IP Audits: Uncovering the Dirty Little Secrets

November 2009

1. Introduction

There are four types of intellectual property-patents, copyrights, trademarks and trade secrets-and every business has some form of intellectual property. Patents protect inventions, and the criteria for patentable inventions are that they must be useful, novel and nonobvious. Copyrights protect original creative works like books, movies, songs, photographs and paintings. Source code for computer programs is also protectable under copyright laws, as is the content of a website. Copyright protects the expression of an idea but not the idea itself. Patent and trade secret laws protect the idea itself.

A trade secret is by definition something that is kept confidential and that would have value to a competitor if disclosed. Unlike with patents and copyrights, there is no government registration process for a trade secret. Trade secret status may be lost if the owner of the trade secret is not vigilant in taking steps to preserve the confidentiality of the information at issue.

A trademark is anything that indicates the source of goods or services. For example, a trademark can be a name or a logo, but it can also be a slogan (like "Patent Law for the New West®"). Unregistered trademarks are afforded some level of protection, but trademarks that are registered with the U.S. Patent and Trademark Office receive heightened protection. For a discussion of the benefits of a federal trademark registration, please click here. Congress recently increased the statutory damages for trademark infringement. For a discussion of this legislation, please click here.

Patents are issued by the U.S. Patent and Trademark Office, and there is no such thing as an unregistered patent (there is no protection for a potentially patentable idea without an issued patent or a pending application). Likewise, although a copyright technically exists from the moment an original work is created, a copyright holder has no right to enforce her copyright unless the work is registered with the U.S. Copyright Office. Thus, an unregistered copyright is a right without a remedy.

The IP audits that I conduct usually consist of half a day of interviews (ordinarily half an hour each) with key personnel. In addition to interviewing top management (the CEO, CFO and President), I also like to interview the managers of the human resources, information technology, and sales and marketing divisions. This enables me to get a comprehensive view of the business and to cover the areas that are most likely to involve some form of intellectual property. The deliverable resulting from the IP audit is an IP audit report that includes a list of action items. It is not unusual for me to work with a client for one to three years after the IP audit to complete the action items included in the IP audit report.

With that background, I will address next the four areas of intellectual property and what we ordinarily cover in an intellectual property audit.

2. Patents

In the area of patents, the questions I ask during an IP audit are directed toward determining whether the company has any kind of invention that may be patentable. A patentable invention could be anything from a hand tool to a cosmetic product to a business method. If not, then I focus the remainder of my questions on the other types of intellectual property addressed below. If so, then I will ask questions related to both ownership and disclosure.

The default under U.S. patent law is that the individual inventor owns the patent rights to his invention, regardless of whether someone else paid him to develop it. Clients often assume that because they paid someone to write a software program for them or to design a product for them, they own the patent rights to that invention; however, when it comes to independent contractors, the client does not own the patent rights unless the inventor has signed a written assignment of his patent rights to the client. When it comes to employees, the situation is a bit more complicated.

In the absence of a written employment agreement, the employer does not own the patent rights to inventions that its employees develop unless the employee was specifically hired to solve a particular problem, and the invention relates to that problem. The problem with relying on the "hired-to-invent" doctrine is that it is highly fact-specific; the burden will be on the employer to show-through offer letters, job descriptions, etc.-that the employee was hired to solve a particular problem. The far better approach is to have all employees sign a pre-invention assignment agreement as a condition of hiring. Without a written patent assignment agreement, and without evidence to support an argument that the hired-to-invent doctrine applies, the employer will have a nonexclusive right to practice the invention (called a "shop right"). A shop right is a license, however; it does not constitute ownership of the patent rights.

The other issue I address during IP audits is the issue of disclosure. Under U.S. patent law, an inventor has one year after the first public disclosure of an invention to get a patent application on file, or else the invention will be deemed to have entered the public domain. The term "public disclosure" includes publication, sale, offers for sale, and public use. For more information on the one-year grace period under U.S. patent law, please click here. If, as a result of the IP audit, we identify a potentially patentable invention, and we establish that the clients owns the patent rights to that invention, then we must determine whether there is still enough time to file a patent application before the end of the one-year grace period. Going forward, we often work with client to develop timelines to ensure that they will not miss patent deadlines in the future.

With the exception of a few countries, most foreign countries are "absolute novelty" jurisdictions, which means that there is no one-year grace period. If a client is interested in foreign patent protection, then we must ensure that the U.S. patent application is filed prior to any public disclosure. The foreign patent application may claim priority back to the U.S. filing date.

Lastly, even if we are unable to identify a patentable invention owned by the client and for which the one-year grace period has not expired, clients are often interested in monitoring the patent applications of their competitors to ensure that they will not some day receive a cease and desist letter that could threaten the future of the company. We regularly work with clients to identify and monitor competitor patent applications and, where appropriate, take steps to prevent them from issuing.

3. Copyrights

Under U.S. copyright laws, employers automatically own the copyrights to works generated by their employees within the scope of their employment; thus, no written copyright assignment is necessary for employees. The rule for independent contractors, however, is different. Even if the client pays to have an independent contractor write a manuscript, prepare an illustration, generate artwork, participate in a sound recording, etc., the client does not own the copyright to the work unless there is a written copyright assignment between the author/artist and the client.

This issue often arises with respect to software and website content. Clients often hire outside firms to write software for them and to develop content for their websites. The services agreement between the client and the outside firm should include a copyright assignment provision so that the client will own the copyright to any works generated as a result of the engagement.

The term "work for hire" (or "work made for hire") is often used in connection with intellectual property, and more often than not, it is used incorrectly. First, the term "work for hire" has no relevance to patent law; instead, it is a term that has meaning only under copyright law. Clients often assume that something is a "work for hire" if they pay for it, but that is no longer the case (it was under pre-1976 copyright laws). Today, the term "work for hire" applies only to works generated by employees or to a very limited body of works (such as atlases, test material, answer material for a test, etc.) for which there exists a written "work for hire" agreement between the client and the author.

As part of the IP audit, we work with clients to identify works (like software, manuals, press releases, website content, photographs, etc.) that are potentially copyrightable. We then determine whether the client owns the copyright to those works, and if so, we develop a schedule for filing federal copyright applications. For something that is updated regularly, like software or a website, I recommend to clients that they file a federal copyright application at least once a year.

4. Trademarks

Trademarks may be registered on the state or federal level. For clients whose business occurs solely within the state of Montana, a state registration is the only option. For those clients, however, who conduct business across state lines, a federal trademark registration is highly recommended. Particularly for clients who are considering undergoing a rebranding process, it is imperative that trademark searches be performed to ensure that the new trademark will not pose any conflicts with trademarks owned by other parties.

One issue that arises frequently in my practice involves state assumed business name registrations. Clients often assume that a state assumed business name registration affords them trademark rights, but it does not. A state assumed business name registration is not a trademark registration, and it does not confer the benefits obtained by registering a trademark. Clients also sometimes confuse company names (i.e., assumed business names) with trademarks. A company name may also be used as a trademark, but the requirements for trademark usage go beyond use as a company name.

The rules for registration of a trademark relating to goods (i.e., physical products) differ from the rules for registration of a trademark relating to services. In order for a trademark relating to goods to be registrable, the trademark must be physically affixed to the product itself (as in a product label) or packaging. Use of the trademark on business cards, stationery, invoices, purchase orders, or in contracts or other legal documents does not constitute trademark usage. In order for a trademark relating to services to be registrable, the trademark must be used in connection with some form of advertising (like a website, brochure, print advertisement, etc.) that mentions those services.

The United States require proof of actual use of a trademark before it can be registered; however, most foreign countries do not. Instead, most foreign countries are "first-to-file," which means that if your client owns a trademark and is doing business overseas, it may be prevented from using that trademark in a foreign country if it is not registered. Although registrations can be obtained in foreign countries without proof of use, registrations are subject to cancellation proceedings based on non-use.

The trademark must also appear as a trademark, which means that if it used as a noun in a sentence, as in "We are here to help you achieve your Preferred Future," that usage will not meet trademark office requirements. Instead, the mark must be physically segregated from the rest of the text, and it should be used as an adjective rather than as a noun. For example, proper use of the "Preferred Future" trademark would be a web page with the phrase "Preferred Future" at the top, the words "career counseling services" beneath it, and then a description of the services below.

During the IP audit, we work with clients to identify trademarks that need protection and to ensure that trademarks are being used properly. For those clients interested in international trademark protection, we develop a schedule for filing of international trademark applications. In order to claim priority back to a U.S. trademark application, an international trademark application must be filed within six months of the U.S. filing date.

Once the client’s trademarks have been identified and protected (registered), for some clients, we initiate a regular trademark monitoring program pursuant to which we search for other applications (filed by third parties) for the same or similar marks. We do this so that we can oppose registration of those marks if the trademark examiner approves them for publication. If the client prefers to conduct the monitoring process in-house, we work with clients to train them on proper search procedures.

From time to time, clients are concerned about goods being imported into the United States bearing their trademarks and without their authorization. In those cases, the client may choose to record its trademarks with U.S. Customs and Border Patrol, which has an electronic registration process for the recordation of trademarks.

5. Trade Secrets

There are really only two ways to protect a trade secret—through written agreements and by restricting access to the trade secret. There are many different ways to restrict access: computer files can be password-protected, laboratory notebooks can be maintained in locked file cabinets, and formulations can be revealed selectively to certain individuals so that only one or two people have knowledge of the entire formulation.

Without exception, every business should have written confidentiality agreements in place with its employees and those independent contractors who have access to the company’s trade secrets. Examples of trade secrets include customer lists, supply sources and pricing, marketing strategies, business plans, computer source code, and inventions for which the client elects not to pursue a patent application. Depending on the level of security required at the client site, some clients may also want to have visitor confidentiality agreements in place. For example, visitors who have access to the manufacturing floor and who may be in a position to view proprietary manufacturing processes should be required to sign confidentiality agreements.

In the event of trade secret misappropriation litigation, the party asserting misappropriation of its trade secrets will be required to prove that steps were taken to maintain the confidentiality of the trade secrets. Without written confidentiality agreements in place, it is not likely the client will prevail. Because the client’s employees are often the only people who have access to the trade secrets, the most frequent scenario—and one I have seen in my practice—is an employee leaving an employer and taking the employer’s trade secrets with him.

IP audits often reveal the client’s concern about trade secrets to which its employees have access. We work with clients to ensure that the appropriate agreements are in place and that reasonable steps have been taken to restrict access and prevent misappropriation.

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Although not mentioned above, our IP audits also address infringement issues with respect to all of the above forms of intellectual property law. There can be infringement of a patent, copyright or trademark and misappropriation of a trade secret. The client may be accused of infringement, or the client may want to pursue an infringer. Either way, these issues are addressed in the IP audit as well.


Amicable photo of Toni

Antoinette M. Tease, P.L.L.C.