Many business owners rightly fear unethical competitors that attempt to misappropriate or infringe upon their intellectual property. However, what most business owners overlook is the enemy within.
Well, maybe you have no enemies within your organization yet. But if you stay in business long enough, there may come a time when an employee or business partner will betray you. For example, your business partner could break off from your business, form a new business and compete directly with you by:
selling products and/or services similar to yours
copying customer data and soliciting current customers
using a trademark or trade dress confusingly similar to yours
claiming to be the inventor of your most important product
An employee could similarly compete with you by:
claiming an interest in patented inventions or copyrighted materials
copying trade secrets and giving them to a new employer or use them to open their own business
filing a patent application for an invention under development by your company
Business betrayal can happen to anyone
Unfortunately, business owners typically think these things will never happen to them. Perhaps such things happen to other people, but not to you. If that is what you think, you are dead wrong.
When you start a business with one or more partners, you are typically infatuated, to a greater or lesser degree, with your team and new employees. As a result you may ascribe your own characteristics to others that may be very much out of line with reality. For example, you may believe, consciously or unconsciously, that your new partners and employees are:
more honest than Honest Abe
smarter and more creative than their industry peers
hard working and competent
100% committed to the business
aligned with the same vision and mission
fair and willing to acknowledge the contribution of others
capable of resolving differences in a rational manner
One or more of these assumptions may be true, but at least some are likely pure fantasy or may change over time. Business partners that betray one another and employees that betray their employers are generally not bad people. Rather, they turn against partners and employers for a variety of reasons. They may feel they:
work harder than everyone else
contribute more creatively than others
have ownership of a particular invention
are not adequately compensated
have lost faith in the business (or feel that failure is imminent)
have a personal relationship with you that has become hostile
have personal issues that prevent them from working with (or for you) including health issues, addictions, and financial problems.
Simply put, they become angry or desperate, and out of anger or desperation, they may betray you and your business. Even friends, relatives, spouses and children can turn against you. It happens all of the time.
Prevent IP theft and minimize risk
You can never anticipate every possible risk that partners and employees may pose to your business. There are, however, a set of best practices that can reduce your risk.
Form a Corporation or LLC
This seems elementary, but it’s a step many startups delay. That’s not a good idea. There are many reasons why forming a legal entity is beneficial; especially since it reduces and eliminates owner liability for acts of the business. But it’s also a good idea if you want to protect your intellectual property (IP).
All rights in patents, trademarks, copyrights and trade secrets (e.g., customer lists, formulas and confidential business methods) should be vested in the business.
This keeps co-founders from later claiming all, or a share, of the rights in creative works developed for the business. Everyone will understand their interest in creative works developed by the business is limited to their share of ownership in the business. This also makes it clear to employees that creative works they contribute to your business in the course of their employment belong to your business, and not to them.
Require confidentiality agreements
This should be a precondition to forming a business with co-founders and a precondition for employment. Typically, the signer agrees to refrain from disclosing your company’s confidential information to third parties and to refrain from using the information for purposes unrelated to your business. Such agreements may be effective for a term of months or years, or may be perpetual.
Assign all IP to the business
This should also be a precondition to partnership and employment. Typically, the signer assigns all future inventions and creative works developed for the business – to the business. Such agreements automatically cover any inventions, copyrightable words, trademarks, trade dress and trade secrets the signer develops in the course of his or her employment.
It is a best practice for the agreement to further stipulate the signer will execute separate assignment agreements for any IP the business identifies. Such individual assignments provide further proof that a business is the sole, exclusive owner of all rights in the work.
File patent, copyright and trademark applications asap
When patent, copyright and trademark applications are filed in the name of the business, it is your best insurance that no third party will usurp your claim to inventions and creative works.
It’s critical to file your patent applications as soon as possible. The U.S. patent system is a first-to-file system. Put simply, you can invent it first, but if someone else files a patent on it before you, they get the patent. Also, if you disclose or bring a product to market, you only have a year to file your application. Provisional patent applications are easy and cheap to file. There’s no excuse not to.
Meanwhile, filing copyright applications as soon as possible is a good business practice. A copyright registration shows your company’s ownership of a copyrighted work and establishes a date the work was created. A registration is also a prerequisite to filing a lawsuit for copyright infringement. Copyright applications are also easy and cheap to file.
Filing trademark applications as soon as possible is also essential. Your rights in a trademark are established as soon as you use it – no registration is actually required. Nevertheless, a registration strengthens your ability to enforce your trademark rights in court. It also puts the world on notice if you are claiming a particular trademark.
Limit access to confidential information
Regardless of how much you trust your current business partners or employees, if a person doesn’t need access to confidential information to do their job, they should not be able to access it for any reason.
Hold hardcopy files and documents containing confidential information in locked filing cabinets, safes or vaults. Store digital files containing confidential information on file systems only accessible to authorized personnel. Encrypt extremely sensitive information. And lock your front door and install an on-site security system.
Fences make good neighbors
Good IP practices can actually prevent business partnerships and employee relationships from turning sour. When partners and employees know your business thoroughly secures its IP, there’s less temptation for them to steal or sell it. It might save someone’s career or even his or her life.
Before entering the practice of law, Wayne V. Harper, of Harper IP Law, PA, worked for 18 years as an information technology professional with a wide array of corporations in retail and financial services industry, serving as a programmer, systems analyst, systems architect and director of software development, among other things. Since 2004 he’s been advising businesses ranging from newly-formed companies to large publicly-held companies on a variety of intellectual property matters. Wayne enjoys practicing intellectual property law and helping clients — both large and small — succeed.