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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.

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