Legal Strategy Roadmap Part 4: Build Competitive Advantage

This is part four in the strategic legal road map series. In this note we will look at how you can use Intellectual property law to build competitive advantage.

In the United States, intellectual property law means four or five different types of legal systems, including patent, trademark, copyright, and trade secret. In addition, we will look at ways to use contracts to compete in your business vertical and geography.

  • Patents protect new, useful, and non-obvious inventions and compositions of matter. Patents give the inventor the exclusive right to make, use, and sell the invention for a period of 20 years from the date the patent was first filed.  Obtaining a patent can be an expensive proposition, but the rights gained are extraordinarily powerful and prevent competitors from using or selling the same technology, whether or not they intended to do so. Although investors will typically insist on securing a patent as a barrier to entry, patents can be and exercise in “gilding the lily.”  The current latency period between filing and issuance is just over two years. It is not at all unusual for a patent to take three years or more to finally issue. In a fast-moving field like software development, biotech, and other modern technologically competitive industries, the real value of an invention is realized when it is first introduced and before the technology competitors move on.  Most often, the decisive factor in bringing a new product to market is not patents, but rather marketing and sales execution and product excellence.
  • Copyright protects original works of authorship from being copied, distributed, performed, displayed, or modified by anyone other than the author. Works of authorship include traditional literary works, but also photographs, videos and paintings, sculpture and designs, music and sound recordings, as well as software.  Protection lasts for 75 years after the death of the author.  Copyright protects against not only literal copying but also against works that are “substantially similar” to the author’s work.  However, it is vital to understand that copyright protection is rather “thin.”  That is, copyright does not protect ideas, algorithms, recipes, formulas, or the functions implemented in software code. Therefore, a technology company whose asset is its algorithm or computer code, or architecture is well advised to look elsewhere to protect its intellectual assets.
  • Trade secret law in the United States is primarily governed by state law, with a patchwork of different state statutes in place. However, the Defend Trade Secrets Act of 2016 (DTSA) provides a federal cause of action for trade secret misappropriation. A trade secret is any information that provides a competitive advantage to a business and is kept confidential to maintain that advantage.  This is why confidentiality agreements are so important and so ubiquitous.  Trade secrets include things like customer lists, manufacturing processes, or formulas for a product. In order to be considered a trade secret, the owner of the information must take reasonable steps to keep it confidential and protect it from unauthorized use or disclosure.  Under both state and federal law, the owner of a trade secret has the right to take legal action against anyone who misappropriates or misuses their trade secret, including through unauthorized use, disclosure, or theft. Injunctions, damages, and other remedies may be available to the trade secret owner in the event of misappropriation.  Trade secrets do not have the same level of protection as patents, and the owner must continuously take steps to maintain the confidentiality of the information. Additionally, trade secret protection can be difficult to enforce in the event of a breach, particularly if the information is widely disseminated or becomes widely known.
  • A trademark is a word, phrase, symbol, or design that identifies and distinguishes the source of goods of one party from those of others. Trademarks are used to protect the brand identity of a product or service. In the United States, trademark is primarily federal law and applies to all 50 states and internationally. Many states have their own trademark laws, but these are, at best enforceable only in the states governed by those laws. It is not difficult or expensive to obtain a trademark, but you want to make certain that a thorough search is done- not only of the federal trademark database but of any appearance of a “confusingly similar” mark in state databases or on the internet at large.  The search is important for both offensive and defensive reasons; offensively, you want to preempt the potential competition from using a name that is similar to your own. Defensively, you want to be sure that no one is going to come after you for using a certain product name after you have invested thousands or even millions of dollars in developing the brand.
  • Finally, contracts can be used as a way of building a defensive wall around your business. This can take the form of exclusivity, noncompete, or non-circumvention (In addition to the already mentioned confidentiality contracts.)  Exclusivity provisions are typically used in either upstream or downstream contractual relationships. Upstream, the exclusivity might relate to a supplier’s promise to supply only your business with a particular good or service, at least for a limited time and or limited geography. Downstream, an exclusivity provision might bar a distributor or seller of your merchandise from distributing or selling goods that are substantially like your own. Noncompete agreements are typically used To ensure that a business partner, like a manufacturer, does not decide to go into the same business you are in with respect to the same set of customers. Finally, non-circumvention agreements prevent business partners from going around your business to speak with or sell directly to your customers.  Exclusivity, noncompete, and non-circumvention clauses are the exception rather than the norm. Each one of them limits the freedom of action for a party to the contract and consequently may cost them opportunity or revenue for the period in which the covenant is in force. Finally, unless they are carefully written, these kinds of clauses can give rise to disputes down the road.

Each of these forms of intellectual property law it is an effort to make intangible information or ideas behave as if it were concrete, physical property. It is, in that sense, an artificial boundary around valuable business assets which, were it not for the law, would have no value. If your company is involved in technology of almost any kind, intellectual property law is an essential part of your product sales and marketing strategy.

A big company might employ a “General Counsel” for strategic guidance concerning intellectual property.  But if you don’t have such a General Counsel, this email series should provide a strategic roadmap for you to consider in your decision-making. Look forward to our next installment, Constructing Defensive Moats, in our next email.

Legal Strategy Roadmap Part 3: Protecting Revenue & Profit

This is Part 3 in the Strategic Legal Roadmap series. In this note, we look at how you can use the law to protect your company’s revenue and profit.

Revenue is income from customers. Profit is revenue less the cost of producing that revenue. Both are governed by contracts – the contracts you have with your customers and suppliers. Your customer contracts can be thought of as “downstream” — the direction in which the value you produce flows. Supplier, subcontractor, and vendor contracts are “upstream” of the customer, in the acquisition of raw materials, supplies, and services.

Downstream Contracts

Whether written or oral, the customer contract contains all the essential terms of the deal: what, how much, when and how, and who. A customer contract may be a relatively simple consumer retail sales agreement – “buy one, get one free.” But if your customer is another business, or if the product or service is intricate, the deal can become quite complex, and the way that you have structured it can have profound consequences for revenue.

  • Services and Deliverables. Though often completed in a hurry, as a statement of work to a boilerplate agreement, the description of the services and deliverables will profoundly affect revenue and expense. Ambiguity in the statement of the activities, services, goods, outcomes, timelines, specifications, performance, and service levels, or a failure to delineate what is and is not being delivered can give rise to disputes or trap the seller or buyer in a deal they did not fully intend. In addition, it is essential that the statement of work speak to how out-of-scope work will be compensated.
  • Compensation. “How much” is just the starting point. You will want to consider the payment terms (can you wait 60 days?), the conditions for withholding payments, offsets to payments, payments for things that are out of scope, contingencies, or events to which the payment may be tied, etc.
  • Termination. How and when can you and the customer exit? If the deal becomes unprofitable, can you exit in a timely way?
  • Competition. Are you an exclusive vendor or can the buyer substitute you? Can you sell the same services to other buyers in the same industry?

Upstream Contracts

On the expense side of the profitability equation are upstream supplier, vendor and subcontractor agreements. If your agreement with your customer depends on third-party goods or services, you must ensure that – to the degree possible – your supplier agreements are a mirror image of your customer agreements.

  • Delivery Parameters. Commitments to the customer concerning the quality, number, timeliness, return and refund of products or services must be accounted for in the supplier contract, so you are not left holding the bag if the supplier fails to deliver to you. You must have ways of adapting and responding to customer demand – both as a legal matter and as a matter of sound business practice.
  • Confidentiality Obligations. If you have confidentiality obligations to your customer and share confidential information with your supplier or subcontractor, you must make sure that those obligations intended to raise money are part of your agreement with the supplier.
  • Intellectual Property. As with confidentiality obligations, it may be necessary for you to pass on any intellectual property licensing, assignment or work for higher provisions that govern your relationship with your customer.
  • Indemnities and Warranties. here too, your warranties to your customers any any indemnities that they have you agree to maybe transitive in nature and passed along in your relationship with your suppliers and subcontractors. Again, it is a matter of not being left holding the bag.
  • Remedies and Cover. If your supplier breaches the agreement, will you be able to fulfill your obligations to your customer? Are there ways of ensuring against problems, for example, by using liquidated damages clauses?
  • Term and Termination. If your supplier exits early, do you have alternatives? Perhaps you should make the supply contract more difficult to exit or have a definite minimum term and notice periods that allow you to adjust should the supplier decide to exit.

A big company might employ a “General Counsel” for strategic guidance, negotiation, and authorship of critical contracts. But if you don’t have such a General Counsel, this email series should provide a strategic roadmap for you to consider in your decision-making.

Legal Strategy Roadmap Part 2: Setting the Direction

This is Part 2 in the Strategic Legal Roadmap series. In this note, we look at the legal roadmap as the business is setting out, at or near inception.

Certain formative business and legal decisions set the overall direction for the business and affect downstream decisions for years to come. How the business is conducted when times get tough may determine whether it ultimately succeeds or fails. Essential power dynamics are written into certain key documents. And, would-be investors doing due diligence want to see ownership and management clearly and have a clean, up-to-date repository of company documents and filings.

Your General Counsel would advise you to carefully consider decisions related to…

  • Formation & Governance. What is the mission of the business? What does it do? This may have implications for its form (partnership, non-profit, corporation, limited liability company). As the company grows, it is essential to have a plan for how owners enter and exit and how profit and loss are shared. Voting rights will determine who maintains control over the company and the power of investors to affect the leadership and direction of the company. How is the operating agreement or bylaws amended?
  • Capitalization & Shareholders. For corporations, what types of security will there be – common, preferred, options? How are they converted? How many securities? What percentage of ownership? What valuation? What liquidation, and anti-dilution provisions? Preemptive rights? How does voting work? What about dividends?
  • Founders, Officers, Employees. What are the founders’ relationships to the company as concerns equity ownership, vesting rights, insurance, indemnities, benefits and the like? What incentives are offered to employees? Options? Warrants? Stock? What vesting periods and other conditions?
  • Filings. Have you filed your annual report(s)? Have you recorded votes and member actions? Have you paid taxes in the states you do business? Are there licenses, permits and other forms of government approval or validation necessary?

These “platform” issues for the business are usually addressed as it formally starts up, but they may occur later, as the business merges with another business or converts itself from LLC to Corporation (or vice versa).

To many entrepreneurs, these can be dull and difficult issues. Who wants to worry about voting rights when we are trying to get the product into the marketplace? They are nevertheless the most important issues you will ever deal with if indeed “Success” is your objective.

A big company might employ a “General Counsel” for strategic guidance in these platform issues. But if you don’t have such a General Counsel, this email series should at least provide you a strategic roadmap for you to consider in your own decision-making. Look forward to our next installment, Protecting Revenue & Profit, in our next email.


Robert Kost

Principal Attorney

General Counsel Online

A Legal Strategy Roadmap for Your Business


Every growing business has objectives, even if they are unstated. “Expand my market…make more lucrative deals…increase market share…retain customers.” These are each common business objectives.

Strategy is HOW you achieve these objectives. It is stated in the form of a “by”.  ”We expand our market by opening new stores…We increase market share by acquiring a company…We retain customers by encouraging loyalty…” and so on.

What about Law and Lawyers? How do they figure into strategy?

Of course, you can use a lawyer like an ‘emergency medic’ or crisis manager to solve a pressing legal problem. But, the smart business person understands the strategic dimension of law. He and she recognize that law and lawyers are key to the following strategies:

  • building a solid business foundation by means of proper formation, capitalization, and administration
  • protecting revenue and profit by making better legal deals, upstream and downstream
  • building brand equity and competitive advantage by using intellectual property law.
  • constructing defensive moats by using trade secrets, cybersecurity, insurance, and contracts
  • and enhancing human capital by implementing proper incentives, policies, and agreements

A big company might employ a “General Counsel” to implement its legal strategy. But if you don’t have such a General Counsel, allow me — over the next 5 emails — to guide you through the topics and questions that a General Counsel might.* I offer you a general “legal strategy roadmap” for implementing strategies critical to your company’s success. Look forward to our first installment, Business Foundations.

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Kost wrote a chapter entitled Cybersecurity Incidents are Legal Incidents.  It’s a walkthrough of the legal challenges that a victim (!) must face.

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