Understanding and Protecting IP in eCommerce Business
This post is Part 3 of a series covering core legal issues for eCommerce and Internet-based businesses.
IP Assets in eCommerce Businesses
Intellectual property (IP) is a term used to describe assets whose value is not based on its material components, but instead is driven by its creative and useful elements. For example, an off-the-shelf blank 1GB USB stick might have a retail value of $30. But if someone copied the Coca-Cola formula onto that USB stick, that same device could be valued at billions of dollars. The physical nature of the USB stick has not changed. What is different is the value of the IP that has been added to it.
Although IP, itself, can often be difficult to appropriately value on a company’s balance sheet, in our digital economy, every savvy company appreciates that IP is as valuable as its more tangible assets such as real estate, inventory, and equipment – perhaps even more so. For eCommerce business, IP may represent most, if not all, of the entire value of the company.
As such, it is critical for eCommerce businesses to adequately protect these valuable assets.
The I S.U.E. Model for IP Protection in eCommerce Business
Given the importance of IP to eCommerce businesses, they must develop a comprehensive strategy to ensure these valuable assets. The I S.U.E. Model can help eCommerce businesses with that challenge.
“I S.U.E.” is an acronym that stands for: Identify, Secure, Use & Enforce. By crafting an IP strategy that includes these four elements, eCommerce businesses can adequately protect these critical assets.
Identify
As quoted in GI Joe cartoons from my youth, “Knowing is half the battle.” In this context, that means that before IP assets can be protected, eCommerce businesses must identify all of their IP assets.
There are four primary types of IP: trademark, patent, trade secrets, and copyright. How IP rights are created and what is needed to effectively protect them will depend on the type of IP that is created. Below is a very basic overview of these four types of IP.
Trademark
A trademark is any name, symbol, figure, letter, word, or mark adopted and used by a business to designate its goods/services and to distinguish them from those of others. Trademarks include service marks, certification marks, and also trade dress, which identifies the source of goods by packaging, product image, and look and feel of business (think of the famous Coca-Cola bottle shape).
In the United States, trademark rights are created immediately and automatically once a mark is used by a company to market their goods or services. However, those common law rights are extremely limited. To grant stronger and nationwide rights in a mark, eCommerce businesses can also register TMs with the United States Patent & Trademark Office (USPTO).
Situations that might give rise to trademark legal issues for a typical company include:
Formation of new company or spin-off
New products or branding
Selling third-part products or software via your website
You notice a similar mark used by other company
Patent
A patent is the exclusive right to an inventor to manufacture, use, or sell an invention.
This can only come from the federal government, and in the United States that means the USPTO. A patent must meet statutory requirements of novel, useful, and non-obvious.
Patent rights expire after 20 years from filing, and they cannot be extended or renewed (except for design patents, which last for 14 years from issue and cannot be renewed).
Situations that might give rise to patent legal issues for a typical company include:
Company invents a new product or develops a new business method
Start-up wants to raise money by pitching a new invention to potential investors
Learn of a competitor’s use of your patented product
Trade Secrets
Trade secrets are secrets kept from the world that relate to how to manufacture, use, or sell something. They merely need to be business secrets that give companies some type of competitive advantage.
No registration is required, and trade secrets do not expire. However, owners of trade secrets must take reasonable precautions to ensure they are kept secret, such as limited access, using NDAs, etc.
Although situations that might give rise to trade secret legal issues for a typical company can be essentially the same as patent issues, others include:
Develop novel software algorithm
Customer, vendor, and pricing lists
Hire new employees or get new partner
Former employee now working for a competitor
Copyright
Copyright is the exclusive right to make copies, license, and otherwise exploit a literary, musical, or artistic work, whether printed, audio, video, or other medium.
Under U.S. law, copyrights can cover 100 years; most other countries do not permit copyrights to last this long. These rights are created immediately once the work is created and owned by the author. Under Berne Convention, this is the one type of IP right that IP owners in the United States gain automatic protection in other countries.
Copyright owners don’t need registration to assert copyright ownership, but registration gives additional rights/benefits such as statutory damages, the right to collect attorney fees, and the ability to sue in federal court. A copyright registration also serves as “per constructive notice to the alleged infringer of the ownership by the copyright owner in the work.
Situations that might give rise to copyright legal issues for a typical company include:
Creation of web site
Develop a software program or mobile application
Create blog posts, training materials, email newsletters or an eBook
Podcasts
YouTube and Instagram posts
Secure
Once all IP assets have been identified, IP owners must take appropriate action to secure their rights in the IP, and they must use direct and indirect means to do so.
Securing IP Rights – Directly
Direct action to secure IP rights involves using agreements to define the ownership with venture partners. Although this strategy is limited to those parties who execute contracts with the IP owners, it allows the IP owners to define their IP rights broadly and makes enforcement a matter of contract law.
NDA’s/Confidentiality Agreements
Partner/JV Agreements
Assignments/Transfers
“Work for Hire” and development agreements
Securing IP Rights - Indirectly
Indirect action to secure IP rights involves taking advantage of national IP registration laws and regimes such at USPTO for trademarks and patents, along with registering copyrights with the US Copyright Office. Although registered IP rights allow IP owners to stop the use of their IP by folks they may have never met, the rights are limited to those granted by the national government.
Use
Once IP rights are property secured, IP owners can safely and confidently use their IP in their business. But the real value of IP legal protections is the ability for IP owners to stop others from using their IP without permission. This permission typically takes one of two forms: license or assignment.
IP owners can permit others to use their IP through license agreements, typically for a fee (i.e., a royalty). License agreements can be very specific and negotiated between the IP owner and each user (each, a “licensee”). Or the license can be a standard agreement such as an End Use License Agreement (EULA), or similar agreement, such as the ones we click to accept when we download a mobile application to our phones or sign up for an online account at a website.
By contrast to a license, an assignment is the transfer of the IP owner’s rights to another person. This is a permanent transfer of the IP which, once completed, means the IP owner is no longer the owner of the IP, and thus has no further right to use the IP.
To illustrate the difference between license and assignment, if you rent a car for the week, you are expected to return the vehicle at the end of the rental period. Your rental fee will be based on the days and/or miles you used the vehicle. However, if you purchase a vehicle, the title is transferred from the prior owner to you, and you will not be expected to return the vehicle to the prior owner. Your price will be based on the overall value of the vehicle.
Enforce
Because IP laws grant IP owners exclusive rights to their IP assets, if an IP owner discovers someone is using their IP without permission, U.S. law empowers them to take legal action to enforce their IP rights. This could include obtaining injunctions against the infringers and/or initiating infringement lawsuits to collect money damages.
However, it is the responsibility of the IP owners, themselves, to discover infringement and take action to enforce their IP rights.
Enforcement can involve several strategies, including:
Investigating claims/potential infringement
Drafting letters of inquiry & “Cease & desist” letters
Negotiating settlements & consent-to-use agreements
Prosecuting & defending infringement lawsuits
Special IP Challenges
Design Patents. These types of patents protect the design elements of a useful device. In some cases, a given item could potentially be protected by a copyright, a trade dress registration, and a design patent.
Computer software – Can be protected by copyright, patent, or trade secret. Copyright is easier but affords protection only against exact copies. Patent is greater protection, but harder to get because program’s “utility” must be novel. Plus, patents are expensive and time-consuming to obtain, which may not be effective for fast-evolving software products. Trade secret is effective for non-public elements like algorithms but will not protect look and feel of site.
Co-Developed works – Each owner will own 100% of the IP, meaning that they could license their rights to a third party without the consent of the co-owners.
Internet – Use of trademarks as part of search terms, domains, AdWords, meta tags, Facebook and social media accounts and hashtags, etc., can lead to infringement issues.
International IP – Because almost all U.S. legal protections for IP assets stop at the border, protecting U.S.-created IP abroad continues to be a huge issue for American companies. Counterfeiting is a multi-billion-dollar annual industry. However, IP owners can get protection from U.S. Customs and Border Protection for infringing imports once they land in the United States.
Common Pitfalls for IP in eCommerce Businesses
There are numerous areas where eCommerce businesses can run into IP-related legal challenges. Some common ones that can cause a real problem include so-called “work for hire” by third parties, and creative content provided to the eCommerce business by its founders.
Work for Hire
eCommerce businesses often will employ bloggers, graphic artists, content developers, web designers, and other third parties to provide creative content to their ecommerce businesses. To the extent the works they create give rise to copyrights, the creator is the owner of the works by default.
Because these providers are paid for their creative services, the eCommerce businesses believe that the eCommerce business is the owner of the work under the legal doctrine of “work for hire.”
Work for Hire statutes hold that works created by certain artists and service providers are automatically owned by their employers. However, “work for hire” is more limited than most eCommerce businesses realize. It only applies to content created by employees acting within the scope of their employment.
If these content providers are not employees of the eCommerce business (i.e., are independent contractors), or if they are employees but the content was created on their personal time and was not part of their job, the copyrights in and to the works do not automatically belong to the eCommerce business. Instead, they are retained by the creators – even after the eCommerce business pays the creators for their services.
A similar challenge exists for inventions and methods which give rise to trade secret or patent rights that are created by these individuals.
This problem has a very easy solution: the eCommerce business merely must get the creator to assign their copyrights and patents to all created works to the eCommerce business via a written agreement. Language to this effect can be added to the contract with the provider when an eCommerce business engages their services.
Founder-Created IP
Much like the misconceptions around the automatic ownership of creative content provided by third parties, as described above, any content created by a company founder will automatically be owned by that creator – and not by the eCommerce business, even if they are the sole owner (unless the eCommerce business is legally a sole proprietorship).
When it comes to individuals providing any services to the company, eCommerce businesses should appreciate that all such individuals are classified as either employees or contractors for purposes of copyright and other IP ownership. In many cases, a founder will not be an employee of the company. As such, the eCommerce business and the founders should enter into agreements clearly stating that all IP rights created by the founder are automatically transferred to the eCommerce business upon creation.
Failure to do so can cause significant issues if/when the company seeks financing, wants to be sold, or if the founder has a falling out. Better to preemptively resolve any such possible issues in the early stages – when everyone is friendly.
Importance of IP Assets in eCommerce Business
For an eCommerce business, IP assets can represent most, if not all, of the entire value of the company. As such, it is critical for them to adequately protect these critical assets.
Working with an experienced IP attorney familiar with the eCommerce industry can help ensure that eCommerce businesses can effectively Identify, Secure, Use, and Enforce their IP assets.
To view previous articles in this series:
Part 1: eCommerce Law for Internet-Based Businesses
Part 2: Privacy Law and Requirements for eCommerce Businesses
ABOUT THE AUTHOR: Jim Chester is a 25-year technology business lawyer, professor and entrepreneur. He is a recognized authority in buying and selling technology businesses, global technology transactions, and providing strategic legal counsel for innovation-based companies. For more on Jim, visit his professional profile. You may email Jim at jim.chester@klemchuk.com.
For more information on eCommerce data privacy, see our Internet Law and eCommerce Legal Services and Industry Focused Legal Solutions pages.