Professional Documents
Culture Documents
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-.-..Oneofthehottestmediaconceptstodayistelevisionpoker.Asthisrnarketcontinues
ty and spin dozens of new innovation3 for entrepreneurs, it repre'. ..
most difficult business models for which to provide any intellectual
, :.... . ,
ion. Steve llPscomb .has. emerged as one of the most aggressive and
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Steve Lipscomb grew up in Nashville, Tennessee, and came from a long line of
': Baptst ministers. His first entrepreneurial effort, after becoming an attorney, was to
launch an attorney referral venture. However. even after early entrepreneurial success, his career made some dramatic changes, primarily because of discrimination
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.
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issues experienced by his mother after she had chosen to enter the Baptist Church
seminary. His anger over this experience led him to make a documentarv film so that
the world would be made more aware of some of these discriminatory issues. He
then sold his attorney referral business. taught himself filmmaking, and proceeded
to make Battle of the Minds, which won acclaim and numerous awards after aopearing on PBS television. This success resulted in a friendship with producer Norman
Lear and a
.. ....i:::-' AlthoughpokerwasnotaforeignconcepttoLipscomb,havingonceentereda
$100 satellite tournament, he felt that ESPN's televising of the World Series of poker
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. *"t poorly presented. After his film project, Lipscomb had the strong vision that not
'.i only could poker be made to be more interesting but that it would be possible to create a major league of poker that would allow for entrepreneurial expansion into
fngfChandise
merchandise, foreion
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lnfaraf competition,
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160
PART
for prize money rased from sponsors. His business model was to establish a league
of poker players similar to golf's PGA Tour. Thus, anyone with $10,000 could enter
one of the World Poker Tour events with a chance to win a large prize of $1 million
or more.
Lipscomb's strategy was to produce a show before getting television to buy it. With
the support of Lakes Entertainment, a developer of casino gaming, and an investment
of $3.5 million, the World Poker Tour and WPT Enterprises were born, including a listing on the NASDAQ (WPTE). With this investment Lipscomb subsequently had to gve
up 70 percent control of his business, but he was able to retain 16.5 percent for himself.
Armed with this infusion of venture capital Lipscomb hit the road to try to persuade the
many popular casinos to support these poker tournaments. His format included two
unique concepts to make the televising of poker more interesting to the viewer. One
of these was a small camera under the table that allowed the viewers to see the two
cards that were dealt face down. Viewers could then play along with the tournament
players. In addition, he added unique graphics that presented on-screen icons of each
player's cards. Odds of winning were included at each stage of the betting process,
making this programming unique and more interesting to thetelevision audience.
Lipscomb regarded these unique additions as intellectual property. but this has
created controversy with some of the competition- ESPN has duplicated Lipscomb's
camera and graphics in its presentation of another league, the World Series of Poker
Circuit. Lipscomb argues that the camera and graphics are proprietary with applications for patents pending. Without any resolution to the intellectual property issue,
Lipscomb hs embarked on an aggressive strategy to buld the image of WPTE. More
tournaments, more casinos. new products, higher stakes, international growth and
syndication, and the recent contract with Fox Sports Network (FSN) are all intended
to increase visibility and profitabilty to the company. Fox Sports Network is a much
better fit for WPT than the Travel Channel or Game Show Network. Audiences will be
higher; exposure will be greater, and FSN plans to include WPT in the Monday sports
block of programming. In addition to the new network, WPTE now owns and operates
WPT China, a multimedia company based in Beijing specializing in television production of the WPT China National Traktor Poker Tour. Traktor Poker is a national card
game in China, and this 1O-year exclusive deal is expected to add substantial income
not only from the tour but also from licensing and other partnerships with Chinese
firms.
Now in its seventh season, the company continues to struggle financially with losses of
about $9.7 million in 2O07 compared to positive profits of $7.8 million in 2006. Sales in
2007 compared to the previous year were also down from $29.3 million to $2'1.7 million,
Higher costs and less exposure with the existing networkwere major contributing
factors to this decline. Lipscomb is confident that the business outlook is favorable
now that the new network is in place and other international deals are complete. Even
though the intellectual property issues previously discussed may not be resolved very
soon, if at all, Lipscomb will continue to explore new opportunities through innovation
and creativity that will enhance sales and profitability.l
CHAPTER
enrepreneur
NE
.
,.
secrets,
the value of intellectual property until a competitor infringes." But a business that hasn't applied for
cgpyrights Or patents and actively defended them
will likely have trouble making its case in court.
One reason many business owners don,t protect
see
their intellectual property is that they don,t recognize the value of the intangibles they own. Cenar ad-
162
ADVICE TO AN ENTREPRENEUR
An inventor with a newly invented technology comes
to you for advice on the following matters:
'l
intellectual property?
2. I have sufficient
resources
to obtan intellectual
CHAPTER
ENTREPRENEUR 163
services' The lawyer then will have a vested interest in the business
and will likely provide
more personalized services- However, in making such a major decision,
the entreireneur
must consider any possible loss of control of the business.
PATENTS
pdrrf Grants holder
protection from others
making, using or selllng
a simila idea
invention for
specified amount of time. At the end of this time, the governmeni puutnes
the invention
and it becomes part of the public domain. As parr of the public domain,
howeveg there is
the assumption that the disclosure will stimulate ideas and perhaps
even the development
of an even better product that could replace the original.
- Basically, the patent gives the owners a negative right because it prevents anyone else
from making, using' or selling the defined invention. Moreover, even if
an inventor has
been granted a patent, in the process ofproducing or marketing
the invention he or she may
hnd that it infringes on the patent rights of others. The inventor should
recognize the distinction between utility and design patents and some of the differences
in international
patents that are discussed later in this chapter.
a
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utility patenls- when speaking about patents, most people are referring to utility
patents. A utility patent has a term of 20 years, beginning
on the date o1filing with the
Patent and rrademark ofrrce (pro). Any invention requiring
FDA approval has also
been amended to extend the term of the patent by the amount
of time tut", the FDA
to review the invention. Initial hling fees for a utility patent for a small
entity can vary
from $82 online ro $165 by mail. Additional f'ees exist depending on the
number of
claims made in the patent application.
A utility patent basically grants the owner protection from anyone else making, using,
'
so easy to
design around the patent. Howeve there is renewed interest in these patents.
Examples
164
PART
are shoe companies such as Reebok and Nike that have become more interested
in
obtaining design patents as a means of proecting thei omamental designs. These types
of patents are also valuable for businesses that need to protect molded plasc parts,
extrusions, and prodrrct and container configurations.
Plant patels. These are issued under the same provisions as utility patents and are for
new varieties of plants. These patents represent a limited area of interest, and thus very
Application Program.
A patent reform bill was introduced to Congress in2OO7, but with changes made independently by both the House and Senate there has not been any compromise. President
Obama has indicated a desie to move on patent reform, and there will likely be changes in
the near future. The most important part of the reform bill is the "first to file" system used
in most other countries. What this means is that regardless of the date of the invention, it is
the fnst one to file who will be granted the patent.3
lnternationaI Patents
With the World Trade Organization (WTO) and its predecessor, the GeneralAgreement on
Tariffs and Trade (GA[T), more global free trade has been encouraged. However, although
internalional trade has increased at the rate of about 6 percent per year since GAIT was
created in 1948, until recently there still was a need for an international paent law to protect firms from imitations and knockoffs. Another mechanism also was needed to provide
firms some protection in global markets.a
In response, the Patent Cooperation Treaty (PCT)-with over 1) participants-was
established to facilitate paent filings in multiple countries in one ofhce rather than filing in
each separate country. Administered by the World lntellectual Property Organization (MPO)
in Geneva, Switzerland, it provides a preliminary search that assesses whether the hling hrm
will face any possible infringements in any countrr.s The company can then decide whether
with the required filing of the patent in each country. It has a 3O-month time frame
to file for these in-country patents. Even though the PCT allows for simultaneous frling of a
patent in all member countries, there may be significant differences in patent laws in each of
these countries. For example, patent laws in the United States allow computer softwae to receive both patent and copyright protection. On the other hand, in the European Union, patent
protection is not always extended to software, although recent court judgments in the U.K.
may change this as well.6
to proceed
of first to market
It is recommended that the entrepreneur first file a provisional patent application to establish a date of conception of the invention. This provisional application replaces the
disclosure document that was previously accepted by the PTO. The disclosure document
was more loosely defined in its requirements and often led to issues when more than one
person claimed the patent rights. In addition, the new provisional application is consistent with European procedures and can be critical when there is a foreign company
CHAPTE R
scriprionortheinvenrion.rnadditio,,.,^
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its final form
ment is filed.
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166
PART
Coleron md
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Patent Infringement
To this point, we have discussed the importance of and the procedures for filing a patent. It
is also important for the entrepreneur to be sensitive about whether he or she is infringing
on someone else's patent- The fact that someone else already has a patent does not mean
the end of any illusions of starting a business. Many businesses, inventions, or innovations
are the result of improvements on, or modihcations of, existing products. Copying and
improving on a product may be perfectly legal (no patent infringement) and actually good
business strategy. If it is impossible to copy and improve the product to avoid patent
infringement, the entrepreneur may try to license the product from the patent holder.
Figure 6.1 illustrates the steps that an entrepreneur should follow as he or she considers
marketing a product that may infringe on an existing patent. The entrepreneur can now
make use of the Internet to identify Web sites and services that can assist in the search
process. Ifthere is an existing patent that might involve infringement by the entrepreneur'
licensing may be considered. If there is any doubt as to this issue, the entrepreneur should
hire a patent attorney to ensure that there will not be any possibility of patent infringement.
Table 6.1 provides a simple checklist that should be followed by an entrepreneur to minimize any patent risks.
of business
method patents. For example, Amazon.com owns a business method patent for the singlecticking feature used by a buyer on its Web site to order products. A few years ago eBay was
CHAPTER 6
PROTECTING THE IDEA AND OTHER LEGAL ISSUES FOR THE ENTREPRENEUR
167
B~ SlIre 1:0 properly rnark'all prducts grjntd a 'patento Not having products marked
c-Quld,resylt in lSs i>r C1arnages t;' a paten1 suii '
'"
tGnsder1i~ensn~ yqur patel1ts.Thls_~n '~nt:iai1c t he-investmeflt)n a patentQY cre.aui1g
f,I~
lTI.ar.ke~
sued by Toro Woolston and his company MercExchange c1aiming a violation of a patent he
owned that covered many fundamental aspect of eBay's operations, such as the buying and
seUing of products through a reverse auction process. Priceline.com claims that it holds a
patent related to jls service where a buyer can submit a price bid for a particular service.
Expedia was forced to pay royalties to Priceline,com after being sued for patentinfringemenl
by Priceline.com. Many Ilrms lhat hold these Iypes of patents have used lhem to assauIt cornpetitors and subsequenlly provide a teady Slream of income from royaltie or Iicensing fee .7
Given the increase in the assaulLs and because oC the growlh of digital technologies such
as lile lnternet, computer software, and telecommunications. concerns have evolved regarding lhese business method patents, Examp les of lhe focu.<i of these concems are lax trategies, the determination o" insurance rates, or how comm clies are plLfchased througb a
third party. These busine s practice patents are now being threatened by a recent court ruljng lbat derued a paten! for a process of hedging risks in commodity trading. Tbe Federal
Circuir Court denied the patent because it did not meel the machine or transformaton le t.
This simply means thal any busines method or practice musl be lied to a machine sucb as
a computer. Thus, a mental process of calculations for hedging ri sks in commodity lrading
did not inelude a machine or computer and therefore was not granted a patent 8
advantages lbat may exist or to identify a unique po itionjng trategy (see Chapter 8). With
a unique marketing plan, the entrepreneur may find Lhal slriking early in the market provides a signilicam advantage over any competitors. Maintain iog this differemial advantagc
wiU be a chaUenge bUl represents an important means of achieving long-term succcss .
TRADEMARKS
A
distinguishing word,
name, or sy mbol used to
identify a product
trademark
,
.
The niche p~tent-licensing b\,JSiness of Acacia "e~?~q, . :t M~a a puyo ~eve~l!rs_ in the third,.qu.art~r.'()~.2~O,
(AGG) is baring fruit-and it has proved to be quite" he n-otes, increased 44.6% from ayear earlier,.exc.eedlucra~ive. TItans like Apple (AAPL), Verizon (VZ), Sie- i~g .~~a!ysts' e~pi~fion~~~ On. a sequenti~.I qu.~~er~
mel')s (SO, and Dell Ine. (DELL) ha\(e opted to license to-quarter basis, rey:e~u~s)umped. ~3%, iro!!, t~e.$7 .1
. cettain patents held by Acacia. For.Acacia, tl'!at makes million Acacia repott-ed in the secQnd quar'ter/ notes
the business all the more rewarding.
O'NeilL
What's tiny Acacia's business strategy? It teams
O'Neill expects Acacia to becom.e profi~abl~: ii!.
up with small, little-known tech companiesand takes 2009, with estimated earnings of 11 ~ a share' on pro.
licenses on their patented technologies. Acada then jected revenues of $67.9 million. In 2008, Ac~ca i~ es
goes afier companies it believes have infringed those timated by analysts to have posted a loss !>f 46t a
patents. Fortunately for Acada, it has settled quite share on sales of $44 million.
a number of such patent violations out of court. And
If, as CEO Ryan predicts, more prominent .compathose companies that settle infringement claims usu- nies sign agreements t~ settle patent infringemerits,
ally end up paying fees.
Acacia's top and bottom Iines would leap,a.longwth
The latest company toocpme to 1errrts with Acacia its stock price.
'",
is giant computer maker Dell, which entered into a
Acacia CEO Ryan \on't say which companies he
settlement that included a licensing agreement cov- expects will sign patent licensing agreements, but he
ering a patent relating to network multifunction prin- is confident more big tech players will end up signing
ter technology.
agreements th is year. Expect some surprises. *
In 2008, Apple signed two tech Iicenses with Acacia,
and Verizon Wireless took a license on a process that
synchronizes IP addresses between wireless network
devices, says Acacia Chairman and CEO Paul Ryan. He ADVICE TO AN ENTREPRENEUR
figures that with the more than 100 patents Acacia
now holds, many other companies are likely to end A friend of yours has read the above article and wants
to know if he could benefit from some of the patents
up signing licensing deals with Acacia.
So far, Acacia has been on a rapid growth path, he owns, just as Acacia was able to do. How would
according to both CEO Ryan and analysts. In 2008, you advise him to proceed to learn if any of his patents
says Ryan, Acacia was No. 42 on Deloitte Technol- are being used by other companies? He also wants to
ogy's list of the 500 fastest-growing tech outfits in know if Acacia may be interested in any of his patents
the U.S. He says Acacia expects revenue growth to and what he could do to find out.
come from 45 patent licensing programs that have
already begun generating revenues, including those
*Source: Reprinted from February 2,2009 issue of BusinessWeek by
signed in 2009.
special permission, copyright 2009 by The McGrawHill Compa
Acacia's "growth prospects remain strong," says nies, lnc., from "Acacia Research Finds Ways to Make Patents Pay,"
analyst Sean O'Neill of Singular Research, who rates by Gene Marcial, www.businessweek.com.
168
CHAPTE R 6 PROTECTING THE IDEA ANO OTHER LEGAllSSUES FOR THE ENTREPRENEUR
169
continues to perform its indicated function. For all registrations filed after November 16,
1989, the trademark is given an illitial IO-year registratio D with 10-year renewable terms.
In the fifth to sixth year, the registrant is requi red to file an aftidavit with the PTO indicating that the mark is currently in commercial use. lf no aftidavit is filed, the registraton is
canceled. Between the ninth and tenth year after registration, and every 10 years thereafter,
the owner must file an application for renewal of the trademark. Otherwise, the registration
is canceled. (There is a six-month grace period.)
Trademark law allows the filing of a trademark solely on the intent to use the trademark
in interstate or foreign commerce. The filing date then becomes the first date use of the
mark. This does not imply that the entrepreneur cannot file after the mark has already been
in use. If this is the case, the entrepreneur may file a sworn statement that the mark is in
commercial use, listing the date of first use. A properly worded dec\aration is inc\uded in
the PTO application form o
It is al so possible to file for a trademark if you intend to use this mark in the future. You
are allowed to file in good faith along with a sworn statement in the application that there
is intent to use the trademark. Actual use of the trademark must accur before the PTO will
register the mark. 9
The protection awarded is dependent on the character of the mark itself. There are four
categories of trademarks: (1) coined marks denote no relationship between the mark and
the goods or services (e.g., Mercedes, Kodak) and afford the possibility of expansion to a
wide range of products; (2) an arbitrary mark is one that has another meaning in our language (e.g., Apple) and is applied to a product or service; (3) a suggestive mark is used to
suggest certain features, qualities, ingredients, or characteristics of a product or service
(e.g., Halo shampoo). It differs from an arbitrary mark in that it tends to suggest sorne
describable attribute of the product or service. Finally, (4) a descriptive mark must have
become distinctive over a significant period of time and gained consumer recognition before it can be registered. The mark then is considered to have secondary meaning; that is, it
is descriptive of a particular product or service (e.g., Rubberoid as applied to roofing materials that contain rubber. LO
Registering a trademark can offer significant advantages or benefits to the entrepreneur.
Table 6.2 summarizes some of these benefits.
-.h proyides notlce t e-..:eryone t l;lat you nave eKclusive rights to the usaof th~ rnark
.. tlir.oughou(-t'he territoria l lif)'lits 01. t~e 4~jted St ates,
t~
.~
~~".
._
'*"
It estabhshes fue right to deposit reglstratioii with ~ustoms to prevent importation .qf
;og{>ods.Wi~h sml'ar marK.
.
'.
feentitle~
YQU,to
'.
... -1" Jise. the notice ofiegistr.iion ().
'It..p rovides a basisJor fil ingy ademarl( .appli<!atl9n in for~ig~ c~\JIit.fies.
170
PART 2
and either submitted by mail or filed electronically using the Trademark Electronic Application System (TEAS) available on the PTO Web site.
Filing of the trademark registration must meet four requirements: (1) completion of the
written form, (2) a drawing of the mark., (3) five specimens showing actual use of fhe mark, and
(4) the fee. Each trademark must be applied for separately. Upon receipt of this information,
the PTO a~signs a serial number to the application and sends a flling receipt to the applicant
The next step in the registering process is a determination by the examining attorney at
the PTO as to whether the mark is suitable for registration. Within about three months, an
initial determination is made as to its suitability. Any objections by the entrepreneur must
be raised within six months, or the application is considered abandoned.lffhe trademark is
refused, the entrepreneur still has the right to appeal to the PTO.
Once accepted, the trademark is publshed in fhe Trademark Official Gazette to allow any
party 30 days to oppose or request an extension to oppose. If no opposition is filed, fhe registration is issued. This entire procedure usually takes about 13 months from the initial filing.
COPYRIGHTS
copyright Right given
lo prevent others from
printing, copying, or
publishing any original
works of authorship
A copyright protects original works of authorship. The protection in a copyright does not
protect the idea itself, and thus it allows someone else to use the idea or concept in a different manner.
The copyright law has beco me especially relevant because of the tremendous growth of
the use of the Internet, especially to download music, Iiterary work, pictures, and videos, to
name a few. Although software was added to copyright law in 1980, the issues surrounding
access to material on the Internet have led to major legal battles for the entertainment industry.
When Napster made its entrance in 1999, Internet users were able to exchange music
files at will. The music industry scrambled and fought against this use since its sales of CDs
were significantly impacted. After three years, the music industry was able to win its battle
with Napster. In addition, the Supreme Court ruled that StreamCast and Grokster, which
both have extensive peer-to-peer file sharing software, must implement content filters in
their software to reduce any copyright-infringing capabilities. 11
The Recording Industry Association of America (RIAA) has also aggressively pursued
universities and individual students that have been found to be illegally downloading music. In addition to the 12 universities recently sent prelitigation letters, the RIAA is also
pursuing individual s in what is referred to as "John Doe" lawsuits. One lawsuit involves a
20-year-old woman from Texas who admitted to downloading pirated music in her teens;
she is being asked to pay $7,400 to settle lhe suil. 12
Copyright protection related to the Internet will continue to be a concem and a gray area
until precedents and regulations are made dear. Although these issues seem complcated,
the registering procedure for copyright protection is fairly simple.
Copyrights are registered with the Library of Congress and will not usually require an
attorney. To register a work, the applicant can send a completed application (available 00line at www.copyright.gov), two copies of the work, and the required filing fees (the initial
filing fee is $35 if filed online or $45 if filed by mail, but other fees may apply based on the
number of works included). As a general rule fOI works created after January 1, 1978, the
term of the copyright is the Iife of the author plus 70 years.
Besides computer software, copyrights are desirable for such things as books, scripts, artides, poems, songs, sculptures, models, maps, blueprints, collages, printed material on board
games, data, and music. In sorne instances, several forms of protection may be available. For
example, the name of a board game may be protected by trademark, the game itself protected
by a utility patent, the printed matter or the board protected by a copyright., and fhe playing
pieces covered by a design patent.
()ETHICS
HOW MUCH RESPPNSIBllITY SHOlD OUR YOUTH ti-AVE
FOR ILLEGALDOWNlOADING?
,
The lines have been drawn between the file-sharing
companies (P2P) that provide software for free downIO,ading of music and movies and the entertainment
irfdustry. The Supreme Court has ruled that these
P2P companies do in fact facilitate the iIIegaJ downloading and sharing of entertainment. However, in
spite of the fact that there has been so much publicity
surrounding the legality of such initiatives, the youth
of our nation continue to illegally download material
that has been given copyright protection. This ineludes college students as well. recently evidenced
by the fact that the Recording Industry Association
of America (RIAA) filed copyright infringement Jawsuits against 405 students at 18 different colleges.
This list of colleges included Columbia. Harvard, and
Princeton. According to the lawsuit, these students
were allegedly using a new file-sharing application
called i2hub to download songs and movies at lightning speeds , The RIAA also has evidence that this
high-speed network is also being used at another
140 schools in 41 states.
TRADE SECRETS
trade secrel
Protection
against others revealing
or disclosing information
lhat could be damaging
to business
In certain instances, the entrepreneur may prefee to maintain an idea or process as confidential and to sell oe Jicense it as a trade secreto The trade secret will have a life as long as the
idea or process remains a secret.
A trade ecret is no! covered by any federal law but is recognized under a governing
body of common law in each state. Employees involved in working with an idea or
process may be asked to frst sign a confidential information agreement that will proteet
against their giving out the tcade secref either while an employee or after leaving the
organization. A simple example of a trade secret nondisclosure agreement is iIlustrated
in Table 6.3. The entrepreneur should hire an attorney to help draw up any sueh agreement. The holder of the trade secret has the right to sue any signee who breaches such an
agreement.
What or how mueh information to give lO employees is difficult to judge and is often
determined by the entrepreneur's judgment. Historically, entrepreneurs tended to protect
sensitive or confidential company information from anyone else by simply not making
mero privy to this informaton. Today, there is a tendency to take the opposite view, that the
more informalion entrusred to employees, the more effective and creative employees can
be. The argumenL is mat employees cannot be creative unless they have a complete understanding of what is going on in the business.
Most entrepreneurs have limited resources, so they ehoose not to find means to protect
their ideas, products, or services. This could become a serious problem in the future, since
gathering competitive information legalIy is so easy to accomplish, unless the entrepreneur
takes the proper precautions. For example, it is often easy to learn competitive information
171
172
PART 2
,(
WflERAS. the undersi~re9 RelPt~r\t iecognizes the necessity of maintaining th,e. sti-j~~:'>
, C!:>~!i~~ enC~:'''Yith'.re~pect to any ~rde~~~rets of NVC "
'.,':"/:::~'::'
ReCi~f~n.t here~y agrees as fOHO~~ -...
~:.: ' ..
<, '.
<R.e~,pient
.:'
. ,;: NVC and Recipient's evalation-thereof and shall disclose such informatin only to ',' " ,~',
': perSbns a\Jthoriz~dto rec.eive same by Nv. Redpienhal1 be responsible for any '; 'j',;:,
"damage resultrn~ from any ~reacti?f this Agreement by Redpient.
'
,,'
2 . .R~iP~t shall neither m,!k use of nor disclose to any third partYduring the i?eriOci of.".,
'~is Agreement and thereafter any suc.h trade secrets or evaration there'of unless ;lriOf
- .~nSent i11 writing is given by NVC.
'
o'tlerwisein ttie 'public dorilain. Any prior knwledge oftrad secrets bythe' Recip;e:iif :;.':~:
shall.ge disclos~d in writing within (30) days.
',
, ,
4: ,. At the cqmpJetion of the services performed by the flecipiEmt. R~cipient shallwithi~ ,':c
,(3Q) 'days ,return all original materials provided by NVC and any copies, notes, or other.: .
'
5. Any trade screts made public through publication or product annoLincements are
excluded from this agreement.
'
6. lhis agreement is executed and delivered within the State of _ _ and it shall be
tonstrued, interpreted, and applied in accordance with the laws of that State.
7. This agreement, including the provision hereof, shall not be modified or changed in a.ny
manner except only in writing signed by all parties hereto.
Eftectivethis _ __ _ __ day of _ __ _ ~ 20
REClPIENT: _ _ __ _ __ __ _ _ __
NEW VENTURE CORPORATION:
By: _ -:-:--_ _ _ _ _
ntle: _---'-_ _ _ _ _ __
Date: _ _ _
_ _ _ __
through such mean s as trade shows, transient employees, media interviews or announcements, and even Web sites. In all instances, overzealous employees are the problem. To try
to control this problem, entrepreneurs should consider some of the ideas listed below.
&
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o
e H A PTE R 6
PROTECTING THE IDEA ANO OTHER LEGAL ISSUES FOR THE ENTREPRENEUR
173
Use simple security such as locked file cabinets, passwords on computers, and
shredders where necessary.
Have employees and consultants sign nondisclosure agreements.
Debrief departing employees on any confidential information.
Avoid faxing any sensitive information.
Mark documents confidential when needed.
Unfortunately, protection against the leaking oftrade secrets is difficult to enforce. More
important, legal action can be taken only after tbe secret has been revealed. It is not necessary for the entrepreneur to worry extensively about every document or piece of information. As long as minimal precautioos are taken, mosl problems can be avoided, primarily
beca use leales usuaUy occur inadvertently.
LlCENSING
licensing
Contractual
agreement gving rights to
others to use intellectual
property in return for a
royalty or fee
Licensing may be defined as an arrangement hetween two parties, where one party has
proprietary rigbts over sorne information, proces , or technology protected by a patent,
trademark., or copyrighl. Tbjs arrangement, specified in a contract (discussed later in this
chapter), req uires tbe licensee 10 paya royalty or some other specified sum to the holder
of tbe proprietary rights (licensor) in return for permission to copy tbe patent, trademark,
or copyright.
Thus, licensing has significant vaIue as a marketing strategy 10 holdees of patents, trademarks, or copyrigbts to grow their business in new markets when they lack resources or experience in those markets. [r is also an important marketing strategy for entrepreneurs who
wish to start a new venture but need permission to copy or incorporate the patent, trademark, or copyright witb their ideas.
A patent license agreement specifies how the Iicensee would have access to the patent.
For example, the licensor may still manufacture the product but give the licensee the rights
to market it under their labe l in a noncompetiuve market (i.e., foreign market). In other
in lances, the licensee mayactually manufacture and market the patented product under its
own label. This agreemenJ must be carefully worded and should involve a lawyer, to ensure
the protection of all parties.
Licensing a trademark generally involves a franchi sing agreement. The entrepreneur
operates a business using the tradernark and agrees to pay a fixed sum for use of the
trademark, paya royalty based on sales volume, buy supplies from the franchisor (exampIes would he SheIl, Dunkin' Donuts, Pepsi Cola or Coca Cola hottlers, or Midas muffler
shops), or sorne combination of these. Franchising is discussed later in the text as an
option for the entrepreneur a s a way to start a new business or asa means of financing
growth.
Copyrights are another popular licensed properry. Tbey involve rights to use or copy
books, software, music, photographs, and plays, to name a few. In the late 1970s, computer
games were designed using licenses from arcade game and movies. Television sbows have
also licensed their names for board games or computer games. Celebrities will often license
the right to use their name, likeness, or image in a product (i.e., Tiger Woods golf clothing,
Jessica Simpson perfume, Elvis Presley memorabilia, or Mickey Mouse lunch boxes). This
is actually analogous to a tTademark icense.
Licensing has become a revenue boom for many Fortune 500 companies. These firms
spend hiUions of dollars each year on the reseaech and development of new technologies
that they will never bring to rnarket. As a result, they will often license patents, trademarks,
and other intellectual property to small companies that can profit from them. Microsoft
174
PART 2
Corporation, with its IP Ventures Division, is a great example of a firm that has offeced
technologies for biometric identity authentication, counterfeit-resistant labels, face detection and tracking, and other intellectual property that it does not know how to market or has
no intent to market. 13 These agreements have generated millions of dollars in revenue for
Microsoft. IBM continues to generate more than $1 billion from its licensing agreements. 14
ARC 1nternational, the world leader in computer processors, has increased its licensing of
its technology to semiconductor companies in their chip designoAt present there are about
140 companies worldwide that rely on ARC's technology.15
Although technology is one of the largest generators of licensing revenue, there are
other significant players in this market. The entertainment industry, particularly motion
picture studios such as Disney, Dream Works, Fox, Sony, and Warner Brothers, generates
millions of dollars foc its bottom line with licensing agreements foc clothing, toys, games,
and other related items. NBC Universal [nc., with its television, movie, music, and consumer products, amassed about $1 billion in revenues in 2008. Just recently, NBC Universal released a fullline of products from its successful television show "Heroes."16 Although
in 2006 Disney ended its lO-year licensing agreement with McDonald's, it has inked huge
deals with retailers to market a variety of products based on the success of "High School
Musical" and "Hannah Montana." These products are expected to result in $2.7 billion in
global retail sales. In fact global retail sales of all Disney's licensed merchandse exceeded
$30 billion in 2008. 17 McDonald's, on the other hand, has moved on and signed licensing
agreements with other molon picture studios such as DreamWorks Animation SKG and
Pixar Animation Studios.1 8
Licensing is also popular around special sporting events, such as the Olympics,
marathons, bowl games, and tournaments. Licenses to sell T-shirts, clothing, and other
accessories require written perrnission in the forro of a license agreement before sales are
allowed.
Licensing represents opportunities for many firms to expand into new markets, expand
product lines, oc simply reach more customers within its existing target markets. Sorne
examples inelude Microsoft's MSN Mobile group, which recently signed a licensing agreement with DeviceAtlas to incorporate their databas e so MSN can improve the content it
presently delivers to its customers. This agreement has already resulted in significant increases in mobile registrations. 19 Retailers faced with economic pressures are looking toc
ways to increase sales of higher-margin items. For example, Safeway has been using Bugs
Bunny and his Looney Tunes friends as part of their new Eating Right Kids food and beverage line. These items can cornmand higher prices and pro vide what retailers feel is a
value-added endorsement. 20
Before entering into a licensing agreement, the entrepreneur should ask the following
questions:
CHAPTER 6 PROTECTlNG THE IDEA ANO OTHER LEGAL ISSUES FOR THE ENTREPRENEUR
17S
Licensing is an exceIlent option for (he entrepreneur to increase revenue, without the
risk and costly start-up investment. To be able to Ucense requires the entrepreneur [O have
somelhing to license, which is why ir is so important to seek protection for any product,
information, name, and so on, with a patent, trademark, or copyright. On the other hand ,
licensing can also be a way to start a new venture when the idea may infringe on someone
eise's patent, trademark, or copyright. In this instance, lhe entrepreneur has nothing to lose
by trying ro seek a license agreement from the holder of the property.
Licensing continues to be a powerful marketing tool. Wilh the advice of a lawyer, entrepreneurs may fmd that Iicensing opportunities are a way to nnimize risk, expand a business,
or complement an existing product line.
product saJely and
liability Responsibility
of a company to mee! any
legal specifications
regatding a new product
covered by the Consumer
Produc! Safety A CI
INSURANCE
Sorne of rhe problems reJating Lo product liability weIe dlscussed in the previous seclion.
Besides being cautious, it is also in the best interests of lhe entrepreneur to purchase insurance in the event lhat probLems do occur. Service-related bu inesses such as day-care centers, anmsemenl parks, and shopping centers have had significant increases in the number
of lawsuits.
176
PART
In general, most tirms should consider coverage for those situations as described in
Table 6.4. Each of these types of insurance provides a means of managing risk in the new
business. The main problem is that the entrepreneur usually has limited resources in the beginning. Thus, it is important to hrst determine whether any of these types of insurance are
needed. Note that some insurance, such as disability and vehicle coverage, is required by
law and cannot be avoided. Other insurance, such as life insurance of key employees, is not
required but may be necessary to protect the financial net worth of the venture- Once the
entrepreneur determines what types of insurance are needed, then a decision can be made
as to how much insurance and from what company. It is wise to get quotes from more than
one insurance frrm since rates and options can also vary. The total insurance cost represents
an important hnancial planning factor, and the entrepreneur needs to consider increasing
premiums in cost projections.
Skyrocketing medical costs have probably had the most significant impact on insurance
premiums. This is especially true for workers' compensation premiums, which for some
entrepreneurs have doubled or tripled in the last few years. Insurance companies calculate the premium for workers' compensation as a percentage of payroll, the type of business, and the number of prior claims. Given the problems with fraudulent or suspicious
claims, some slates are beginning to undertake reforms in the coverage. Even before reforms are enacted, the entrepreneur can lake some action to control the premiums by paying attention to details, such as promoting safety through comprehensive guidelines that
CHAPTER
177
is aiarge
group
resol
but can be
coverage.
as a
"t',#:ffi"3j,1"rT."J,ffi:_'ff;::H:
professional
association that offers such
home-based
safbty.
fo.
"nt."p."n"u6
offrce
es on home
SARBANES-OXLEY ACT
it
has
radio. or
TV.23
178
PART
FROM IDEATOTHEOPPORTUNITY
With the passage of this law there has been some concern as to the
law and subsequent directors' liability. For example' will this law dis
dividuals from being members of important boards because of their
Oxley AcL
The other option, ofcourse, is for the entrepreneur to set up a board of advisors insbead
of an extended board of direcrors. Advisors would not be subject to liability since they do
not formulate final policy for the venture but only provide recommendations to the actual
venboard of directors, which in this case could consist of the management of the start-up
a
require
would
they
involved,
were
investor
ture. If a venture capitalist of even an angel
and
acceptable
be
likely
not
would
advisors
of
a
board
board seat, in which case the use of
be necessary.
CONTRACTS
contra A legally
binding agreement
between two parties
CHAPTER
li
rule is to never rely
For example, a company
used in the trainins. The
. One
t"r:Til;tl"'fi$,:ffi;*"t::;:rrjr};;:
In addition to the
l.
2.
3. Do not sign if there are blank spaces (these can be crossed
4. Make a copy for your hles after signing.
out).
IN REVIEW
SUMMARY
This chapter explores some of the major concerns
regarding inteilectuar property of
as well as.other important legal issues such
as product safety, insur_
ance. contracts. and the sarbanes-oxrey Act. The probrems
with inteilectuar property
have become more compricated with the growth
of the tnternet. rt i, i.portant for the
entrepreneur to seek regar advice in making any
inteilectuar property iegar decisions
the entrepreneur;
180
PART
OPPORruNIY
such as patents, trademarks, copyrights, and trade secrets. Lawyers have specialties
that can provide the entrepreneur with the most appropriate advice under the circumstances. There are also resources identified in the chapter that should be considered
before hir:ing an attorney. Some of this information can save time and money for the
entlepreneuf.
A patent requires a patent attorney, who assists the entrepreneur in completing an
application to the Patent and Trademark Office with the history and description of the
invention, as well as claims for its usefulness. An assessment of the existing patent(s)
will help to ascertain whether infringement s likely and to evaluate the possibilities of
modifying the patented product or licensing the rights from the holder of the patent.
A provisional patent can be filed that will give the entrepreneui 12 months to finalize
the patent. Being the first to file with a provisional patent can be very useful to provide immediate notification of ownership of the patent rights as well as provide time
to develop
business strategies.
A trademark rnay be a word, symbol, design, or some combnaton, or a slogan or
sound that identifies the source of certain goods or services. Trademark give the entrepreneur certain benefits as long as the following four requirements are met: (l) completion of the written application form, (2) submission of a drawing of the mark,
(3) submission of five specimens showing actual use of the mark, and (4) payment of
CHAPTER
RESEARCH TASKS
1'
2'
cases. Describe
the process
and
defense.
3' what are some of the world's most famous trademarks? use data
to back up your
anSwer.
liability: (a) negligence, (b) warranty, (c) strict riabirity. and (d)
misrepresentationWhen possible, report both the details and the payouts.
CLASS DI SCUSSION
1'
SELECTED READINGS
Baroncelli, Eugenia; carsten Fink; and Beata Javorck. (2005).
The Global Distribution
of Trademarks: Some Stylised Facts. World Economy vol. 2g, no. pp.
6,
765_g2.
This paper provides the first empirical analysis of the gtobat
distribution of trademarks. The analysis is based on data compitd and puilished
by the world tntellectual Property organization. tt includes an analysis f trademai registrations
across
countries of different income groups and diffrent sectoru
of the economy. The resulb provide implications for changes in intellectual property protection
in international trade.
Caballero-Sanz, F.: R. Moner-Colonques; and J. Sempere_Monerris. (2005).
Licensng
Pof icies for a New product. Economcs of tnnovation
g,
& New Technology, vor.
14, no.
pp.697-7't3.
studyarguesthatth
ritory crause. consu
trto not jr"i., the exclusive
Product' The
territory
provision.
exclusive terarrangement
I82
PART
Chaudhry. Rahul; and Kajigailiu G. Kamei. (July 2008). Can Your Firm Keep lts Secrets?
Managing Intellectual Property, lssue 181, pp. 109-12.
Irade secrets have become an mportant strategy of choice to protect confidental
information. The information age has enhanced the amount and importane of
nonpatentable information. This ar,tcle focuses on a definition of a trade secret and
describes ways to protect this information.
Cromfey, Timothy. (2004). Twenty Steps for Pricing a Patent. Journal of Accountancy,
Depoorter, Ben; Francisco Parisi; and Sven Vanneste. (2005). Problems with the
Eniorcement of Copyright Law: ls There a 5ocial Norm Backlash? International lournal
of the Economics of Business, vol. 12, no. 3, pp. 361-69.
Copyright norms have developed in opposition to existng copyright laws. This arti'
cle argues that copyright enforcement efforts may actually induce further copyright
disobedience by reinforcing the moral and social beliefs against conventional copy-
right
law.
Dodwef f, Wif fiam J. (2008). Six Years of the Sarbanes-Oxley Act. CPA Journal, vol.78,'
no. 8, pp.38-43.
assessment of corporate financial reporting is provided in this review of the
effectiveness of the Sarbanes-Oxley Act. The backlash of negative factors that was
created from the new law is presented as well as a subsequent cost-beneft analysis
of the relative significance of each of these factors.
An
f rance, M.; and s. Siwolop. (1996). How to Skin a copycat. Euslnessweek (october 21,
1996), pp.4-7.
pp.39-41.
This article argues that because a trademark is an appreciating asset with a potentially perpetuat tfe, it s mportant to choose trademarks carefully and protect them
through federal registraton and controlled licensing. /t drscusses issues of trade-
mark clearance, the establishment of trademark rights, the federal trademark registration and application process, and domain names.
Marshalt, Jeffrey; and Ellen M. Heffes. (July/August 2008). Smaller Firms Get Hit Harder
Overseas. Survey Finds. Financial Executive, pp. 9-10.
The expansion of many small entities into foreign markets raises some significant
legal issues. Differences in laws, languages, currencies, and styles of conducting
business enhance the need for hiring a lavvyerThe survey reported here indicates a
shift in relevant factors in doing business overseas from terrorism and political insta'
bility to currency risk and supply chain failure.
Ryan, Kenneth E. (February 2003). Product Liability Risk Control. Professional Safety,
pp. 20-25.
ln the current legat climate, parties injured by the defective product can easily sue
not only the manufacturer of the product, but also any commercal supplier in the
distribution channel, including the wholesaler and the retailer. The article discusses
some of the risks and tiabilities that these parties face and some of the product
quality guidelines that they can follow to Iimit their liability.
cHAprER'6
1.
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rua iy zo'8).
tnte,ec.
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{October 2002), pp. 1-6.,
6.
7
(re
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Rapoza, ,,Hope
tf,,,sinro,matno roaay
See www.uspto.go/main/trademarks.htrn.
pp.7-8.
13.
14.
12.
5.
2oo7), p-
1.
4.
PART