Investors' Guide to IP: Four Key Considerations

Those active in the professional investing world usually understand quite a bit about intellectual property protection, but there are still pitfalls. Here, we explain some important considerations that can protect investors from problems down the road.

Verify Ownership

Ownership of IP can be difficult to pin down. But the potential downside of acquiring a company that doesn’t own the assets it claims to be selling is devastating. Some potential issues include:

• Assignment: Make sure all assignments are lined up from founders, inventors, related companies, and others. In the U.S., while it isn’t necessary to record assignments of trademarks and patents with the U.S. Patent and Trademark Office or of copyrights with the U.S. Copyright Office, recording should be done to put third parties on notice of the owner’s rights.
• Work for hire agreements: Often an independent contractor agreement will include a clause stating that any work product is work for hire owned by the company rather than the contractor. Although this is a standard clause in independent contractor agreements, work for hire is a very specific copyright law concept and many works defined as such in these contracts legally may not qualify as works for hire. Even if a contract states that work product is work for hire, it should also specify that, in the event that the work is not considered work for hire, it should be considered assigned. Further, the contractor should agree that it will execute any necessary documents to effectuate the assignment. If a contract between an inventor or other creator and the target company is not specific, ownership should be clarified by a separate agreement clarifying assignment of the work.
• Inventor’s employment: This is a complex issue that merits careful consideration. If an inventor is an employee of another organization while working on a startup on the side, be careful that the invention is not a work for hire owned by the employer. Particularly if an invention is in the same field as the inventor’s day job, review the inventor’s employment contract, the state laws that limit employment agreements, and other circumstances surrounding the invention, such as whether work on the invention was conducted on the employer’s premises.

Review Agreements Affecting IP Rights

In addition to assignment agreements, pay attention to other contracts that could affect intellectual property rights. This could include prior agreements that affect the owner’s freedom to operate within the technology or restrictions on the ability to use a trademark.

If the company has already licensed its IP in some way, carefully review the licensee’s use as well as provisions for termination or assignment of the licensor’s rights.

Know the Industry and the Market

The importance of IP registrations, particularly patent registrations, will often depend upon the industry of the target company. For example, in medical devices and biotechnology, patents may be linchpins of the investment. On the other hand, in an industry such as software where patentable technology often is developed after acquisition, patent ownership may not be as crucial.

Similarly, the importance of IP registration may depend on the target countries. For example, in the U.S., trademark rights arise from use. A trademark owner may take action against infringers even without a federal registration, although registration provides important benefits for enforcement. In many other countries, however, it is necessary to register trademarks in order to enforce rights.

Consider Registration Strategy

Consider the current intellectual property strategy of the target company as well as your strategy as an investor going forward.

While patent registration can play a crucial role in startup and acquisition strategy, careful consideration of the goals of registration can streamline the process and ensure that priorities are front and center. Startups, particularly with inventor-owners, may be enthusiastic about registering patents. A large patent portfolio may on first glance be impressive to a potential investor. But, despite a volume of patent registrations, it is important to ensure that the key aspects of the technology are protected.

Filing patent applications can be expensive, particularly on the international front. We help identify the strategic reasons to invest in the extra protection and help assure ROI. Filing provisional patents may help to buy time and save money. On the other hand, trademark and copyright registrations are comparatively less expensive and simpler. If a brand is a significant portion of the target company, look for trademark registrations in key jurisdictions. Copyright ownership also has benefits for enforcement and can provide significant protection in fields such as software.

In addition, consider instances in which filing IP applications might be detrimental, as in the ability to protect trade secrets. Conversely, if an invention is disclosed, the U.S. patent application must be filed within a year of disclosure.

The IP conversation that begins in the early stages of acquisition should continue and be refined throughout the lifecycle of the company.

At AEON Law, we are experienced IP attorneys with expertise registering patents, copyrights, and trademarks and protecting trade secrets in the United States and around the world. Just as importantly, we have worked with investors and startups on a range of transactional issues. We are not only technically savvy, we are also strategic partners with our clients in building their businesses. Please contact us to learn more about how we can help you.