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Protect Your Assets
By Francis X. Gilpin
Associate Editor
Randy K. Sterns, a shareholder at the Tampa law firm of Bush Ross PA, represents entrepreneurs forming business ventures to develop and market new products and services.
Six years ago, Bush Ross helped a client, who had developed a rapid process for preparing rotisserie-like chicken, win a $48.6 million Hillsborough County jury verdict from Perdue Farms Inc. The damage award for alleged misappropriation of the process was reduced on appeal, and the parties settled out of court.
Sterns, who has a master's degree in business administration to go with his law degree, takes clients through the legal steps of setting up a business, with an eye toward preventing such litigation.
The Gulf Coast Business Review asked Sterns to discuss how entrepreneurs can protect themselves against the loss of intellectual property or other pitfalls that can result in litigation. Here's an edited transcript of the discussion.
Can you talk a little bit about how intellectual property is defined, by case law and statute?
Everybody uses that "intellectual property" loosely. You're really talking about intangible property assets, in contrast to equipment, furniture, fixtures, real estate, where you can go out and touch it.
It really gets at trade secrets, which was the Perdue case and which are really proprietary methods, procedures, know-how that a company or an individual develops and owns. You have trade secrets and patents and trademarks.
Do you find juries have a tougher time understanding this than they do if somebody swindled somebody out of real estate?
I don't litigate IP cases. With that caveat, it depends on the category of intellectual property asset. Patent cases are difficult because patents get at very complicated design drawings, engineering.
I don't think a trademark infringement case is necessarily that complicated. People can understand a mark. They can understand a Coca-Cola, a McDonald's. They can understand a Nike swoosh.
What are some of biggest mistakes you see entrepreneurs making in terms of protecting intangible assets?
Ownership of the asset needs to be clarified and protected from the outset. Where that can come into play is when an employee works on a project, is employed by the business or there's an independent contractor relationship. You can have problem after problem if it's not clarified at the outset of the engagement that the entity that is paying for the services owns the results of the work.
That's particularly important for software companies. That can come up where there could be disputes among owners who go into business together in a partnership or an LLC or a corporation. Getting ownership of the intellectual property assets clarified at the outset can save thousands of dollars at the end in litigation costs.
Is there anything a business owner can do physically to secure software code and that type of thing so an independent contractor doesn't walk out the door with it?
Software escrow agreements are very common, where the original code is kept in security and kept in escrow. Limitations can be placed on who is actually given access to that.
If there is a termination, usually it's important to have an agreement that they are required to deliver any documents, material, codes and acknowledge that they have returned that back to the employer. Sometimes the individual, the employee that leaves, may have no assets that you can even sue to get.
It becomes a weapon to go after the new employer for infringing on a trade secret, proprietary information that that employer owns and the only way they could have gotten access to it is through this employee.
At small companies, is this a priority?
It is a problem because they're understaffed. If you don't have a patent, you don't have a trademark, you don't have a copyright, you're falling below into that trade secret category.
Trade secret cases are the most difficult to prove. Trade secret cases all come down to you having to show that it's really proprietary, that it's something special. A proprietary item that you've created that is an advantage over someone else and that you treated at all times as a house secret that means everything to this company.
You sometimes also may have the extra burden that the market for that product or service is not fully developed yet?
Again, this is a very difficult thing. I can't tell you how many clients I've had over the years who've had an idea that they haven't reduced to a patent application and that it has all kinds of value and potential, if it's ever exploited.
Do you have any practical advice for entrepreneurs getting started who think they have something that's worthwhile?
They need to do the inventory of what's important. Make sure you have agreements in place that they really do own what they are working on to create.
That's with employees, independent contractors, joint venture participants?
And within the ownership group itself. For example, you've got two or three partners. One person is contributing money. Another person is contributing ideas. It needs to get clarified who owns the assets. Because if there's any doubt as to what anybody is contributing, there's going to be fights later on, if they ever split up, as to the ownership of the intellectual property.
They should have that at the time of incorporation?
When they form this entity, one of earliest steps they need to take is to make sure that is taken care of in a document.
If it's a trademark, there's a whole process of selecting a name and a mark - one that's a good, solid mark, one that's not just a generic descriptive mark. Kodak, Exxon, those are arbitrary, made-up letters that have become very good trademarks.
If you've got a dream of developing a sandwich shop that you hope to franchise someday, you've got to get a solid, good name, or you'll never be able to franchise. The whole thing you franchise is the name.
Joe's Pizza Parlor is probably not a good name.
Probably not a good name. That's the steps that become important for the small business. Once they have clarified the ownership, once they've documented internally that they own this, go through all of the filings to register and protect those assets. If small businesses will do those steps right there, they've gone a long way toward doing what they should do to protect their intellectual property. And you don't need a huge staff to do those things.
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