The viral PokemonGo phenomenon this summer and Jet.com’s meteoric rise and brief independence illustrate that, despite the “overnight success 10 years in the making” path characteristic of most startups, success can come unexpectedly quickly.
This is both good and bad. While a hockey stick revenue curve is often celebrated by the CFO, growth can be very challenging from an intellectual property management perspective.
For the latest installment of our IP Answers series, we reached out to John Chandler, an Associate with Davidson Sheehan LLC in Austin, Texas. During an eclectic 12-year IP career, John has helped scores of entrepreneurs and companies create and evolve IP strategies and plans. He’s a perfect resource to discuss IP for startups, IP management priorities for young companies, and “Fire Drill IP Management” when growth suddenly jumps far beyond initial projections.
Note: John’s comments are his personal views, and are not representative of those of the members of Davidson Sheehan LLC. His statements should not be relied upon for legal advice in any particular circumstance or situation.
Background: IP Watch Dog recently published a review of the patent portfolio consisting of three location-based gaming patents of PokemonGo developer Niantic. Thirteen months after ecommerce titan Marc Lore launched Jet.com to compete against Amazon.com and other discount retailers, Wal-Mart acquired Jet.com and its ‘gain sharing’ retailing technology for $3.3 B. The patents of Jet.com are aready involved in patent infringement litigation.
Thanks for joining us John. Most companies launch with the expectation that the road to success will be long, so a common belief is that there will be time to take care of the IP down the road.
Chandler: First, it is really important to understand that surprising success - I’m not just talking about Pokemon apps or high-growth VC-funded Silicon Valley companies - can happen to even small companies.
One of my clients, a mostly-service franchise in the U.S., recently and very unexpectedly, took off in Great Britain. With the opportunity to protect a potential future franchise network in Britain, we looked at everything based on what she would need in the U.K., when she might need it, and what she could afford. We initially filed a PCT patent application in the US with a view toward seeking patent protection in the UK, and have planned a second patent application to be filed later this year.
We also did a UK trademark clearance search and researched co.uk domain name options connected with her business name. In the next year, I also expect we’ll have to find a local in-country attorney to handle business and franchise documents. None of this work or the expense figured in her 2015 business plan but the need arose very rapidly.
What’s your role with a client like this?
When something really gets rolling, people too often forget to sit down and take a look at how to create protection in front of the business and the IP. This is my role as a business and legal counselor -- to anticipate legal needs before clients see a need. A little investment up front can save many legal dollars just a few weeks or months later.
Especially with first-time entrepreneurs, I’ll spend a couple of hours with new clients to put out fires that they don’t know are burning. Next, I’ll identify potential business assets, and put them into what I call “Boxes.” For me, Boxes represent a legal protection available under the law. Each Box typically comes with a price tag, a deadline and action items.
Clients can then easily prioritize which Box is right for their situation and budget. Also, clients can more easily understand what does not fit within any Box. If the business asset doesn't fit within a Box, I can’t put a legal protection on it. Some Boxes are out of reach or don’t strongly fit the focus of the company.
In my client interviews, I first look at IP through the lens of how people and customers find my client. If you are already a viral success, people have obviously already figured out how to find you. Usually, though, I’m working with pre-viral companies, many of which don’t have any marketing experience or plan.
A domain name related to how people know you is step one. I think the domain name is really critical for a startup. It is a good lead-in to trademark protection. You want to be found often and you want people to quote you. The recent and huge expansion of available Top Level Domains means that you should be able to find a domain name that aligns with your marketing strategy and business name. If your app is called Fire, getfire.co can work. If you don’t have a really good domain name, you can instantly reserve one. Grab it before it is gone.
In terms of trademarks, I’ll start by looking at everything from protecting the brand and domain name, to hashtags and slogans. Understanding that trademark registration can take 5 months or more, some of these are on a slow burn, and some need immediate action for protection. It is best to commit to just a few terms initially, and use them consistently and properly over time.
What comes next?
In terms of IP categories, it’s domain name, trademarks, then patents. The order is based on both time, or time-to-result, as well as money.
Can we create any patent assets? Perhaps, but they take the longest and cost the most. For patents, even taking and paying for the expedited option, getting a patent takes a year minimum. As far as cost, if the cost of a utility patent is out of reach, a workaround is a design patent.
Design protection is too often overlooked, but it can be very useful if your startup is more on the creative, expressive side. If a company has something unique about their customer facing website or mobile app, I’ll look at how we can perhaps protect the user interface. This is especially useful when the computer back-end processing is not totally ironed out, new or the interesting part of the business.
Do you always look at patenting in terms of product or service protection?
In my experience, there is almost always some kind of technology involved in the business that you can protect, particularly for companies that blow up. Often, the unexpected commercial success and urgency to maintain customer satisfaction can draw your attention away from protecting the core value in the underlying technology.
The tech might not be 100% relevant to whatever has made your suddenly hot right now, but it may have long-term value, which is part of the pitch when seeking funding and thinking exit strategy. Although a pending patent application doesn’t offer any protection until the patent issues, pending status can help during fundraising and marketing.
Some tech investors are really leery of investing if they haven’t had a chance to determine whether something is patentable and could create value 5, 10 or 15 years down the road. In addition to this, if your exit strategy is a merger, or acquisition by a larger company, patents need to be part of your roadmap.
TOS and TOU documents are very important for categories such as software, SaaS and social media. In them, you define the boundaries of your relationships so that people understand what you do, and what you will and will not accept in terms of responsibility - yours and theirs. The obvious example is Facebook whose TOS basically say that Facebook is free to use anything uploaded to the site.
By way of example, if your business enables people to post and share content, warnings such as, “Don’t post stuff that’s copyrighted by a movie studio,” are standard. If you offer an API, you need to spell out limitations and expectations. Limitations in the TOS/TOU should include guidance on use of your trademarks and lots of other things.
Don’t write your TOS/TOU just for litigation purposes. Think about setting expectations and shaping perceptions of your company in your TOS/TOU, along with detailing what you consider your IP and what you consider protected. If use of your website generates money for you and your end users, include details on how money is made, affiliate marketing, duration of data retention, and on and on. At least clearly define who owns what, when and how. Often, the TOS/TOU is an afterthought. No one makes time to review that when your company is blowing up.
PokemanGo was almost instantly global. How does geography fit in?
You can seek legal protections in other countries but the price quickly mushrooms. If you aren’t sure now about where you may need future protection down the road, you can do an initial filing with the US patent office under the patent cooperation treaty or PCT. It bookmarks your place worldwide at first.
I’ve done it many times to provide my clients with flexibility. Later, you can identify where the business has really taken off and narrow down the countries where you want the long-term patent protection.
Trademarks are less time-sensitive, but can be started early if the revenue is there. I recommend that you let the revenue guide you on a country-by-country basis. You can built up world-wide trademark protection a little at a time. Of course, expand your domain name portfolio and add other languages on your UI on a weekly basis if possible.
What is your advice on employment contracts and IP assignment?
IP assignment is a good segue into something I haven’t mentioned yet, which is nonetheless absolutely critical. This is the formation document. Before you even think of employment contracts, you need to make sure that IP protections are defined in the bylaws of incorporation or the operating agreement of the LLC.
There may only be four of you in a garage moonlighting on weekends, but everybody should be obligated to sign over their contribution - whether it’s the trademarks, the technology to be patented, media content, cash or time commitment.
Personality conflicts and evolving priorities among founding team members are common, and founders can sour on each other. Suppose two of the four want to leave. This scenario and succession steps need to be spelled out very carefully in the operating agreement or the bylaws of the corporation - not in a term sheet or napkin scribbles.
If someone leaves, how do you value the company? What do they get to keep? If she is the technical lead or chief developer, does she have an obligation to assign over the source code? Is she entitled to a copy? Is it under password protection on a server she can still access? Does she have any rights at all to it? Will she publish the secret sauce later as part of her research? What are the pre-existing obligations?
Something aspiring entrepreneurs often overlook, as well, is the economic value of what you create regardless of commercial success. While you may have failed to create a viable company, you may may have something really valuable that you can either open source or sell as an asset. Your corporate documents must cover these scenarios.
The employment contract and assignment language address these points for employees and contractors.
Exactly. In the rush to hire and get some revenue in the door, companies often overlook what’s in their employment agreements. Look in your contracts to ensure they include confidentiality, invention assignment, and non-compete language and clauses. Lock these down so you know that the creative aspects will remain with your startup, and former employees can’t leverage your innovation, business processes and customer databases.
If you want to be open and informal in the relationship, spell that out in writing so that everyone has confidence in the venture. Don’t overlook copyright assignment, either. If you don’t include details in contracts, you will not have ownership and control of what employees and contractors created on your dime. I have seen this far too many times, and spoken with too many frustrated CEOs, to think it is uncommon.
OK, let’s circle back to the PokemonGo example. It may not equate to the viral hit of Summer 2016, but let’s assume that my app blew up last week. I haven’t done any of the startup IP best practices you just laid out. What should I do now? What is my priority list?
First, sudden growth doesn’t always require virality. The “secret” can simply be a lot of funding. If you land enough VC funding, the road from a small scrappy team of 10 to, say, an org-chart of 100 can be a very fast ride. Whatever the cause, my catch-up IP management blueprint would be something like this:
1, Domain Registration
Review and register domain names related to your existing brands and related trademarks. Review where all domains point.
2. Trademark Clearance
Update your trademark clearance results for your current and expected markets.
3. Trademark Registration
Register relevant trademarks in use or soon-to-be-used with the appropriate authorities. Review proper use of trademarks throughout the company.
4. Usage Contracts
Review import/export restrictions for the countries in which you operate. Review your existing contracts with vendors, contractors, etc. for their contractual restrictions.
6. Employment Contracts
Ensure that your rights are not compromised by incomplete or absent contract provisions. Make sure new employment contracts harmonize with corporate values and corporate documents. Re-sign existing employees to a new contract if the old contract won’t work. Ensure assets remain with the company.
7. Patent Protection
Depending on your budget, uniqueness of technology and innovations, definitely look at pursuing patent protection. Don’t hesitate to contact a professional because patent deadlines are unforgiving. There are ways to delay the relatively high expenses involved.
8. Physical and Electronic Security
Review existing mechanisms to safeguard the business documents, legal documents, innovations, business reputation and financial assets. Would a quick computer security audit and operational practices review be beneficial?
9. Corporate Culture
At least start with a short meeting to get all employees on the same page in terms of expectations of how you value everyone’s contributions and IP. Explain the steps being taken to protect the IP. Explain the basics of your corporate expectations of business conduct, computer use, and operating and security procedures. A quarterly update can go far to show strong leadership and vision.
Is there anything else that a startup should think about?
In an early-stage company, don’t underestimate the basic bread and butter legal provisions or permissions. IP for startups doesn’t have to be convoluted. Have someone experienced review your documents and policies to ensure there is nothing that can lead to an easily avoidable, crushing liability or lengthy legal dispute. Don’t let a legal conflict distract the business operations. A little attention early can go a long way toward avoiding big problems later.
A big thank you to John for his time and expertise. You can reach him at 512.582.2455.