Chapter 7 PARTIES TO IP RIGHTS, PART II: PROTECTION OF THE WEAK AND STRONG

CHAPTER 7

Parties to IP Rights, Part II: Protection of the Weak and Strong

AS THE PRODUCTS, SERVICES, CREATIONS AND PROCESSES to which IP rights attach move from owner to user to consumer, the various parties that touch on those rights will tend to change position in their bargaining power, from strong to weak to strong and then weak again. The ownership of IP rights is complicated by the fact that, although the tangible properties may be transferred from hand to hand, the intangible IP rights remain with the owner. To a large extent, the owner must count on the integrity of consumers to respect the owner’s IP rights, because of the expense of fighting all but the most flagrant infringements.

Creator

KNOW WHO OWNS IT Your company’s employees create IP—perhaps clothing designs, trademarks, logos, and inventions for the transference of designs onto fabric. You decide to license the IP rights to another company to manufacture your clothing. Your license agreement states that the licensee must protect the mark within its own country on your behalf, and based on that authority, your licensee files twelve trademark applications for your marks in his name to ensure coverage of stickers, paper, jewelry, luggage, and other clothing accessories. If your licensee is allowed to retain the trademarks, he will also have a right to use them on his own goods and your own marks are liable to be diluted. You will have to negotiate with your licensee for the ownership rights to the trademarks, if possible, paying only the filing costs. Meanwhile, your employee who invented the design transference process itself licenses it to his friend who wants to use it in the production of canvas bags. With regard to your own employee, if you do not have an express agreement assigning his rights to the company, you will have some tricky negotiations with him and his licensee, because a patent belongs to the inventor in the absence of an assignment to the employer. THE MORAL: Your ownership rights in your IP must be clearly stated in agreements and understood by all parties, and you should be the only person responsible for asserting your IP rights.

SECURE OWNERSHIP RIGHTS BEFORE REVEALING THE IP A lot of time and labor has been spent in developing your company’s database program. Now that it is perfected, your company’s management is considering whether to license it to a software publisher or otherwise to sell rights to use it to

other companies within your industry. Before you label the supporting documentation as confidential and identify the software as a trade secret of your company, one of the programmers discusses it with a software publisher, who realizes the potential and begins to develop a similar system. Finally, you decide to file a copyright registration, but you find that the software publisher has already begun distribution of a very similar program. You may not be able to retrieve your rights because you failed to diligently protect your trade secret and it has now entered the public domain. THE MORAL: Valuable rights can be lost through inadvertence or neglect of your IP strategy. It is important to train your employees, secure registrations, and place ownership notices on your IP.

CHECK OUT THE OTHER PARTY A manufacturer approaches your company’s representative at a trade show and suggests a license agreement for country X. Your representative provides some literature and a few product samples to the manufacturer and refers the name and address of the manufacturer to the licensing department. The concept is passed about from desk to desk for a time, and then finally someone tries to contact the manufacturer but gets no response. Two years later, your company decides to file a trademark and expand your sales into country X, at which time you learn that the manufacturer has already registered an identical mark, has been producing and selling similar goods locally for several years, and has begun exporting to two neighboring countries. You will now have an expensive infringement action in more than one jurisdiction, whereas you could have been receiving royalties from a licensee if you had made the original deal. It is also probable that you will receive bad press from the local media for crushing a native business. On the other hand, if you had done due diligence on the manufacturer, you might have found out about his propensities for infringing prior to handing over your merchandise, in which case you could have kept a closer watch on that market. THE MORAL: If you pay attention to due diligence, you are more likely to gain the right partners and profit from your IP rights, and less likely to have to fight against infringement.

LIMIT YOUR RISK FROM FACTORS BEYOND YOUR CONTROL Your company designs, manufactures, and sells high quality designer clothing for teenagers, and your logo is considered one of the most attractive in that market.

All the trademarks, copyrights, and designs have been filed, and trade secrets have been carefully protected. Nevertheless, your company has to fight more and more infringements to protect your trademark and products, and you have just found goods being imported into a country without your authorization and undermining your exclusive country distributor there. Given the growing attractiveness of your mark, your IP strategy needs to be adjusted to ensure that you can track your products, audit your licensed manufacturers and distributors, and deter infringements through innovative protective devices. THE MORAL: By managing factors within your control, you can anticipate and take the offensive against infringers.

TREASURE YOUR IP RIGHTS Based on your business plan, you start up your company, and soon your markets are multiplying and your profits are flowing. You are keeping close watch on the quality of your products, and your reputation is spreading quickly worldwide, but your IP rights are not as important as keeping a fast turnover among your designers.

You have been sent infringing products from various markets, but you have not bothered to follow up because of the expense. Then your market share starts to slide and your products stop selling. An investigation reveals that your trademark has been registered by other companies in 15 countries where you have major markets, a number of companies have registered designs that are similar to the ones you have been using, and local markets are being flooded with less expensive infringing copies of goods similar to yours and of similar quality. It will cost you dearly to sort out all these infringements and retrieve your IP rights. THE MORAL: Your company’s IP can become one of its most valuable assets if you treat it as a treasure, but if you fail to polish it, perfect it, and protect it, your company’s IP will tarnish and become a liability.

Licensee, Assignee, or Franchisee

VERIFY THE CREATOR ’S OWNERSHIP RIGHTS You have been offered rights to use or own another’s IP. You complete all of the paperwork, accept transfer of the rights, and start producing and selling within the terms of the agreement. A few months later, you receive a notice to stop infringing on the IP rights of a third person and you become embroiled in a passing off and infringement action. The party who offered you the rights has since vanished. Proof of what you believed were your own rights may save you from penalties for bad faith use of the IP, but because you failed to do due diligence, you could lose your initial payment price for the rights, your investment in the new business and in building goodwill, plus profits gained from your infringing use. In some countries, you may even be held criminally liable, ruining your reputation even if the charges are dropped because you had no intent to infringe.

You might be able to negotiate a license or franchise, thereby saving some of your investment, but the terms are likely to be strictly against you at least for a time, until you prove yourself to be a trustworthy advocate for the rightful owner. THE MORAL: Due diligence is just as important for the licensee or assignee, and if you take the other party at face value, you could find that the rights you have just purchased are not worth the paper on which they are written.

KNOW WHAT YOU ARE GETTING Your understanding of the license, franchise, or assignment contract is that the rights being offered are of great value in the market. There is a promise of high profits and an assurance that the IP comes with a solid reputation and valuable goodwill. You sign the contract and make your investment, only to find that the

IP has little or no value in your own markets. The IP owner does not permit any alterations. You cannot succeed under the restrictions placed on your use or

ownership rights, and you will be liable for a strict termination penalty or for damages for breach of contract if you do not perform your end of the bargain. THE MORAL: Before signing a contract, be certain that you understand all of its terms and that you have done due diligence in terms of the marketability and reputation of the rights that you are receiving.

RESPECT THE CREATOR’S OWNERSHIP RIGHTS An exclusive license or franchise agreement is on the table giving you authority to protect the IP creator’s ownership rights in your own country. It also requires you establish a system to monitor use of the IP in your own country and to report infringements to the IP owner. The system is completely within your discretion. After signing the agreement, you review the IP registrations in your country and find that the owner has not registered trademarks for goods that could easily be sold in connection with the products currently authorized. You also find that the owner could have registered patent or design rights but has not done so. You file registrations without informing the owner. Finally, you decide that monitoring and reporting infringements is fairly expensive, and therefore you take the most minimal steps to avoid breach of the contract. Unauthorized products begin to appear at below-market prices and start to cut into your market share. At the same time, the IP owner discovers your extra registrations through a routine check. You complain about the unauthorized products, but the IP owner is unwilling to assist you because you have gone beyond the spirit of your agreement, if not the terms, by failing to respect the ownership rights in the IP. THE MORAL: Do not take a mile when you are offered an inch. The protection of IP rights is in everyone’s best interest because any undermining of those rights will dilute them, reduce their value, and ultimately affect everyone’s profits.

Attorney for Creator

The complexity of negotiating and formulating a license, assignment, or franchise involving IP rights means that you have most probably sought legal assistance. You should know that your attorney can provide you with services related to the following issues.

■ CHECK OUT THE OTHER PARTY

Your attorney can: ■ Review the other party’s business standing and qualifications. ■ Obtain a financial and operational background check. ■ Assist you to analyze the reports for unusual or conflicting information.

■ CHECK OUT A COUNTRY’S POLITICAL AND LEGAL SITUATION

Your attorney can: ■ Advise you on a nation’s system of laws, the development of its judicial system, and the policies of its government in relation to your contractual dealings with a national of that country. ■ Caution you about your own country’s boycott and embargo policies, travel alerts, and trade restrictions with respect to other countries.

■ Apprise you of trade and legal incentives for doing business in other countries.

■ REVIEW UNFAMILIAR NATIONAL REQUIREMENTS

Your attorney can: ■ Explain the effect of import, export, immigration, labor, environmental, consumer, and other regulatory laws that might affect your transaction. ■ Review your IP portfolio to establish whether protection is complete under the laws of your own country and the other party’s country. ■ Identify whether your transaction might have to be recorded to ensure its validity in your country or the other party’s country. ■ Check whether any documentary, stamp, or other taxes might apply to the transaction.

■ NEGOTIATE AND PREPARE THE AGREEMENT

Your attorney can: ■ Review the terms of typical agreements and assist you in tailoring your agreement for the particular transaction. ■ Inform you of provisions that you need in order to comply with the peculiarities of the national legal system or to cover matters not otherwise encompassed by those laws.

■ REVIEW RISKS INVOLVED

Your attorney can: ■ Advise you on monitoring and protecting your IP rights against infringement in the other party’s country, whether the infringing acts are committed by the other party or by third parties.

Attorney for Licensee, Assignee, or Franchisee

It is most unwise to enter into a contract for the use or ownership of IP rights without legal advice, particularly because that contract is likely to have been framed by the attorneys of the IP owner. You should keep in mind that your attorney can assist you with the following key issues when considering whether to accept or decline the offer being made by the IP owner.

■ CHECK OUT THE IP OWNER

Your attorney can: ■ Review the IP owner’s business standing, qualifications, and registration or other proof of ownership. ■ Obtain a financial and operational background check. ■ Assist you to analyze the reports for unusual or conflicting information.

■ REVIEW UNFAMILIAR NATIONAL REQUIREMENTS

Your attorney can:

■ Explain how import, export, immigration, labor, environmental, consumer, and other regulatory laws will affect your business if you agree to the transaction. ■ Review the IP portfolio presented by the IP owner to see whether protection is complete under the laws of your country and recommend that you seek additional protection from the IP owner. ■ Identify whether your transaction might have to be recorded to ensure its validity in your country. ■ Check whether any documentary, stamp, or other taxes might apply to the transaction.

■ ASSURE YOUR UNDERSTANDING OF THE AGREEMENT

Your attorney can: ■ Explain the terms of the agreement offered and recommend negotiating points in your favor. ■ Clarify the interests that you are purchasing in the IP and your liabilities in the event of breach.

■ REVIEW RISKS INVOLVED

Your attorney can: ■ Inform you of the potential effect of infringement by third parties, and the most time and cost efficient means by which you can assist in monitoring infringement. ■ Recommend means by which you can reduce the risk you are taking in investing in another’s IP, the value of which is dependent factors beyond your control, such as the IP owner’s reputation, goodwill, and policies of enforcement.