sometimes, the inventors are the founders of the company, which brings us to the next milestone: Starting the company When the entrepreneurs decide to start up a company there are many issues to be resolved. One of them is where the IP is to be held. Most of the time the decision will be to move the IP from the hands of the founders, who initially came up with the concept and who own it to begin with, to the company. As a result, one element of the founders’ agreement, usually written with a corporate attorney, is an assignment of the IP (and this is not just for the inventions – it can also include any prototypes, software, etc., that has been created to-date).

Very frequently, the process of starting the company includes creating other, standard contracts, such as employment agreements and contractor agreements.

These agreements should include standard clauses assigning rights in any future IP (of all kinds, not just patents) to the newly started company.

The next milestone is probably the most exciting and the most difficult: investor due diligence.

Negotiating and then receiving a large investment is one of the first hurdles of any startup and requires an incredible amount of work from the management and directors of the company. One of the issues for a technology- based company is the IP due diligence that the investor(s) will want to do.

The main part of the IP due diligence is to determine what kind of IP there is, how “good” it is and what can be done with it. The investor will usually do some searches, usually a “patentability” search to determine how unique the products/inventions/processes of the company are and a “freedom to operate” search to determine what players are in the same space and whether the current products and those in the pipeline are likely to infringe the rights of these players.

The management of the company will have to invest a significant amount of time in reviewing the results of these searches and in determining how to respond to them.

Another part of the IP due diligence is to determine that the company owns the IP it lists. For many young startups, this is an issue, as they don’t always have all of their contractual arrangements in place before the first large investment. If some of their original employees have left the company in the years before the large investment, settling their contracts and gaining clear title to the IP (patents, designs and copyrights being the IP of greatest concern) can be a huge hurdle to getting the investment.

A similar process occurs prior to being bought out and to going public. Both require due diligences, where the ownership of the IP is under particular scrutiny.

A more common time to handle the IP is when the company decides to sell or license its technology. Most of the negotiations will be handled by the management, to determine the price and conditions of the sale/license and to which technology of the company the sale/license refers. The IP attorneys of the company may contribute a list of the IP which is associated with the technology while the corporate attorneys may handle the contractual arrangements.

Some other IP milestones are employee compensation, and litigation.

Under Israeli law, an employee is entitled to compensation for his inventions, but that right may be waived by agreement, as recently decided by the Supreme Court. Thus, agreements need to be written properly to handle this.

There are two types of litigation situations: when the company utilizes its IP, claiming that some other entity (usually a competitor) is using the company’s IP, and when the company is sued by someone else.

The infringement in the latter case might be with respect to some aspect of the company’s operation that isn’t patented by the company. However, it usually requires working with IP attorneys versed in litigation and research.

IP is relevant throughout the lifetime of a company and is even more important at the end, if the company goes into bankruptcy. For a technology-based company, the IP defines the company and is the most important asset that the executor will have to sell. Other assets (like the furniture, equipment, etc.) may bring in money as well, but only the IP provides the buyer with the rights to make, use and sell the technology.

Thus, while IP may not be the main focus of the management of the company, there are definite times during the life of a technology-based company when handling the IP is of paramount importance. Smart entrepreneurs creating IP-based companies should choose their legal firm wisely, choosing one that knows how to handle their IP throughout the lifetime of their company and not just when securing, registering and protecting their IP.

The author is head of the Strategic Patent Department of Eitan, Mehulal & Sadot and has accompanied her clients through all of these milestones, often together with her partners in the IP, commercial, securities, litigation and bankruptcy departments of the firm.

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