Many startups have contracts with foreign-based or multinational entities.  Contracting with companies based in foreign countries is getting more common every day.

But when contracting with a company based in a foreign country, watch out!

Foreign laws may be radically different than the laws in the United States, including laws relating to:

• contract formation, interpretation and enforcement;
• IP ownership;
• available protection for confidential information or trade secrets;
• types of rights for copyrights and patents;
• scope of IP rights, especially “Moral Rights” for copyrightable works;
• contract prohibitions regarding reverse engineering; and
• the range of damages and potential liability for breach of contract and related claims.

If foreign laws apply to your agreement, you may be in for some nasty surprises.  You may not be agreeing to what you thought you were and the rights and legal remedies will be different than those in the United States, sometimes radically so, and not usually in a good way.

Moreover, it’s important to consider what will happen if the relationship sours and disputes about the terms of the agreement arise.  What will you do if you don’t get paid and they keep your products?  What will you do if the foreign company reveals your trade secrets?  What will you do if the foreign corporation uses or resells the source code they allegedly created specifically for your company?

What country’s law governs?  Where can you sue or be sued?  Will you be at the mercy of foreign courts or bound by foreign law?

The beauty of contract law is that in the actual contract between the parties you can specify what law governs the agreement and the contract’s interpretation.

The “Governing Law” section is typically at the end of the contract.  To some extent, the parties can choose the applicable law.  For many claims, they can specify that the law of a particular country and state will govern disputes arising out of or relating to the agreement.

Watch out for contracts drafted by foreign companies who slip in a term specifying governance by the law of their country.  A contract governed by foreign law may not mean what you think it means and your rights may be radically different than what you’ve come to expect under our laws.

When asked, foreign corporations who frequently do business in the US, even very large ones, will usually agree to specify United States law as the governing law.  They usually already have US legal counsel and are familiar with US laws.

Whether you can force the issue with a company who initially refuses to agree to US law will depend on your bargaining power and their desire to do the deal.  You should carefully consider the subject matter of the contract, its value, and its relationship to your business when considering whether to do the deal with the risk of foreign litigation.

I’ve represented numerous domestic and foreign corporations in international disputes and I would balk at signing any agreement that designates the governing law to be anything but the law of the United States.  It can be extremely difficult to really understand the ramifications of foreign law without consulting a foreign attorney.  You may end up paying for lawyers in both countries.

Pragmatically, sometimes a small company doing business with a foreign corporation has to cave on the issue of the governing law to get a deal done.  But the business people should understand that there are very expensive risks to agreeing to foreign law.  Unless the startup has beaucoup capital, foreign litigation could severely jeopardize the company’s financial viability.  If the company’s key intellectual property is involved, it may pay to consult with a foreign lawyer when negotiating to better understand your risks and potential liability.

Further, in a contract, the parties can specify what courts or dispute resolution organizations will have the power to decide future disputes. This term is usually called “Jurisdiction and Venue” or “Dispute Resolution.”  It may be combined with governing law in a section called “Governing Law & Jurisdiction.”

Jurisdiction is different than the governing law, which determines what law applies. Technically, jurisdiction has to do with the rights and power of the courts to apply the law.  Venue is the specific location for the resolution of the dispute by a court with jurisdiction.

In a contract, to some extent, the parties can specify the specific jurisdiction and venue where resolution of future disputes between the parties related to the agreement will take place.  They can also specify whether the agreement must be decided by alternative dispute resolution like arbitration.  Generally, courts will uphold arbitration agreements and the court may decline to exercise their power to hear the case based on the arbitration term in the agreement.

In international agreements, arbitration may be the best way to fairly resolve disputes with foreign corporations.  It is common to specify international arbitration in a location that is neutral and mid-way between the companies.  Hawaii, Hong Kong and Singapore are popular with companies located in Asia.

When a foreign company has no assets in the United States, it may be judgment proof because our courts lack the power to reach the foreign company’s assets.  In this scenario, an arbitration award may be easier to enforce than a US court’s judgment and can be enforced through the New York Convention treaty in participating countries.

International arbitration and judgment enforcement may be very expensive.  Arbitration may be somewhat more expensive than litigation in a US court in part because you usually need to designate three arbitrators, one from the country of each party and one from a neutral country.  The arbitration process usually involves travel for all parties and it may also involve translators.  Discovery costs in arbitration can be lower but this cost savings may be offset by the lack of other judicial procedures, like motions to dismiss, that can expedite resolution of the dispute and limit attorney preparation and fees.

If a company has assets in the United States and your agreement involves IP rights, I would try to get an agreement to jurisdiction and venue in the US courts.  You will want the power of the courts to protect your IP and enforce any judgment.  Injunctions are important remedies in many types of IP cases.  Additionally, if you win in court and the foreign company won’t pay the damages award, a US court may have the power to seize assets of the foreign corporation in the US for payment.

In any event, it pays to consider potential costs of a dispute with a foreign company when estimating the costs and benefits of a potential deal.  It may be far more costly to do business with a foreign company than you anticipated.

In my last post, I gave an overview of the current Facebook ownership litigation in which Paul Ceglia is claiming that he owns 84% of Facebook based on an old software development contract with Facebook’s founder Mark Zuckerberg.

A few years ago, Zuckerberg and Facebook also faced legal allegations that Zuckerberg stole the business idea and source code from some Harvard classmates to start Facebook.

Assuming for the sake of discussion that the allegations in both lawsuits are true:

What can entrepreneurs learn from Zuckerberg’s legal troubles?

Here are my top ten lessons.

1.  If you are wildly successful, people claiming ownership may come out of the woodwork.

If your business gets VC funding or becomes valuable, your company will become the target for any person or entity who has a potential case for ownership.

The skeletons will come out of the closet.

IP ownership disputes are very common.  Old employers, co-workers, partners or even classmates may claim that they are entitled to a piece of your new company based on former agreements, verbal or written, or intellectual property rights that they own or claim to have originally created.

2.  Don’t contaminate your company’s IP with any IP that you don’t have the right to use.

A cavalier attitude regarding ownership of software code can get you in trouble.  Just ask Zuckerberg. He’s probably lucky.  Taking someone else’s code can land you in jail.

To minimize the chance of any claims, it’s important to understand basic information about intellectual property law, especially trade secret law, so you know what you can and can’t use from what sources for your new venture.

When you incorporate intellectual property that you don’t own into your company, you contaminate your IP and make your entire company vulnerable to claims by others.

Some plaintiffs are very aggressive and may claim that they own everything that was built on the foundation of contaminated IP.  It’s sort of like fruit of the poisonous tree.  A plaintiff may try to get all of the fruit, especially VC money and related intellectual property rights.  (For another famous example, see my discussion of the famous Bratz doll case.)

Clean IP is very important to maintain the value of your company.  In the Facebook case, if the plaintiff can prove that it owned the intellectual property rights to the foundation of Facebook as well as the future alleged business interests, the plainitff’s damages expert will have a heyday.

3.  Software genealogy is important.

It’s super simple to copy and take software code.

Unfortunately, many software programmers freely use code written by others without understanding that copyright law and sometimes trade secret law protects software.

To keep IP ownership clean, it’s important to understand who wrote each section of code and what rights or licenses are related to it.  A company will want to make sure that it owns the code created by its employees and independent contractors and that it has an appropriate license for any open source code used.  Make sure your company really owns the code provided by the founder.

Ask your software programmers: Where did you get the code?  Did you write it? If not, who did?  If yes, when and where did you write it?  Does anyone else have a potential claim to the code?

Watch out for sections of code that is legally owned by others, especially former employers.  It’s very easy to do a software code comparison and it makes a stunning exhibit in litigation.

4.  Assume your business will be successful and treat equity like gold and not penny candy.

In the alleged contract between Zuckerberg and Ceglia, Zuckerberg allegedly gave up 50% ownership to the Face Book software and business interests.  The contract also had a bizarre penalty clause for delay in completion of the Face Book website of a 1% interest in the business per day.

This is crazy but not uncommon.  Some entrepreneurs don’t have an understanding of the potential value of a business interest.  Although equity in something worthless is worthless, even a small piece of equity in a valuable company may be very significant.

Don’t give away equity lightly as payment for services.  You may be paying a much higher price than you intended.

If someone is asking for equity they are assuming that you will be successful, you should assume so too.

5.  Read and understand any contract concerning ownership of intellectual property before you sign it.

I can’t stress this enough.  If you are giving away your IP rights, know and understand the boundaries of what you are giving up.  Make sure they are fair and reasonable for the circumstances. As an independent contractor, you have more negotiation power than you think.

Zuckerberg’s alleged signature on the Ceglia contract looks real.  My hunch is that Zuckerberg signed the alleged contract but didn’t read or understand it.  I’m also betting — considering the bizarre, hodpodge nature of the alleged contract — that the drafter didn’t understand the contract terms either.  It looks like part of it was copied from another unrelated source.  Indeed, the alleged contract is so convoluted the parties may be fighting about the meaning in court for a long time.

I’m sure Zuckerberg has read the contract by now but it is a little too late.

6.  Beware of contracts drafted by non-lawyers and don’t sign bizarre, crazy contracts.

Contracts like the alleged contract in the Facebook case make the hairs on the back of my neck stand up.

No one should ever sign a contract that looks like that.

7.  Know what you’ve signed and keep a copy of all contracts.

This is basic housekeeping.  Keep a copy of all contracts that you sign.  Know what you own and don’t own.

8.  Make sure you use proper assignment language in your contracts.

The alleged assignment language in the alleged Facebook contract is improper and bizarre.  Courts are very picky about the specific wording of IP assignments.  If the assignment provision in a contract is written incorrectly, it may not do what you think it does.

Moreover, don’t count on the “work made for hire” doctrine in the Copyright Act if you don’t understand it.  There are only a few statutory categories of work that apply to independent contractors.  Always have a fall back assignment provision if you really want to own copyrights for work you didn’t create.

9.  Understand that you will be subject to broad discovery if you are sued.

In litigation, everything within your possession, custody and control that is relevant must be given to the other side.  Archive tapes, random disc drives, thumb drives, old non-working computers and boxes in your attic and garage are all fair game.

Again, the skeletons will come out if you keep them.

10.  Even a crazy, amateur contract may be the basis for a lawsuit and enforceable.

This item is my favorite.  Just be aware that anything that looks like a contract may come back to haunt you if your startup is successful.

Other posts about IP ownership claims:

• Analyzing the Risk:  Will My Current Employer Claim Rights to My Startup’s IP?
• Preventing Your CA Employer From Owning Your Inventions
• Who Owns the IP Rights to Custom Software?

I just got back from vacation and I finally had a chance to read the legal complaint and alleged contract in the Facebook ownership debacle.  I love a juicy cautionary tale, especially when billions of dollars are implicated.

In this blog, I’ll discuss some of the potential issues in the case and what entrepreneurs can learn.  This post will give a case overview and my next post will discuss the lessons.

Case Overview

(Ceglia v. Zuckerberg, 10-CV-00569, U.S. District Court, Western District of New York (Buffalo))

If you haven’t heard the story, Facebook, Inc. and its founder Mark Zuckerberg were recently sued in New York for enforcement of a contract granting the plaintiff, Paul Ceglia, an 84% ownership interest in Facebook, Inc.  The plaintiff is also seeking 84% of all monies realized by Defendants from 2003 to the present.

Since the estimated value of Facebook is in the billions, this litigation may be going on for years if Facebook doesn’t win on its statute of limitations or laches defenses.  (Basically, Defendants are claiming that it’s too late for Ceglia to bring his contract enforcement action.)

Ceglia alleges that he hired college student Zuckerberg to write software code for two projects in 2003 and that Zuckerberg signed an agreement that sets out the terms.  The alleged contract states that it covers work for both a “StreetFax Database” and Zuckerberg’s “project with the working title The Face Book.”

Ceglia submitted evidence that he paid Zuckerberg a $1000 for this work.  This is a paltry sum given the estimated value of Facebook today but sufficient consideration under the law to have an enforceable contract.  Courts in general don’t look at the adequacy of consideration but in any event $1000 may have seemed like a lot to a college student.

The Alleged Contract’s Ownership Terms

As an intellectual property lawyer, I think this alleged contract is very, very poorly drafted.

It’s crazy!

In the alleged contract, there are dozens of fundamental contract drafting errors, inconsistencies and some bizarre and convoluted clauses—the signs of a contract drafted by an amateur.  Consequently, the lawyers will have lots of language to fight over and it will be an expensive nightmare to litigate.

Although the alleged contract is titled ”Work For Hire Contract,” it appears from the contract language that the drafter didn’t understand this copyright doctrine or its implications.

Section 9 of the alleged contract titled “Proprietary Rights” states:

“It is acknowledged that this is a work made for hire agreement and that all Intellectual property rights or patent rights are that of Streetfax Inc. . . .”

This will be yet another fertile area for dispute in the case.  Copyright protection automatically arises when source code is created and belongs to the author.  In some limited cases in an independent contractor situation, the Copyright Act may transfer ownership of the work to the person paying for the work.  This “work made for hire” doctrine is complicated and restrictive.  The work must fit within one of the enumerated statutory categories.  (See my post discussing this copyright doctrine.)  The language in this contract is a mess.  The alleged contract fails to include appropriate legal language and it doesn’t have a standard fall-back copyright assignment provision for the software.

And strangely, the scope of the ownership clause is both broad and narrow.  It’s also fundamentally unclear.  The alleged contract states:

“It is agreed that Purchaser [Ceglia] will own a half interest (50%) in the software, programming language and business interests derived from the expansion of that service to a larger audience.”

None of the key terms like “software,” “programming language” or “business interests” are explicitly defined in the contract.  And what the heck does “expansion of that service to a larger audience” mean?  If this case continues, the lawyers will no doubt spend a lot of time debating the meaning of these vague terms.

Zuckerberg’s lawyers will likely be arguing that “software” noted in the contract has nothing to do with the “software” related to Facebook.com.  And what is the difference between “programming language” and “software”?   The defense lawyers will also likely argue that Zuckerberg didn’t even have any “business interests” at the time of the contract.

Definitions in software agreements are critical for clarity. The meanings of key terms are usually explicitly spelled out and the corresponding terms are thereafter capitalized in the document indicating a defined term.  The terms and their usage in this alleged contract are a hodgepodge.

Moreover, the bizarre kicker in the alleged contract is the penalty clause for delayed completion for the Face Book website:

“The agreed upon completion for the expanded project with the working title ‘The Face Book’ shall be January 1 2004 and an additional 1% in the business will be due the buyer for each day the website is delayed from that date.”

It seems bizarre that anyone would agree to such a vague and outlandish penalty term.  But it’s arguable that a naive college freshman would.

This alleged contract is quite simply a mess.  Although poor drafting alone doesn’t make a contract invalid, it will provide the defense lawyers with fuel to litigate this to death.

Defendants’ Defenses

Ceglia won’t own anything without a valid contract so it’s no surprise that Zuckerberg’s initial defense was to deny the existence and validity of the contract.  Was it forged?  Did Zuckerberg really sign it?

Eventually, if Facebook doesn’t win on its statute of limitations or laches defense, experts will likely debate both issues.  It doesn’t help Ceglia’s credibility that he’s been in some legal hot water lately, arrested and charged with fraud.

It also doesn’t help Zuckerberg’s credibility that his former Harvard classmates sued him on claims that he stole their business idea and code and turned it into Facebook.  This case was quietly settled but it implies that Zuckerberg may have had a weak understanding of intellectual property law and a cavalier attitude toward the intellectual property rights of others.

It’s important to note that Zuckerberg admits that he worked for Ceglia writing computer code when he was in college.  These facts will work in Ceglia’s favor.

A second layer of defense for Facebook is to deny that Facebook Inc. or its website falls within the subject matter of the contract.  The vagueness and ambiguity of the contract language will help the Defendants.  Moreover, Zuckerberg claims he hadn’t even thought of Facebook when he worked for Ceglia.  Commentators are quick to point out that Zuckerberg didn’t even register the Facebook domain until a year after the date of the contract.  Of course the commentators assume that domain registration is the very first thing that a budding entrepreneur would do.  This is a big assumption and very weak evidence that Zuckerberg hadn’t thought of the name, developed the idea, or written any related software code.   If he really signed the alleged agreement, it is clear evidence of his naivety and legal ignorance and not evidence of a savvy entrepreneur who would quickly register a domain for a new idea when he first thought of it.

Moreover, the fact that Zuckerberg worked on something called Facemash between the time he worked for Ceglia and starting Facebook doesn’t mean squat either.  Entrepreneurs often have multiple ideas they are pursuing and skip between projects.  Many don’t work on projects in a linear fashion.

There are plenty of issues to keep the parties’ lawyers very busy with legal research including whether you can give away part of a business before it’s incorporated.

Discovery

The discovery process will be critical in this case. The broad reach and scope of discovery in the US is astonishing.  Each party can get copies of electronic and paper documents in the possession, custody or control of the other side that are relevant to the claims. This includes emails and source code that go back for years including archived documents.  Some parties go to great lengths and hire forensic computer technicians who can unearth documents that the owners thought were destroyed.  It sometimes feels like electronic information can live forever.  Documents in the previous ownership dispute are also likely relevant and discoverable.

If either party is a pack rat who kept much material from 2003, this case is going to get very interesting.  One of the key issues is whether Ceglia has any software code in his possession that matches code that is in any version of the Facebook application. Ceglia kept the contract in a file for years so who knows if he kept any old computer disks or hard drives with the early versions of “The Face Book” project.

Although it is unlikely that much of Facebook’s original code is in its current website, Facebook or Zuckerberg may possess early versions of the code somewhere, which will be subject to discovery.  It’s not uncommon for a founder to keep archive tapes.  But considering that Zuckerberg was sued previously regarding claims of ownership he may have cleaned house and destroyed old, incriminating records.

Finding code from both parties that match would be a big win for the plaintiff.

Given the former litigation between Zuckerberg and his classmates, the geneology of the Facebook software may prove very interesting.

This case will be fun to watch.

Stay tuned for a discussion of the lessons entrepreneurs can learn from this case in my next post.

Ownership of the intellectual property rights to custom software created by an independent contractor can be tricky.  Because custom software can be highly valuable and expensive, it’s important to understand IP ownership issues.

Over the last decade I’ve seen both businesses who paid for custom software and software developers  be surprised and outraged by ownership issues.  I’ve seen millions of dollars spent on litigation trying to untangle IP ownership and millions of dollars of potential revenue lost because IP ownership issues couldn’t be cleaned up after the code was created.

IP ownership to custom software in part depends upon:  1) the relationship between the software developer and the client; and 2) the authors of the code.

1)  The  Relationship

Without a clear contract between an independent software developer and a client that defines and clarifies intellectual property rights, copyright assignment or license terms, IP rights to custom software will be murky at best.

And it doesn’t matter if the client paid a large amount of money for the creation of the custom software.  Without a clear, written contract, the client may end up with nothing but a limited, implied license to use the software.

The default law under the Copyright Act is that the author of the work — the independent software developer— owns the copyright to the software.  Moreover, a transfer of the ownership to the software’s copyright is only valid if it is in writing and signed by the author or owner of the work.

To further complicate matters, if the client contributed design ideas or process information that qualifies as a trade secret and this IP was integrated into the custom software, the client may be a joint owner of some IP rights.

Importantly, the parties may have different views on IP ownership that may or may not have been discussed as part of the business deal.

The Client’s Perspective. A business client that is paying for complex, custom software may want to own all of the copyright rights to the custom software.  For example, it may want to be able to make derivative works — modifications of the original program — or the ability to sublicense the software or sell it to others.  A business client with this attitude and a lawyer may require a standard independent contractor agreement that fully assigns all IP to the client.  A business client without a written contract or an understanding of copyright law, however, may mistakenly assume that it owns the copyright if it paid for the creation of the custom software.  (See my former post for an explanation of the types of copyrights rights.)

The Software Developer’s Perspective. In contrast, an independent software designer who has spent several years creating the core code that is customizes for clients, will probably want to retain some or all of the IP rights.  He may want to reuse the core code for future clients and only give the client a non-exclusive license to the custom software.  Of course some developers may not care about owning any rights to the custom code.  They my also not care about infringing the copyright to their former work.

Importantly, the software developer who wants to retain some IP rights  may have signed an independent contractor agreement early in its relationship with a client and may need to renegotiate the terms regarding IP rights.  It is possible to negotiate a carve out of some IP rights, even with a big client, but the independent contractor may need a lawyer’s help.  An independent contractor may be able to negotiate this carve out with the client’s lawyer himself but he may not get the rights he thinks he is getting.  (I’ll write more about what a software developer needs to watch out for in a licensing clause in later posts.) .

The only way to hammer out IP rights is with a written contract.  Oral agreements are not valid to fully transfer copyright ownership.  Contracts need to address trade secret issues and be specific about who owns what and the limits to the corresponding rights.  Both parties need to understand what they can and can’t do with the software.

2)  The Authors of the Code

Ownership of custom software gets even more complicated if:  a) more than one software developer worked on the code; b) the software developer has a development company that doesn’t own his works; or c) open source code with a restrictive license was used in the custom software.

Oh what a tangled web.

a.  Multiple Developers

First, if the custom software was developed by more than one developer, all developers may be joint authors and owners.  One key is whether the developers have independent contractor agreements or IP assignment agreements that assigned any IP rights to code they created to a larger umbrella company that then owns the rights and has the ability to transfer or license those rights.  Without written contracts with all developers, there is an IP ownership mess.  This is why some clients require a warranty from the developer regarding ownership of the IP being transferred or licensed.  A breach of the warranty may negate the contract and lead to hefty damages.

b.  Software Development Company Rights

A second issue is whether the software development company even owns the rights to the custom software.  A software developer who owns a development company may not have even assigned his rights to his own company.  Indeed, the code may have even been created before the incorporation of the development company.  Moreover, the software may be sold through a different business entity without an employment relationship  or written contract with the software developer.

Warning.  A contract between a software development company and a business client may not transfer or license the IP rights to the software if the development company didn’t obtain the original rights from the actual software developer.

Is your head spinning yet?

c.  Open Source Code

Third, incorporation of open source code into the custom software may complicate IP ownership even further.  Some open source code requires a restrictive pass through license that creates a legal mess.  Some clients are aware of this issue and scan custom code to ensure that all open source code is identified and that any underlying licenses are appropriate for the transaction.

The bottom line is that clean IP ownership to custom software requires a written contract and a genealogy of the creation of the code.  Without both, IP ownership of custom software will remain unclear.

This post was probably as clear as mud.  Any questions about the general information?

For more information about copyrights see the following related posts:

• Copyright Rights and Licenses
• Why Copyright Assignments Can Be Critical for Your Company
• Copyrights, Independent Contractors, & the Work Made For Hire Doctrine

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.

When you start a new technology company while employed by another, you put your startup’s intellectual property (“IP”) at risk.

One of the biggest threats to your new startup is a claim of trade secret misappropriation by your former employer.  It may allege that you used or disclosed its trade secrets in the creation of your startup’s IP and therefore it owns the resulting work.

One of the best ways to minimize this risk is to quit your old job like a newborn baby—leave naked like the way you entered the world.

You want to strip yourself of anything belonging to your former employer.

Do not take any documents, computers, paper or electronic files, electronic storage devices, prototypes or work that belongs to your former employer, regardless of whether you think it actually qualifies as a trade secret.

Do not take source code or software tools, even if you wrote them.

To stay safe, do not take your phone or your business contacts list.  Customer lists can qualify as a trade secret and companies frequently sue over their use and disclosure.

Keep NOTHING in your possession that refers to your former employer except a copy of any contracts you signed and minimal documents related to any pension, profit sharing or insurance documents.

If you need to take something else, get permission from the company in writing.

And even if they offer to let you take your company computer — don’t.

Remember that in the event of litigation, a trade secret plaintiff will typically seek all documents that mention its name.  You will have to turn over everything in your possession, custody or control.  That includes documents in your house and garage or on remote servers.  Many entrepreneurs are stunned to learn this after litigation has commenced.

Once a lawsuit is imminent or filed, it is too late to clean house.  Destruction of documents can lead to a claim of spoliation of evidence and the plaintiff may win on a technicality.

You may be characterized as a trade secret thief regardless of whether your possession of your former company files was inadvertent.

Further, when you quit, it is a good idea to write a letter to your former employer stating that you understand your legal obligation not to use or disclose company trade secrets.

Think of the letter as the first exhibit in your litigation defense.

Make a show of returning all company property.  State in your letter that you returned all company documents and files in your possession with the exception of your employment contract and 401 K documents.  State the name of the person who took the documents and the date of their return.

By leaving your old job like a newborn baby, you can decrease the risk of trade secret litigation by your former employer.

This is the final post in the Startup Launch Series.  Click on the category to see other related posts.

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.

I understand that you may be trying to start a company and build a website on a shoe string budget.

You may think that you are saving money by hiring an individual or a small Web design shop to create your website.

You may think that you are getting a real deal because the individual or tiny shop happens to be highly creative and truly talented.

You may think that you are saving money by not having an IP attorney review the contract, if any.

You may think that you own the website design and logo that you paid to have designed.  Your Web designer may even tell you that you do.

You may think that the contract that the Web designer gives you really assigns the copyright to you because it vaguely talks about ownership and copyrights in the same paragraph.

You may think that your Web designer will understand copyright law and not rip off other sites and put infringing material on your site.

YOU MAY BE VERY, VERY WRONG!

Legally ignorant Web designers (“Amateur Web Designers”) can create a legal cesspool.

Warning!  Some Web designers don’t understand the basics of copyright law!

Amateur Web Designers may be exceptionally talented and legally clueless.

Amateur Web Designers may be launching their own startup on a shoe string budget.  They may decide to save time by not researching the law.  They may decide to cut costs by not getting competent legal help.  They may rely on a best friend’s girlfriend’s brother or a friend of a friend for business and legal advice.

Amateur Web Designers may stick their heads in the sand and ignore the legal issues related to their work.

An Amateur Web Designer’s lack of legal knowledge can have serious consequences for your business.

Amateur Web Designers will not use proper contracts with their clients that correctly assign (transfer) the design copyrights to the person or company who pays for the design.

Cavalier Amateur Web Designers won’t use a written contract of any kind.

Earnest Amateur Web Designers may try.  They may have good intentions.  They may even draft a contract trying to transfer the copyrights and give you a copyright assignment.

But if they don’t understand copyright and contract law basics, they won’t use the proper assignment language.

Amateur Web Designers may think that it is utterly unnecessary to learn about copyright law.  They may think they can just use what seems like logical language rather than legal language.  They may think that legal language is unnecessary and utter hogwash.

But Amateur Web Designers who draft their own contracts may create a legal quagmire.

Some crappy amateur contracts are internally inconsistent, talk about some of the individual copyright rights in strange ways, and create a tangled mess that is actually worse than no contract at all.

I know it’s hard to read contracts and that legal language sounds like mumbo jumbo.

But Web designers need to understand that the copyright statute and judicial decisions that interpret the statute and language in litigated contracts actually dictate the proper wording for copyright assignments.

Law makers and judges determine what language is appropriate.  And if the contract isn’t written properly, it won’t legally do what the designers thinks it does and it may create a putrid, legal cesspool.

You may be wondering, does it really matter that I don’t own the copyright to my website design?

If the Web designer doesn’t use a proper contract, then you won’t have clean IP rights to the website.

Without a signed, written copyright assignment, the default law is that the Web designer owns the copyrights.

No skin off the designer’s back.  It is your problem going forward, not his.

If you don’t own the copyright to your website design:

• Depending on your contribution to the content, you may not be a joint author and you may only have an implied license to use your company’s site.
• You may be infringing the designer’s copyright when you change or redesign your company’s site at a later date.
• You won’t be able to sell your website to a competent company who does IP due diligence.
• You can’t register the website copyright with the Copyright Office.  If you don’t register the copyright and someone copies your site, you can’t bring a legal action for infringement, get statutory damages or attorney fees.
• Depending on the specific facts, if pissed off, your Web designer may have the power to stop you from using your company’s site.

Too bad for you.

If you don’t have a written, signed copyright assignment for the design of your website, you may want to make the Web designer your BFF.

If your Web designer doesn’t understand copyright law, you may be in for more unpleasant surprises.

Amateur Web Designers may infringe the copyrights of others and use unlicensed or improperly licensed material on your site.  When you operate the site, you will be the infringer.

Amateur Web Designers may use video that they don’t have the clear legal right to use.

Amateur Web Designers may be so clueless that they don’t have a proper copyright assignment to video that they have independent contractors shoot for them.  If they don’t have an Independent Contractor Agreement that assigns the copyrights to their business for the contractor’s work, then the contractor — yea the guy who shot the video — owns the copyrights.

When you use the video on your site, you will be relying on a tangled IP mess and a domino line of implied licenses.

Amateur Web Designers may use software that they don’t have the clear legal right to use.

They may copy and use unlicensed code.  They may use code that they think they own that is really owned by their former employer.

Amateur Web designers may also unwittingly use open source code that has horrible commercial implications for your site.

You may pay a small price for Web design now and pay a big price later.

What does a professional Web designer do?

A professional Web design company will have a proper contract drafted by an attorney who understands copyright law issues.  A proper contract will assign the copyrights for the overall design, new images and any logos to you.  This will allow you to register copyrights to your logo and website if you so desire.  (There is usually a carve out for designer’s software that gives you a license to use old code that the designer reuses.)

A professional Web design company will have a proper license to use any photographs and other third party material on your site.

A professional Web design company will disclose any source code that they use for the website’s foundation, have proper licenses to use the software, and give you a copy of the related licenses when asked.

A professional Web design company won’t copy other sites and infringe the IP of third parties.

A professional Web designer may be well worth the money.

In my personal opinion, you may want to hire a professional Web designer if:

• If you are not married to, closely related to, or best friends with the Amateur Web Designer who is creating your site
• You are paying a lot of money for the creation of your website
• The designer is creating a lot of original images for the site
• The designer is creating your company logo
• You plan on using your site for at least a year
• You plan on modifying your website at a later time
• Your website is the core of your business
• You might want to sell your website in the future

I’ve used small shops for the design of my websites to save costs but I’ve taken precautions.

I required the designers to sign a contract that assigned the copyrights to me.  I also reviewed the contracts for underlying open source code that was used for the foundation for my sites.

I ABSOLUTELY WOULD NEVER HIRE A DESIGNER WHO WON’T SIGN A DESIGN COPYRIGHT ASSIGNMENT!

I also believe the best practice for licensing photographs on your site is to license the photos yourself after the designer has selected them from a stock shop. This way you make sure that there is a license and that the license is appropriate.  I’ve also gotten a signed written copyright assignment from a photographer friend who has taken photos for my sites.

To make sure that you have the proper rights to your website’s IP, you can hire an Amateur Web Designer and an IP attorney to draft a proper website design contract for you.  Let the attorney explain the contract to the Amateur Web Designer.

Ultimately, protection of your website’s IP and reducing your risk of copyright infringement is up to you.

You need to make sure that you have the legal right to use every element of your website.  In business, it pays to be informed.

If you want to understand more about copyright law, download the free ebook IP Law FAQ or go to the Copyright Office’s website.

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.