The leaders from eight of the world’s richest industrialized countries (commonly known as the “Group of Eight” or “G8”) – Canada, France, Germany, Italy, Japan, Russia, the United Kingdom, and the United States – met in Deauville, France from May 27-28, 2011.  This forum, which traditionally discusses issues of mutual or global concern, was the 37^th formal G8 meeting since its founding in 1975.  Interestingly, at the conclusion of the meeting, the G8 leaders issued a joint final statement entitled: G8 Declaration Renewed Commitment for Freedom and Democracy. Among many other things, the G8 leaders’ 23-page, final statement called for better protection of intellectual property around the world.  More specifically, the following six paragraphs relating to IP were the most interesting:

• “In Deauville in 2011, for the first time at Leaders’ level, we agreed, in the presence of some leaders of the Internet economy, on a number of key principles, including freedom, respect for privacy and intellectual property, … that underpin a strong and flourishing Internet.”

• “The Internet has become a major driver for the global economy, its growth and innovation. The openness, transparency and freedom of the Internet have been key to its development and success. These principles, together with those of non-discrimination and fair competition, must continue to be an essential force behind its development. Their implementation must be included in a broader framework: that of respect for the rule of law, human rights and fundamental freedoms, the protection of intellectual property rights, which inspire life in every democratic society for the benefit of all citizens.”

• “The global digital economy has served as a powerful economic driver and engine of growth and innovation. … As we adopt more innovative Internet-based services, we face challenges in promoting interoperability and convergence among our public policies on issues such as the protection of personal data, net neutrality, transborder data flow, ICT security, and intellectual property.”

• “With regard to the protection of intellectual property, in particular copyright, trademarks, trade secrets and patents, we recognize the need to have national laws and frameworks for improved enforcement. We are thus renewing our commitment to ensuring effective action against violations of intellectual property rights in the digital arena, including action that addresses present and future infringements. We recognize that the effective implementation of intellectual property rules requires suitable international cooperation of relevant stakeholders, including with the private sector. We are committed to identifying ways of facilitating greater access and openness to knowledge, education and culture, including by encouraging continued innovation in legal on line trade in goods and content, that are respectful of intellectual property rights.”

• “We agree on the necessity of a level playing field in the innovation area, including a strong and robust intellectual property system as an incentive to innovation and a catalyst for growth. We acknowledge the important role of the World Intellectual Property Organization (WIPO) in developing a broad approach to intellectual property in support of business friendly, robust and efficient national intellectual property systems. Renewing our support to the principles of the patent system, we attach great importance to its promotion and development. We encourage increased international action to strengthen patent quality, and call for improved diffusion of patent information, particularly critical for SMEs and research centres. We support transparency in technology markets and call for the improvement of market places for trading rights. We invite WIPO, in close cooperation with Member States and other relevant entities, to intensify its work in these three areas. In addition we note the importance of enforcement in order to incentivise innovation and protect innovation once developed.”

• “We welcome the Patent Pool Initiative launched by UNITAID in order to facilitate the production of affordable generic medicines well-adapted for use in resource-poor settings, and we encourage the voluntary participation of patent owners, private and public, in the project.”

In a Part 1 of this post, I stated that engaging in competitive intelligence is not the same as, or synonymous with, engaging in economic or industrial espionage or the misappropriation of trade secrets.  That is, gathering competitive intelligence should not involve the intentional gathering of competitor’s confidential information or trade secrets.  To the extent that confidential information or trade secrets are obtained, a firm should only utilize such intelligence if they were not obtained by theft, misrepresentation or deception.

I also mentioned that, as a relatively new discipline, there are few standards for competitive intelligence professionals to follow.  Well, here are some “do’s” and don’ts”:

Do’s:

• Publicly available information may be freely gathered using any channels through which it is offered to the public.
• Competitive intelligence professionals should examine published information sources, conduct interviews, and use other legal and ethical methods to collect competitive intelligence information, using deductive reasoning to fill in any gaps in such information to create an analysis of a competitor’s product or marketing strategy.
• Competitive intelligence professionals can contact competitors directly to obtain publicly-available information.
• Competitive information disclosed to a firm or its agents can be used for the benefit of the firm if the information is not subject to a restriction of confidentiality or is a trade secret.
• Contractors employed by a firm to collect competitive information must accurately identify themselves, stating their name and the name of their company.  However, unless the firm otherwise agrees, the contractors do not need to identify the firm by name, even if the subject requests the name of the contractor’s client.
• Competitive intelligence professionals should attempt to make contact at the manager level or above, and should not contact lower level employees of an organization.

Don’ts:

• Competitive intelligence professionals should never purposefully seek to obtain the trade secrets or non-public/competitively sensitive information of other companies.
• Competitive intelligence professionals should never attempt to induce a third party to violate their confidentiality obligations to another party.
• Direct contact with a competitor for the purpose of competitive intelligence activities should be avoided.
• If a vendor performs work for a competitor, any information obtained as a result of such engagement of the vendor should not be shared with your firm or used by such vendor on your firm’s behalf without authorization from such competitor, except for general “know-how,” skills or industry knowledge.
• Former employees of a competitor now working for your firm, or current or former employees of a competitor who have a personal relationship with one of your firm’s (or its third-party vendor’s) employees should not be exploited in order to obtain information about the competitor.
• Employees (current and former) have a duty to their employer not to disclose confidential information or trade secrets they received during their employment.
• Employees and third party vendors conducting competitive intelligence gathering on behalf of your firm should not misrepresent their identity or intent in gathering competitive intelligence information.
• Misrepresentation of one’s identity and misrepresentation of intent are unethical and improper means of gathering competitive sensitive information and can interfere with an employee’s duty to their employer.

Traditionally, companies gather information on their competitor’s marketing activities,  advertising strategies and organizational structure, or perform some form of industry-wide benchmarking.  Recently, however, companies have started to engage in more formal competitive intelligence activities.  “Competitive intelligence” is the process whereby a firm monitors its competitors (and the marketplace as a whole) by collecting information, analyzing the information and then disseminating the information to decision makers within the firm.  The widespread use of formal competitive intelligence departments and employees dedicated to such monitoring is probably less than two decades old.

Engaging in competitive intelligence is not the same as, or synonymous with, engaging in economic or industrial espionage or the misappropriation of trade secrets.  (As a review, a “trade secret” is information that an owner has taken reasonable steps to keep secret, and from which the owner derives economic value as a result of the information not being generally known by the public.  “Confidential information,” on the other hand, simply refers to information that an owner has taken reasonable steps to keep confidential.)

As a relatively new discipline, there are few standards for competitive intelligence professionals to follow.  The following general types of activities, however, raise potential ethical and legal concerns and should be avoided in the course of performing competitive intelligence activities:

• Misrepresentation of Identity – when an information gatherer or competitive intelligence professional is asked their identity and they do not correctly and fully reveal their identity.
• Misrepresentation of  Intent – when an information gatherer or competitive intelligence professional misrepresents their intent to a target in the course of gathering competitive intelligence.
• Inducement –when an information gatherer offers inappropriate benefits in return for information from others in possession of confidential or trade secret information.
• Covert Information Gathering – when information is being gathered while the targeted person/firm is unaware of its collection and such person/firm would have to develop elaborate defenses to protect its confidential or trade secret information.
• Unsolicited Information – when confidential or trade secret information is received by an information gatherer that is not actively seeking it.

Engaging in the general types of activities listed above can have serious legal consequences for a firm and even the individual employee who obtains any competitor’s confidential information or trade secrets.  Such negative consequences include liability under the federal Uniform Trade Secrets Act and applicable state statutes protecting trade secrets and unfair competition, susceptibility to  breach of contract claims, and running afoul of the Economic Espionage Act of 1996.

It is an obvious fact that the ability to raise capital is vital to many small (especially “high-tech”) businesses. In doing so, small business founders and other entrepreneurs spend a significant amount of time drafting a business plan and toiling with presentation slides. Those plans invariably define a market, describe the new service or product offering and detail the biographies of the management team. However, rarely do entrepreneurs think of stating their business case to potential investors in terms of the intellectual property (IP) rights (i.e., the patents, copyrights, trademarks and/or trade secrets) their new company controls or potentially can control.

Why should a small company care about IP?  Well, in the last thirty years, there has been a shift from a labor economy to a knowledge economy. That is, less than 10% of Americans now work in manufacturing. Consequently, intangible assets (i.e., long-lived assets used in the production of goods and services, including IP rights, know-how, software, databases, and certain contractual rights such as broadcast licenses, governmental permits, customer and supplier agreements, etc.) have emerged as the most powerful asset class, overtaking more traditional capital assets such as real property, plant and equipment. Studies have shown that as much as 75% of the value of a U.S. publicly-traded company comes from intangible assets. This is an inversion from 30 years ago when less than 20 percent of a company’s value came from intangible assets, and is significant because the largest component (or subset) of intangibles is IP.

So again, “What does IP have to do with me the small company entrepreneur raising capital!?”  Well, the lifeblood of any small, high-technology enterprise is the IP that it controls or potentially controls. In other words, the short-term salability, the long-term profitability, and the eventual ability to undertake an initial public offering of the small company all depend upon its ability to develop, acquire, protect and apply innovative ideas and concepts. The foregoing is supported by data showing that small businesses generate 13-14 times more patents per employee than large firms (and would empirically suggest that this tangible asset versus intangible asset inversion described above applies, if not more so, to smaller (and private) companies as well).

Thus, when an entrepreneur is spending a significant amount of time drafting a business plan and toiling with presentation slides in the hopes of raising capital, it would be prudent to ask: “What is my IP position and have I conveyed that in my materials such that a professional investor will understand?”  In other words, as an entrepreneur, you would not have started a company if you didn’t have a great idea about making some new product, offering a new service, or making some existing product or service faster, slower, cheaper, bigger, smaller or whatever adjective applies for describing the next “cool thing” in your technology space. Well, how do you keep competitors (think bigger, more-established companies) from just copying that idea!? The answer is IP rights!

Therefore, your business plan and pitch book should address the following:  What patent applications will we file?  What will we keep secret?  What will be open sourced?  What trademark applications will we file?  Have we obtained domain name registrations corresponding to the trademark applications we filed?  Does our business model depend on using someone else’s materials that are protected by copyright or some other form of IP?  Your plan and pitch books should address these because without any plan for establishing (or any established) IP rights, your venture essentially becomes a commodity provider attempting to compete on price – which is difficult given that you most likely won’t be able to take advantage of any economies of scale, unlike your more mature and larger competitors.

9. Invalid IP.  An IP-related agreement is, by definition, about IP rights in the form of exclusive rights to do certain acts or the right to exclude others from doing certain acts.  That is, after all, the whole point of IP rights.  Thus, when the parties negotiate an IP agreement, their expectations are based upon the ability to enforce such rights.  What happens, however, if the licensed IP rights are later found to be invalid by a court or government agency?  What happens when a potential IP right (e.g., a patent application) is licensed and it never materializes (e.g., the patent application never matures into an issued patent)?  Does that lead to an automatic termination of the agreement?  Or, does it simply lead to a reduction of the royalties?  If automatic termination, does that then lead to a refund of past royalties already paid?  In sum, the agreement should address what happens if the parties’ expectations with respect to the validity (or existence) of the licensed IP rights are not met.

10. Confidentiality.  Aside from the specific IP that is the subject of the agreement, the parties are likely to (purposefully or inadvertently) share confidential information during the course of performing under the agreement (e.g., future business plans, customer lists, pricing, etc.).  Thus, all IP-related agreements should contain provisions to address the treatment of the parties’ respective confidential information much like an Non-Disclosure (or Confidentiality) Agreement.

11. Assignment.  The agreement should spell out when, if at all, the parties can assign or transfer the agreement to another related or unrelated entity (e.g., only in the case of the sale of the entire business, only to an affiliate, etc.)?

12. General Provisions. These provisions, which some refer to as “miscellaneous” provisions, are found in every agreement (typically at the end) and often overlooked.  However, if (and when) a dispute arises with respect to the agreement, these provisions are far from unimportant.  The more notable general provisions include: (a) Governing Law – which state’s or jurisdiction’s law governs the agreement? (b) Dispute Resolution – how will disputes be resolved (e.g., arbitration, mediation or litigation)? (c) Venue – where will any dispute resolution proceedings take place (e.g., your company’s home jurisdiction, the other party’s or a neutral site)? (d) Survival – which provisions of the agreement survive the termination or expiration of the agreement such that the parties “walk-away” rights are clear (e.g., right to exhaust inventory of licensed products, return of confidential materials, indemnifications, etc.).

At the end of the day, any IP-related agreement must answer the “what if this happens” questions raised by the parties’ contemplated relationship.  While no agreement can answer all the “what if’s,” a properly drafted one will anticipate those that are most probable.  The considerations presented in this post will help start your thinking about IP-related agreements, but do not substitute for quality legal advice that is tailored to your company’s unique situation.

5. Obligations.  In order for the parties to be happy during the course of performance under the agreement, each party must tailor their behavior to conform to the other party’s expectations.  Thus, besides the transfer of IP rights, the agreement must clearly set forth the respective obligations of the parties so that no side becomes disappointed with the other side’s behavior.  Such expected behaviors include the obligation to: keep certain records, give written notice of certain events, prepare reports, obtain regulatory approval, purchase insurance, perform certain R&D, provide and update data, provide technical assistance, pay government fees such as taxes and IP-related maintenance, renewal and annuity fees, enforce the licensed IP rights against third-party infringers, mark products with certain IP-ownership notices, etc.

6. Dates.  It is important that the agreement clearly sets forth all dates (e.g., the effective date, expiration date, etc.) and time periods (with clear triggering events) for each party’s respective obligations (e.g., deadlines for making payments and delivering royalty reports, data, prototypes, etc.).

7. Newly-Created IP.  While the agreement should obviously specify the parties respective rights to existing IP, the allocation of rights to future IP that may be created during the course of performance under the agreement is often overlooked.  That is, the licensed IP may be modified, enhanced, improved and/or derivative works created therefrom by the licensor and/or the licensee.  Who owns such new IP?  Are they automatically included in the original license grant or does that trigger the need for additional compensation or negotiations?  Further – especially when such new IP is jointly created by the parties – who pays for and controls decisions regarding securing IP protection and who is responsible for enforcing such new IP?  Jointly owning newly-created IP sounds like a fair and simple solution to the issues raised by these questions.  However, what happens when the relationship sours (i.e., the agreement terminates) or runs its course (i.e., the agreement expires)?  The IP is still jointly owned and the parties’ fate with respect to licensing and enforcing the IP is still tied to each other.  Therefore, when negotiating the term sheet, don’t let the concentration on the existing IP that is driving the deal be accompanied by a neglect of future IP.  They both should be addressed, especially given the fact that newly-created IP can sometimes turn out to be more valuable than the IP existing at the time the agreement was first entered into.

8. Indemnifications.  If the licensee makes a product using the licensor’s IP which turns out to be defective, who’s responsible for any product liability or personal injury claims?  Does the answer change if the licensee modified the IP in the process of producing the defective product?  What if the licensed IP infringes a third party’s IP?  What if a third party sues because one of the parties to the agreement fails to perform one or more of its obligations?  The agreement must allocate these risks in terms of indemnifications (i.e., where one party holds the other party “harmless” and agrees to pay for all court costs, attorneys’ fees and judgments for certain types of claims).  Even if one party agrees to indemnify the other party, who controls the defense strategy and who decides when to settle?  Simply put, your agreement must address these questions.

At the end of the day, any IP-related agreement must answer the “what if this happens” questions raised by the parties’ contemplated relationship.  While no agreement can answer all the “what if’s,” a properly drafted one will anticipate those that are most probable.  The considerations presented in this post will help start your thinking about IP-related agreements, but do not substitute for quality legal advice that is tailored to your company’s unique situation.

1. Recitals.  Often overlooked and underdeveloped, the recitals (i.e., the “Whereas” statements that begin most agreements) should “set the stage” for a third-party reader of the agreement.  Generally speaking, in a later dispute, the recitals are presumed to be true statements held against both parties.  Thus, the recitals should tell the story about how the parties got here.  They should reference what technology, funding, personnel and/or other resources and capabilities each party brings to the table.  The recitals should also reference any other agreements between the parties (e.g., an earlier confidentiality or funding agreement) which are now amended or rendered void.

2. Definitions.  There is no more important task in drafting an agreement than defining the (capitalized) terms which will be used throughout the agreement.  That is, the definition section is the skeleton of the agreement upon which the business terms and conditions of the term sheet can be fleshed out.  Thus, such terms as “Licensed Product,” “Field,” “Licensed Services,” “Net Revenue,” “Territory,” “Licensed IP,” “New IP,” “License,” “Party A’s IP” and “Party B’s IP” must be precisely and accurately defined.  In sum, the definitions section, like the rest of the agreement as a whole, must strive for clarity and be the basis for each party’s (realistic) expectations of the other.

3. License Grants.The heart of any IP-related agreement is the precise description of exactly what IP is licensed to whom, under what conditions (e.g., only after regulatory approval or receiving a next round of financing), under what restrictions, for how long, for what purposes, exclusively or non-exclusively, and with or without sublicense rights.

4. Royalties.  The agreement must specify the type (and amount) of consideration for any IP license grants.  Such consideration can be monetary or non-monetary, and includes: a one-time fee, royalty payments based on net or gross revenue, options, access to licensee’s IP, development of complimentary IP, equity position, or any combination of these.  The refundability and any minimums with respect to royalties should also be specified.

At the end of the day, any IP-related agreement must answer the “what if this happens” questions raised by the parties’ contemplated relationship.  While no agreement can answer all the “what if’s,” a properly drafted one will anticipate those that are most probable.  The considerations presented in this post will help start your thinking about IP-related agreements, but do not substitute for quality legal advice that is tailored to your company’s unique situation.

]]> http://dcipattorney.com/2010/01/12-important-considerations-for-drafting-ip-license-agreements-part-1-of-3/feed/ 0 http://dcipattorney.com/2010/01/12-important-considerations-for-non-disclosure-confidentiality-agreements/ http://dcipattorney.com/2010/01/12-important-considerations-for-non-disclosure-confidentiality-agreements/#comments Mon, 04 Jan 2010 16:18:03 +0000 Raymond Millien http://dcipattorney.com/?p=156

Happy New Year!  With the second decade of the new millennium upon us, I wanted to discuss the most common agreement individuals and companies enter into that affects intellectual property – the Non-Disclosure (i.e., Confidentiality) Agreement.  While this type of agreement is no doubt considered “routine” or “standard,” maybe this is a good time to actually review the form that your enterprise uses, and each time you go to execute one, consider the following:

1. Parties.  Who is the contracting party?  That is, does the Confidentiality Agreement (commonly referred to as “Non-Disclosure Agreement” or “NDA”) specify a parent, affiliate or subsidiary company?  Does the NDA allow the party receiving your small firm’s confidential information to share it with a parent, affiliate or subsidiary?

2. Personnel.   Does the NDA need to specifically list the employees and other personnel of the receiving party who can have access to the confidential information?

3. Direction.  Does the NDA contemplate a mutual (i.e., “two-way”) exchange of confidential information or just a “one-way” exchange?

4. Subject Matter.  Does the NDA accurately describe the confidential information (e.g., documents, discussions, visual presentations, etc.) being disclosed?  Is the existence of the NDA itself also considered confidential information?

5. Term.  How long does the NDA stay effective (i.e., when is it effective and when does it terminate)?  How long does the confidentiality obligation lasts?  One year?  Two years?  Three years?  As long as the discloser maintains the confidential information confidential?

6. Use.  What are the allowable uses of the confidential information (i.e., for deciding whether to enter into a business transaction, for testing purposes, etc.)?

7. Labeling.  Does the NDA require confidential information to carry a designation (e.g., markings, stamps, etc. on documents, a follow-up letter for oral disclosures, etc.)?

8. Obligations.  Does receipt of confidential information carry an obligation to enter into an agreement or specific relationship with the disclosing party?

9. Independence.  Does the NDA specifically allow the receiving party to independently develop products and/or services that compete with the confidential information they receive or independently pursue similar opportunities?

10. Residuals.  Does the NDA contain a “residuals” clause that allows information mentally retained by the receiving party’s personnel who have had access to the confidential information to be used freely?

11. IP.  Does the NDA need any IP ownership provisions in case, for example, the meetings between the parties become “brainstorming” sessions where new IP is created?

12. Assignment.  Can the parties assign or transfer the NDA (e.g., in the case of a merger or the sale of the business)?

In sum, the NDA must answer the “what if this happens” questions raised by the parties’ contemplated relationship.  While no NDA can practically answer all the “what ifs,” a properly drafted one will anticipate those that are most probable.  Thus, quality legal advice that is tailored to your individual or enterprise’s unique situation is vital.

One can think of a patent as an externally-declared right (i.e., a right granted by a governmental body – the U.S. Patent and Trademark Office, which is part of the Department of Commerce).  Conversely, one can think of trade secrets as internally declared rights.

A trade secret is any confidential information that is valuable because it provides a competitive advantage to the holder of the information.  The only requirement for the law to protect a trade secret, as its name suggests, is that the owner must take reasonable steps to keep it secret.

Reasonable steps include limiting access to the trade secret by, for example, utilizing locked file cabinets, designating restricted areas within your firm’s facilities and requiring employees (and even potential investors) to sign a confidentiality agreement before disclosing the secret to them.

Trade secrets are protected by each individual state’s laws and require no formal application, examination or registration procedures.  Thus, the trade secret form of IP protection is very inexpensive.  Further, unlike patents and copyrights, trade secret protection does not expire.

It remains a trade secret as long as the owner can keep it confidential.  (The best-known example of a long-lasting trade secret is the formula for Coca-Cola, which has remained a trade secret for more than 150 years.)

The owner of a trade secret can exploit it by being the only one to offer goods or services created from or utilizing the trade secret, or by licensing someone else the right to utilize it in exchange for royalty payments.  Should someone obtain that secret by improper means and use it to unfairly compete, the owner can sue.

A court, upon finding misappropriation of the trade secret, may award monetary damages, order an injunction and/or grant attorneys’ fees and costs.

Because trade secrets are internally declared, they have to be accepted, and granted legitimacy, by each partner with whom you share them.  That is, from both a psychological and legal perspective, they do not have the “government seal of approval” and presumption of validity that a patent enjoys.

Moreover, they carry a greater burden of proof for their owner, should their existence and validity be challenged.  Finally, trade secrets reduce the “innovative ripple” you can lay claim to, and thus they may reduce your strategies for licensing and distribution further downstream.  Consequently, as opposed to patents, trade secrets place a greater burden on the creator to actually practice or utilize the subject matter of the trade secret.

In sum, trade secrets place a greater degree of responsibility on the business to have the necessary complimentary assets required for success.  Generally speaking, however, if you had those complimentary assets and basic resources, you’d likely be a large company and not a start-up.