space

4. INITIAL OPERATIONS

e. Intellectual Property

Introduction

The term “intellectual property” (IP) refers to trademarks, trade secrets, copyrights, and patents. Federal and state laws generally prohibit the unauthorized use, reproduction, or distribution of IP owned by someone else.

The different categories of IP law protect the following types of intangible property:

• trademark law protects words, names, symbols, and devices
• trade secret law protects confidential information
• copyright law protects original works of authorship
• patent law protects inventions

IP law is relevant to the private equity business. First, a fund management company should take reasonable steps to protect its own trademarks and trade secrets. Second, the company should take reasonable steps to protect the trade secrets of its private equity funds and their portfolio companies. Third, the fund managers should perform due diligence on the IP of their potential investments.

Trademarks

The trademarks of a fund management company usually consist of the company name and logo. For each name, two trademarks may apply – one for the standard text version of the name, the other for the stylized text contained in the logo.

Trademark law generally gives a company the exclusive right to use its trademark in connection with specific industry classifications of goods and services. In the United States, trademark rights arise upon the first use of the trademark in commerce, not upon the creation or government registration of the trademark. Trademark protection applies only for the period of use.

Although not required, registration of trademarks provides certain benefits under the law.

At the federal level, registration with the U.S. Patent and Trademark Office allows the registrant to do the following, among other things:

• sue in federal court for trademark infringement
• prove ownership of the infringed trademark
• require the infringer to disgorge profits
• recover up to three times the actual damages
• register in foreign countries based on the U.S. registration
• register with U.S. Customs to block infringing imports

At the state level, the California Secretary of State also registers all types of trademarks except trade names. Trade names may be registered at the county level. The benefits of registering with the California Secretary of State include, without limitation, the right to obtain an injunction against infringement. Registration at the county level may help the plaintiff prove, among other things, ownership and prior use of the trade name.

Even if trademarks are registered, the owner may lose the benefits of registration by failing to enforce its rights against infringers. Thus, if you discover an infringing use of your registered trademark, consult with a trademark attorney immediately.

Trade Secrets

Trade secrets are protected primarily at the state level, but certain federal criminal statutes also apply.

Trade secret law only protects confidential information with economic value. Legal rights arise upon creation of the information, not its use or registration. In fact, registration is not possible.

To obtain legal protection, companies must make reasonable efforts to maintain the confidentiality of trade secrets. For example, they should do the following:

• limit access to personnel with a “need to know”
• include confidentiality obligations in agreements with employees and independent contractors
• distribute a personnel handbook containing a confidentiality policy
• control disclosures to company outsiders
• execute “non-disclosure agreements” (NDA's) with outsiders before sharing information
• include a prominent confidentiality notice on materials containing trade secrets
• add “terms of use” with a confidentiality provision to the company website
• require personnel to return or destroy materials upon the termination of their services, or upon request

Copyrights

Private equity firms investing in technology, entertainment, and other creative sectors should care about copyrights. Specifically, they should investigate whether their portfolio companies own and protect their creative products.

Copyright law grants copyright owners the exclusive rights to copy, use, publish, and otherwise commercially exploit the original works covered by the copyrights. The period of exclusivity depends on various factors. In the case of new works owned by companies (as opposed to individuals), the copyright terminates 95 years after the year of its first publication or, if earlier, 120 years after the year of its creation.

Examples of protected works are websites (both the content and the underlying computer code), business cards, letterhead, brochures, and other marketing materials. Copyrights also apply to such works as instruction manuals, software, video games, motion pictures, screenplays, music, and architectural designs.

Companies automatically own the copyrights in new works created by their employees on the job. In addition, companies may own the copyrights of new works created by their independent contractors, if the independent contractors execute written “work made for hire” agreements applicable to such works. With regard to existing works, companies may acquire the copyrights by executing written assignment agreements with the copyright owners.

A company may register copyrights at the federal level, but not the state level. At the federal level, the applicable agency is the U.S. Copyright Office. Unlike trademark law, copyright law protects works immediately upon their creation, not upon use or registration. However, registration provides various benefits, such as proof of ownership, statutory damages, and reimbursement of attorney fees in litigation.

Copyright law requires copyright owners to file deposit materials with the U.S. Copyright Office within three months after first publication. This “mandatory deposit” obligation is different than the registration of copyrights. Failure to file deposit materials may result in fines or penalties, but copyright protections continue to apply.

Patents

Patent law grants inventors (or their assignees) the exclusive right to exploit their inventions for 20 years after registration. Patent law only protects inventions that are useful, novel, and not obvious. Patents are usually one of two types -- “utility” and “design”.

Works must be registered to obtain protection under patent law. Registration takes place at the federal level only. The applicable agency is the U.S. Patent and Trademark Office.

Unlike copyrights, employers do not automatically obtain ownership of patentable works created by their employees. However, the “shop rights” doctrine allows employers to use inventions created by the employees within the scope of their employment or in the workplace. The employee maintains exclusive ownership of the patent rights other than use. The shop rights doctrine may be limited by agreement.

From the perspective of a private equity firm, portfolio companies are more valuable if they own the inventions of their employees and independent contractors.

IP Notices

A fund management company should prominently display the proper trademark, copyright, and patent notices in all marketing materials, including websites. In addition, as noted above, the company should include a prominent confidentiality notice on materials containing trade secrets.

The legal notices put third parties on notice of the protected nature of the materials. In a legal dispute, the existence of such notices may help the company win the lawsuit and recover statutory damages, including attorney fees.

Timing of Registrations

Trademark applications may be filed at any time.

Copyright applications should be filed within three months after first publication or at least prior to any infringement, because the law provides for extra statutory damages for “willful” infringement if the filing is timely.

Patent applications must be filed within one year after the first sale or other distribution of the invention to the public. However, some foreign countries will enforce a patent only if the owner filed the application in the United States prior to the first sale or other distribution.

Registration of intellectual property usually takes longer than expected – especially in the case of trademarks and patents. Thus, the IP owner should begin the application process as early as possible. It will probably be necessary to consult with attorneys who specialize in the applicable areas of IP law.