Contracts are the basis of business:  one party offers goods or services for a price and the other party accepts the offer and pays.

Valid contracts can usually be oral or written.  For a few types of transactions, like the sale of land, the agreement must be in writing.

Many tiny companies rely on oral agreements.  And many bootstrapping startups tend to wing it and try to get by without formal, written contracts.  Sometimes they rely on verbal agreements and conversations, e-mails or short, written summaries of proposed work.

Many startups don’t want to spend the money for an attorney to draft a custom contract and many don’t know the first place to start or want to take the time to research what they need.  Many startup CEOs don’t understand that they may be putting key parts of their business at risk when they operate with a fly-by-the-seat-of-your-pants approach when it comes to formal contracts.

For a startup, is it really necessary for contracts to be formal and written?

Frankly, without formal, written contracts a startup may become a big, hot mess.  From my perspective from cleaning up business messes and practicing litigation for over a decade, I think formal, written agreements are necessary if you want to do any of the following:

• Grow big
• Get major funding from Angels or VCs
• Decrease your liability and manage your risk
• Decrease confusion and misunderstandings
• Increase the odds that you will get paid for your work
• Protect and own your IP, especially trade secrets
• Have evidence that you are taking reasonable measures to protect your trade secrets to increase the odds of getting legal protection for them and
• Protect the integrity of your business

In my next post, I will discuss some of the major types of business contracts that relate to operations and intellectual property.  Understanding what types of contracts you need is the first step for a successful startup.

More posts about contracts:

• The Elements of Contract Formation
• The Biggest Startup Blunder:  Failing to Secure Protection of Your Startup’s IP

I know that proper use of trademarks and service marks gets confusing for many entrepreneurs.  The following is a simple and handy guide on the proper use of the marks in your business.  It’s important to review your website and marketing material and make sure that you are preserving potential legal protection for your marks.

Trademarks and service marks are essentially brand names.  A mark identifies and distinguishes products or services of one company from the products or services of others.

Trademarks identify goods.  Service marks identify services.  In contrast, a trade name is a name that identifies a business.

Confusingly, sometimes the same name may be a trade name, a trademark and a service mark.  GOOGLE is a trade name, a registered trademark for mugs, bags and t-shirts, and a registered service mark for search engine services.

A critical issue is that improper use of a mark may cause the loss of legal protection.

A federal registration may be denied because the owner used the mark in a generic way to describe its goods or services.  Moreover, a court or the PTO may determine that even a registered mark has become generic and therefore free for all to use.  Once upon a time, aspirin, escalator, and cellophane were all trademarks.  Eventually, the names began to represent the goods rather than the source of the goods and trademark protection was lost.

Improper descriptive use by the trademark owner in advertising or other materials is a factor in deciding whether the name will get legal protection. Widespread use of the mark as the common name for similar goods or services may ultimately allow free use of the mark, even by competitors.

A key issue is whether the public understands whether the name is a common name or a brand name.

If the public thinks the name is the common name—like aspirin—then the law will not protect the mark from competitive use.  But if the public thinks the name is a brand name, trademark status may be preserved.

Proper Use of a Trademark or Service Mark

1.  Use the mark with a generic term

To preserve legal protection for a brand name, the mark should be used in conjunction with a generic term, like using the mark Kleenex with tissue.  Kimberly-Clark Worldwide, Inc. is very careful to write:  Kleenex tissue or Kleenex brand tissue.  If you use the common name in conjunction with your brand name it is far less likely that your brand will become the common name. Your brand will be seen as separate and distinct from the common name.

Remember, generic or descriptive names do not have trademark protection upon initial use.  Generic names may never be a trademark.  Descriptive names may only receive trademark protection after they become famous for identifying the goods as coming from a single source.

2.  Use the mark as an Adjective NOT a noun or verb

Use the mark to modify the generic term for the goods instead of describing the goods.  This point is similar to the previous one.  An example is Google search services.  Google needs to be careful that google doesn’t cross the line into becoming the common noun and verb for using any search engine.

Also, don’t use the mark as a possessive or plural.

3.  Make the mark look distinctive

To preserve protection, it is good practice to make the mark look distinctive.

Good ways to distinguish a mark include:

• Capitalizing the mark;
• using color; or
• using stylized lettering or a special font.

4.  Use the TM or SM symbols

When you initially claim use of a mark as a brand name, after the mark you can use the ^TM symbol for goods and ^SM for services.  You don’t need to wait until you have filed a registration.

After receiving a federal registration, you can use the ® symbol.

With a little bit of care, you can preserve the value of your trademarks and service marks.

For related posts on Trademark Law:

How to Avoid Trademark Infringement When Selecting Business or Product Names

Consider Whether You Can or Want to File a Federal Trademark Registration

As discussed in my last post Copyright Rights, a copyright isn’t a single right – it’s a bundle of rights.  And a copyright owner can transfer some or all of the rights.

A full transfer of rights is called a copyright assignment.

For startups, it’s important to get full copyright assignments for logo designs, website designs, and other works including software written by independent contractors.

Why should a company care about copyright assignments?

Generally, if you don’t have a written, signed, full transfer of rights to the work from the original copyright owner, which is usually the author, you don’t own the copyright.

It’s like when you buy a book.  You own a copy of the book but you don’t own the copyright to the book.  The original author (or publisher by written assignment) retains ownership of the copyright.  You can read the book you purchased but you can’t copy and sell copies of the book, make a new work based on the book (a derivative work), or publicly perform or display the book without permission of the copyright owner.

When you are paying for the creation of copyrighted work for your business, you usually want to own all of the rights.

And pursuant to Section 204 of the Copyright Act, if you don’t have a written copyright assignment signed by the owner of the copyright or its agent, you don’t own the copyright.

You may just have rights to a single copy.  This is important because you won’t be able to register the copyright to your logo or website to get statutory protection and you may be guilty of copyright infringement when you modify the original work.

A copyright assignment may be critical for your business.

For example, if you don’t have a written copyright assignment for the software being written by an independent contractor for your startup, you don’t own the copyright.  It seems so wrong but it’s true.  The developer can resell and use the code and try to stop you from using it.  You may pay hundreds of thousands of dollars for the creation of software that you don’t have a clear right to use.

This was the fact situation for the first copyright trial I worked on as an IP attorney.  The alleged independent contractor sued our client for copyright infringement after it had paid an enormous amount of money for the creation of the custom software at issue.  Our client won an implied, temporary license to use the software but only after a very expensive legal battle and trial.

The battle and expense could have been avoided with an upfront, simple, written contract with the alleged independent contractor that assigned the copyrights to the company.

It’s important for startups to think about copyright assignments at the beginning of a project before they pay designers and independent developers.

And software startups need to be aware of ownership issues if they plan on reusing code in future projects for other companies and they hire independent developers to write code.

It’s cheaper and easier to hammer out these IP ownership issues in contracts in the very beginning of your relationships and projects.

And I know that copyright rights can get crazy complicated when you work with multiple software developers who want to use old code and open source.  That will be the subject of later posts.  This post is just the beginning of the conversation to help startups see the relevance of copyright assignments to their business success.

Have you ever wondered why most copyright licenses have a laundry list of rights?

For example, the MySpace.com Terms of Use Agreement has a typical copyright license which you grant to Myspace when you upload content to the site.  It says:

By displaying or publishing (“posting”) any Content on or through the MySpace Services, you hereby grant to MySpace a limited license to use, modify, delete from, add to, publicly perform, publicly display, reproduce, and distribute such Content . . .

There is a reason for the list that most non-lawyers don’t understand:  a “copyright” isn’t just one right — it’s actually a bundle of rights — and a copyright owner can agree to license or transfer some or all of the rights.

The Copyright Act specifically says (emphasis added):

§ 106. Exclusive rights in copyrighted works

Subject to sections 107 through 122, the owner of copyright under this title has the exclusive rights to do and to authorize any of the following:

(1) to reproduce the copyrighted work in copies or phonorecords;

(2) to prepare derivative works based upon the copyrighted work;

(3) to distribute copies or phonorecords of the copyrighted work to the public by sale or other transfer of ownership, or by rental, lease, or lending;

(4) in the case of literary, musical, dramatic, and choreographic works, pantomimes, and motion pictures and other audiovisual works, to perform the copyrighted work publicly;

(5) in the case of literary, musical, dramatic, and choreographic works, pantomimes, and pictorial, graphic, or sculptural works, including the individual images of a motion picture or other audiovisual work, to display the copyrighted work publicly; and

(6) in the case of sound recordings, to perform the copyrighted work publicly by means of a digital audio transmission.

A “derivative work” is basically a new work that is based on the original work — it’s a modification of the original work.  This is why a list would talk about the right to change the original work and why MySpace.com’s Content license lists the right to “modify, delete from, add to” your posted material.

Since a copyright owner can license or transfer some or all or the rights, careful lawyers specify which rights are being licensed or transferred. They write out a list.

I have seen some bizarre  contracts drafted by web designers who didn’t understand copyright rights.  They actually created an IP mess because they didn’t understand how to write a copyright license or transfer.

When you are granting a license or getting a license to copyrighted work, you want to see a list of the specific rights involved.

It’s important to know your rights as a copyright owner and what you are transferring or licensing.  It’s also important to know a copyright owner’s rights when you want to use or own another’s copyrighted work.

My next post will talk about a full transfer of copyright rights — a copyright assignment.

To learn more about copyright law and why it’s important if you are paying someone else to design your website read How a Legally Ignorant Web Designer Can Create an IP Mess for a Startup’s Website.

Copyright law is confusing.  Consequently, it’s frequently misunderstood.

Many people think copyright law protects ideas.

Wrong.

Copyright law does not protect mere ideas.

Not in your head. Not in your bed. Not in your book. Not on a hook.  Not in a play. Not in any way.  Not in your code. Not in any mode.  And yes, I’ve been reading a lot of Dr. Seuss lately.

And copyright law does not care about proper attribution of ideas.  That’s the province of the morality and plagiarism.  College grads may be confused because their professors made it seem like all plagiarism is illegal copyright infringement. It’s not.

Further, copyright law does not protect concepts, facts, names, titles, slogans, procedures or methods.

Copyright law only protects “original works of authorship fixed in a tangible medium of expression.”

Copyright law protects the creative expression that explains an idea if it is fixed in a tangible form like scribbling on the back of a napkin or typing in a computer program.

Copyright law protects how you write about an idea on a piece of paper but not the idea itself.  The line between an “idea” and the “creative expression of an idea” can be blurry.  It keeps lawyers fighting in court.  For example, have you ever wondered about copyright infringement cases based on stealing the “ideas” for TV shows?  These types of cases tend to give the general public the mistaken impression that naked ideas are protected by copyright law.  They aren’t.  Copyright law may protect a written expression of an idea that includes a complex outline, well-developed characters and plot.

You can’t claim a copyright on a naked idea.  So if you have a brilliant idea, write it down in complex, creative detail and you automatically have a copyright.

Also to read why “ideas” are not protected by patent law, read the post on Patent Myths.

The most common, classic mistake that technology startups make is not securing all rights to the intellectual property created for it by its founders, independent contractors, employees and vendors.

Friendship and verbal agreements are not enough to secure IP rights.

Relying on IP law default rules will create a complicated nightmare.

You need contracts —properly drafted contracts that assign IP rights to the company.

And everyone needs to sign one — even company founders.  Especially company founders.  You don’t want your startup’s IP rights walking out the door with a key founder.

Warning — not all contracts are created equal.  Some are horrific.  Some are poorly drafted and contain clauses that are an expensive hassle to litigate in court.

If your startup’s IP is valuable, you need contracts that will hold up in court.  You need the right type of contracts with very specific language that will properly assign the IP rights to your startup.

IP rights worth millions have rested on a few contract words.

Stanford University learned this the hard way.  In a recent case, a federal court found that Stanford didn’t own the rights to the HIV testing technology it thought it did because its contract with the inventor failed to use terms that actually conveyed the IP rights when the contract was signed.

To fully protect the value of your startup’s IP, you need well-drafted contracts.

If you use random contracts from the Internet that you don’t fully understand, you may be penny wise and pound foolish.

The following guest post is by contributing editor Heather N. Schafer, a patent attorney at Beem Patent Law Firm in Chicago, Illinois.  Heather specializes in representing university startups and entrepreneurs in the fields of biotechnology, alternative energy, and consumer products from kitchen gadgets to golf shoes and beyond.

The internet, your friends, your family, and maybe even your corporate lawyer are full of “helpful advice” about patents.  However, much of this advice may be misinformed, incomplete, inaccurate, or just plain wrong.  The following are five common patent myths.

Patent Myth No. 1

For example, your friends may say:

• “You should patent your idea” – FALSE

Ideas are not patentable.  To earn a patent, you must have an invention.  There are two steps to creating an invention, conception and reduction to practice.

When you have a terrific world changing idea, you are typically at the “conception” stage.  An example of a conception is: “wouldn’t it be great if my cat litter box was self cleaning?”  At this point, you do not have an invention.

Why Not?

To have a patentable (legally protectable) invention, you must reduce the invention to practice and file a detailed patent application with the Patent Office.

Reduction to practice may happen in two ways: (1) by constructing a working prototype of a self cleaning litter box, (2) by creating detailed drawings and a detailed description of a self cleaning litter box.

“Detailed” means that you could hand your drawings and description to your colleague and she could follow your instructions and make your invention.

Patent Myth No. 2

• You can secure a “poor man’s patent” by mailing your idea or invention to yourself – FALSE

You receive NO legal protection from mailing your “idea” or invention.  The reasoning behind this myth is that the post office date stamp will prove your date of invention.  However, the postal system is not the Patent Office.

The only way to be confident that you have secured your date of invention is to file a patent application meeting all of the statutory requirements with the Patent Office.

Patent Myth No. 3

• Patent application = patent – FALSE

A patent application merely proves that, on the date that you filed, you were in possession of the invention that you disclosed.  The application doesn’t turn into a patent until years later – after being thoroughly scrutinized by the Patent Office.

There are many reasons that you might not receive a patent for your application.  Chief among those reasons are that someone else invented it first.  For example, someone else is already selling your invention, or filed a patent application for your invention, or wrote an article about your invention in a magazine.

Patent Myth No. 4

• A provisional application is a “cheap patent” that gives you time to shop your idea around before making the “big” investment – FALSE

This myth is such garbage that it deserves (and will receive) its own post.  Suffice it to say for now, if you hire an online patent filing service, an unskilled patent attorney, or a patent mill to file a provisional application for you, you will likely waste your money.

Worse, a badly drafted provisional may compromise your future patent rights.  A provisional application is a foundation document.  What you put into the application, and what you leave out, may come back to haunt you later both during prosecution of your patent application and during litigation.

A good provisional application takes time and attention and often costs as much to prepare as a non-provisional application.  In many circumstances, particularly in the high-tech industry, a provisional patent application might be a bad idea.

Patent Myth No. 5

• You don’t need a patent application – you can disclose your invention to potential investors if you have a non-disclosure agreement (NDA) – FALSE

Most “investors” will laugh if you show up with an NDA.  In fact, they will likely hand back to you what I call an “anti-NDA.”  The “anti-NDA” will state that you cannot tell them anything that they don’t know and if you think you have something new, you are wrong – they have been working on your invention for years before you were born.

The attitude is “you need us, we don’t need you.”  If you want to play, you have to trust that they won’t steal your invention.  If your invention is something that only you can do, it might be a good risk.  If your invention is something that your potential investor can hire someone else to figure out – file a patent application!

If you think you have a patentable invention, you should . . .

Treat your invention with the same respect as your plumbing.  Unless your mom, bartender, or best friend is a plumber – don’t take her plumbing advice.

A patent is an investment.  Along with your other IP; it is the “plumbing” of your business.  Talk to a patent attorney, maybe even two or three patent attorneys.  Most patent attorneys do not charge for initial consultations.

Don’t blow potential patent protection by believing patent myths.  Learning accurate information about patent law can be critical to preserving your invention’s value.

Heather can be reached at HSchafer@BeemLaw.com.

After doing IP litigation for over a decade and spending thousands of hours conducting evidence discovery, people never cease to amaze me.

Many people hoard an enormous number of worthless documents — just in case they might be needed in the distant future.  This bad habit can increase litigation costs by millions, even for unfortunate startups, when lawyers have to sort and review the stockpile for potentially relevant evidence.  The ease of electronic storage and duplication has made hoarding a litigation nightmare.  (I’ll do a post on proper document retention policies in a few months.)

Ironically, the hoarders usually neglect to adequately document their most important ideas and inventions.

Many people keep the crap and not the important stuff.

(Of course some hoarders keep evidence that proves infringement, which is important to the other side.)

When IP ownership is disputed or the company tries to stop a competitor’s infringement, some companies have been highly dismayed when they don’t have the proper documentation about the creation for the company’s crown IP jewels.

For example, in the Bratz doll case discussed previously, the fate of the billion dollar doll line in large part hinged on the documentation of the Bratz dolls’ creation.  Carter Bryant failed to prove that he conceived of the dolls when he was not employed by Mattel.  Mattel hired forensic document experts and Bryant admitted at trial that he had altered dates on his records.   His poor, clumsy documentation in a spiral notebook didn’t cut it in court.

Because the jury found that Mattel owns the Bratz doll line, the doll designer will likely lose millions in royalties.   MGA, the Bratz doll maker, will lose billions in sales.

If you think that you and your employees may be creating valuable IP, it is well worth the effort to require good idea and invention record keeping — from the start.

As you are creating your company and your key IP assets, you have the perfect opportunity to implement proper recording practices and procedures.

Be aware:

• Courts don’t trust electronic documents.  Dates are often critical to claims of ownership and patent statutory issues.  Everyone knows that dates can be electronically altered and faked.   Trustworthy records are crucial.
• Courts distrust sloppy record keeping.
• An inventor’s own testimony is suspect because it is usually self-serving.

To overcome the Court’s suspicions, you need to create idea and invention records that look reliable and believable.

Even in the electronic age, recording ideas and inventions by hand in old fashioned, permanently-bound notebooks is still the best evidence in court.

Bound notebooks that show when a page has been deleted are more trustworthy.

Affixing data printouts and key code sections to notebooks in a way that shows later alterations, like stapling, is also better evidence than an electronic file.

Remember:  You are creating potential court evidence.

(I will discuss the major issues that software developers face in creating trustworthy evidence in a later post.)

The following are important for an Idea/Invention Notebook:

• Permanent binding (a composition notebook or lab notebook works well)
• Permanent ink for writing

On the inside cover of the Notebook:

• Prominent, legible, printed name of creator
• Name of employer or IP owner
• Date that notebook is started and finished
• Location where work is being conducted

In litigation, failure to identify the notebook’s author and the dates of notebook entries is a big problem.

In the Notebook use the following:

• Legible handwriting
• Project and topic headings
• List of all people involved in each project
• References used or sources of ideas if any
• Ideas described in a way that is understandable to others in the field
• Contemporaneous entry of ideas and research
• Full date on every entry!
• Time of work, if done during off hours and IP ownership is an issue
• Initials on the bottom of every page
• Printouts of key software code sections stapled to notebook pages
• Printouts of key data stapled to notebook pages
• For pages explaining the most important ideas and data, there should be the full signature of the inventor(s) and a signature by a witness

You should have a witnessed record of when you conceived of the idea and when you actually made a working version of the idea.  This is critical for patentable inventions.

You need to remember that you are creating potential legal evidence.

I know it’s a pain, but if what you are creating is potentially patentable or valuable, it is well worth the effort to do a good job in documenting your ideas.

With proper record keeping you can improve the odds that you can protect your million dollar idea or defend yourself against claims of infringement.

Picking great business and product names is hard.

You want a name that is distinctive, memorable, and makes a good impression.  The best name is also easy to say and spell.  You want a name that captures the essence of your business or product.  You want a name that makes you stand out from the crowd.  And you want a name that has an available domain.

Sometimes it seems like all of the good business and product names are already taken.

When thinking about your business and product names, it’s important to think about them in the context of trademark law.

But why oh why should you think about trademark law in the startup planning stage?

Because so many of the good business and product names are already taken.  Many names have a federal trademark registration or common law rights that protect them.

You want to understand the basics of trademark law so that you can take steps to increase the odds of being able to use the names you want to use.

If you don’t consider trademark law when you pick your business or product name, you might get accused of trademark infringement or lose the right to use the brand that you have worked so hard to develop.

After you have incorporated your business with a name, designed a logo, built a website and marketed your brand, it’s a terrible setback to have an aggressive trademark owner allege that you are infringing her registered trademark.

Even worse, if you don’t understand the value of federal trademark protection and fail to file a registration, someone else may get a federal registration on the name that you’ve been using and then try to stop you from using it.  If the PTO doesn’t find your prior use (it might not if you don’t have a registration) or you don’t monitor pending registrations during the time when you can object, you may be very upset that you didn’t register your mark earlier than the interloper.

Trying to prove priority and cancel a registered mark is an expensive hassle.

What does trademark law do?

Trademark law protects brand names that are used in commerce.  Its goal is to prevent consumer confusion as to the source of goods or services.

Go to USPTO.gov website and learn about trademark law.  The government is trying to help small business owners and it has a ton of free information on its site.

The US Patent and Trademark Office (PTO) has a registry system that keeps track of federally registered marks and gives people notice of the source of the goods or services associated with the mark.

When you go to USPTO.gov, you can also do some basic searching yourself and find out whether the name you want to use is already being used for similar goods and services by another company.

You can search this registry for free with TESS on the USPTO.gov website.  It’s easy.  You can search for specific names and you can search on owners.  (Use the New User Search Form (Basic).)  You can find out what names already have a federal registration and the associated goods or services.  (The third post in the sub-series will discuss federal trademark and common law trademark searching in more detail.)

Trademark law will prevent you from using a name that is likely to confuse consumers as to the origin of goods or services.

No one wants to start over from scratch.  And you don’t want to waste time or money or hire an IP attorney to clean up the mess.

Clean up always cost far more than prevention.

If you learn about trademark law and do some preliminary groundwork, you can save yourself money, time, energy and hassles.

My next two posts will discuss trademark registration and specific tips for avoiding infringement when picking business and product names.

When you start a new company while employed, it’s a little like being pregnant (creating IP) and giving birth to a new baby (incorporating a startup) while being married to another (your employer).

IP paternity and legal custody can be troubling issues.  After you give birth and get a divorce, there may be a court battle.  Custody claims are more likely if your new baby is beautiful with a bright future.  Of course, your ex won’t claim custody if he doesn’t know that you’ve given birth or if your baby is ugly and stupid.

Some courts may believe that your employer husband at the time of birth is the legal father. Courts in states like California, however, are more progressive and they don’t jump to conclusions about IP paternity.  California even has a law that limits the rights of current employer spouses to IP children conceived outside of the employment marriage.

In court, you may have to try to prove that your ex isn’t the father.  Ultimately, a court may decide that you have to give up some rights to the IP child and share custody (a license).  In the worst-case scenario, your ex may get full custody of the IP and the company’s assets and you may not have any legal rights.

(I realize that the pregnancy analogy isn’t perfect, but as a mother, IP lawyer, and startup founder, it feels close.  Guys will have to bear with me.  Founding a startup may be the closest thing a man can experience that is like pregnancy and childbirth, which can be distracting, tiring, overwhelming, exciting and painful.)

With some basic precautions and planning, you can minimize the risk that your current/former employer will claim the rights to your startup’s IP.

Starting on Monday, February 15th, I’ll be posting a Startup Launch series dealing with legal issues from IP conception to your company’s birth.  The series will explore the following issues:

• A Doll Designer’s $100 Million Mistakes
• Analyzing the Risk–Will Your Current Employer Claim Rights to Your Startup’s IP?
• Steps for Preventing Ex-employer Ownership Claims
• Documenting the Creation of Your Startup’s IP
• Trademark Issues When Selecting Business And Product Name
• Securing Ownership of the IP Created for Your Startup
• Websites and IP Ownership
• Business Plan Disclosure to Potential Investors
• Quitting Your Job Like a Baby

This series is going to provide remarkable value.  If you are contemplating a new business or creating one while employed by another company, it will be well worth your time to carefully read this series and consider these issues .

As a lawyer I’ve spent a lot of time doing IP ownership cleanup in large part because company founders and executives didn’t know or understand the information that I will be sharing in this series.  Successful startups have spent millions of dollars dealing with claims from former employers–claims that could have been prevented.

You can save yourself time, money and headaches by learning a little about IP law and knowing what steps to take to protect your startup’s IP.