For technology-based companies the most significant asset is generally their intellectual property rights—patents, copyrights, trade secrets, and trademarks—and there is a real and substantial risk to those companies if they fail to take the necessary steps to preserve the value of these assets. In order to analyze the legal risks in this area, and take appropriate steps to minimize and manage those risks, companies should conduct regular audits that focus upon the creation of the assets and ownership rights therein; the procedures used to perfect and maintain all legal rights in the asset; and the risk that the use of the assets might infringe upon the valid legal claims or the contractual rights of others.
Extensive covers of intellectual property audits is available in Chapter 202 of Business Transactions Solutions on Westlaw Next. In particular, you should review the executive summary for clients regarding intellectual property audits (§202:71) and distribute it to your clients. Some important things you need to know about intellectual property audits include the following:
1. The audit process begins with the collection of information through a review of statutory intellectual property rights, business information being protected as trade secrets, technology rights agreements, employment and consulting agreements, court filings and correspondence relating to actual or potential litigation with respect to technology used by the company, questionnaires, searches of company files and interviews. Once the information has been collected, it should be carefully subjected to ownership analysis, perfection and protection analysis, valuation analysis and infringement analysis. If appropriate, a report or summary of findings and proposed remedial actions should be prepared and delivered to the senior management of the company.
2. The information collected during an intellectual property audit can be used for a number of different purposes: whenever the investigation is done in the context of a proposed transaction involving technology rights, the information will be used by both parties to negotiate, structure, and document the terms of the transaction; training company personnel on proper procedures for protecting the company’s intellectual property rights; identifying remedial actions which might be taken in order to enhance the competitive utility of the technology assets; and improving the procedures which the company uses to protect its intellectual property rights (e.g., developing a corporate patent program or implementing a trade secret security program).
3. The analysis of ownership rights requires a review of public records, agreements with employees and consultants involved in the development of innovations that might be eligible for intellectual property protection and both inbound and outbound license agreements. Once ownership rights have been determined, the company's technology portfolio should be reviewed to ensure that the various components thereof have been perfected and kept up to date. An investigation should be done to verify that patents remain valid; and all statutory registrations should be maintained, by the filing of appropriate fees, and renewed. The company's trade secret protection program should be fully reviewed. With respect to technology rights licensed from third parties, contractual restrictions and covenants should be reviewed to verify that the company is not in default.
4. There are at least two common areas of concern in assessing the possibility that the company will become subject to a third party infringement or misappropriation claim. The first arises when employees or independent consultants may have used the trade secrets or statutorily protected rights of a former employer or hiring party in developing new products for the company. A second set of issues is created when a new product or service is substantially similar to an existing product or service of a third party, since an allegation might be made that the new work has been unlawfully "copied."
5. Even though the company may have clear title to its intellectual property assets, and the use thereof does not infringe upon the rights of third parties, there nonetheless may be various other limitations and restrictions which should be accounted for in assessing the commercial utility of the technology. Among the areas of inquiry would be restrictions and limitations which may have been imposed in contracts pursuant to which the technology rights are being used, as well as clouds raised by litigation or similar disputes surrounding the intellectual property rights.
6. The intellectual property audit may reveal unprotected technology, defects in the chain of title, or that a third party has rights in the technology. Where there is a defect in the chain of title, remedial action may include obtaining written assignments from parties that may have an interest; licensing the rights of third parties; reverse engineering the technology or part thereof; or using “clean room” procedures to independently develop the technology or part thereof.
Every company, regardless of its size and activities, is touched in some way by technology. For example, the use of computer hardware and software has now become commonplace for recording the terms of business transactions and creating and maintaining business records and even the smallest firms need to be attentive to improvements in computing tools that can lead to lower costs and greater efficiencies. Technology becomes even more important for the firm as its activities expand to include product development and manufacturing and it looks to stake out a technology-based competitive advantage. Given the importance of technology in so many of the activities engaged in by their companies, the founders and other members of the executive team need to understand the science and practice of technology management and the steps that should be taken to develop and implement the company’s technology strategy, conduct technology assessments and audits, create an effective management structure for technology, develop and implement plans for acquiring necessary technologies and perfect and protect the company’s legal rights to use its intellectual property.
A new chapter on Technology Management (Chapter 206) has been added to Business Transactions Solutions this month and its available on Westlaw Next. Among the practice tools that you can put to immediate use are the following:
- Executive summary for clients regarding intellectual property rights (§206:43)
- Executive summary for clients regarding intellectual property audits (§206:44)
- Management guide on technology management (§206:45)
- Slide Deck presentation: Technology Management (§206:46)
- Business Counselor’s Guide to Technology Management (§206:47)
Some important things you need to know about technology management include the following:
1. While the competitive advantage offered by technology will vary from among industries and markets, it is fair to say that companies have often leveraged technologies to reduce costs associated with production and distribution of products, increase efficiencies in production and distribution processes, support product differentiation strategies based on higher levels of quality and/or reliability, facilitate circumvention of barriers to entry and competition with established firms, trigger a radical change in the basis for competition in a specific industry and/or create new markets and industries through discovery of solutions to problems that are important to consumers.
2. Effective technology management requires the development and implementation of a clear technology strategy that defines the role that technology is expected to play in the overall business strategy of the firm. The technology strategy will determine the focus of the company’s internal research and development activities, as well as the need to look to outside sources for technology, and also impacts the selection of market sectors for the company’s new products and the way those products are positioned in the eyes of potential customers. There is no single method for defining and determining the technology strategy of a company or business unit; however, one possibility is to focus on the degree to which the company is dedicated to becoming a “technology leader,” as opposed to pursuing a “follower strategy”, and the balance that should be struck between these two extremes across the company’s technology portfolio. Selection of a technology strategy requires consideration of the likely rate of diffusion and adoption of new technologies or innovations, both within companies and among their customers. A variety of factors influence diffusion and adoption including politics and governmental policies; societal culture; understanding of, and experience with, elements of information systems (i.e., people, hardware, software, communications networks and data resources); and economic, geographic and geopolitical factors, particularly income levels and characteristics of populations (i.e., skills, educational qualifications, literacy rates, productivity and the cost of labor).
3. Key issues relating to technology management include identification and evaluation of potentially valuable technologies, selection and implementation of strategies to access needed technologies, identification of markets for exploitation of new technologies, creation of the optimal organizational structure for management of new technologies, establishment of procedures for perfecting and maintaining intellectual property rights associated with new technologies and establishment of scanning and forecasting procedures to anticipate future trends in technology development and use.
4. Companies should designate one person, often a “chief technology officer”, who will be responsible for the advance of existing strategic technologies and identification of the future technology requirements of the company and who will be responsible for a number of different activities including technology audits, benchmarking the company’s technology portfolio in relation to competitors, technology forecasting, defining the strategic technology requirements of the company, and establishing procedures and practices for keeping informed of new developments and acquiring and protecting those technologies that are crucial to the business strategies of the company.
5. As part of the administering the technology strategy for the entire company, senior management must also conduct regular assessments of the individual technology policies and practices of each internal department or business unit. Technology-based activities should be reviewed against strategic benchmarks and progress made by other participants in the relevant markets and industries. In addition, legal review and compliance efforts should focus on creation of intellectual property assets, identification and perfection of ownership rights, procedures for maintaining legal usage rights and procedures for avoiding infringement of the legal claims or contractual rights of others.
6. Companies may elect to develop desired technologies using internal resources; however, in most instances companies lack the capital and resources to do all of the work on their own even if success would give them maximum flexibility and allow them to harvest all of the benefits of the work. The reality is that as companies establish priorities with respect to research and development, they typically rely on one or more methods for acquiring new technologies from outside parties, including contract R&D arrangements, purchasing and licensing arrangements, joint development arrangements, joint ventures and strategic alliances and acquisitions.
7. Investment in the development or other acquisition of key technologies is only warranted if the company will be able to appropriate and protect the advantages of such technologies. The most commonly used methods for appropriating the gains from innovation include reliance on statutory intellectual property rights and non-statutory protection of trade secrets, complimentary assets, multiple technologies and lead time.
8. Companies may use their proprietary rights with respect to valuable technologies in licensing arrangements to gain access to the technology assets and other unique skills and resources of other companies. Technology rights can also be used as contributions to new business ventures and can serve as barriers to technology strategies of competitors. In addition, the value of technologies can be enhanced through “knowledge management”, which include the processes and techniques used by an organization to create, acquire, transfer and protect the information and knowledge necessary for the organization to be successful, and the steps that must be taken to identify improvements to the existing knowledge base that must be pursued in order to respond to competitive challenges and changes in the operating environment.
Restrictions on the use and disclosure of trade secrets and other confidential information are basic elements of any trade secret protection program and companies need to understand when and how to include such restriction into non-solicitation and non-competition agreements they ask their managers and employees to sign in order to restrict their ability to solicit business from the customers for the benefit of their future employers or to otherwise actively or passively engage in activities that compete with the company’s business. Non-solicitation agreements are appropriate for employees, such as sales representatives, whose job activities involve extensive interaction with the customers of the employer. A non-competition agreement may be useful for senior management and other key employees who may logically be inclined to compete with the employer following termination of his or her employment, either directly or as an employee of another company. Care must be taken, however, not to run afoul of applicable state laws that dictate the scope of enforceability of specific attempts to limit competitive activities. Westlaw Next subscribers can learn more about, and obtain examples of, non-solicitation and non-competition agreements, by reviewing the chapter on Employee Noncompetition and Nonsolicitation Agreements in Business Transactions Solution (§§ 168:1 et seq.).
While companies have traditionally relied on employees for the development of inventions and other proprietary information it is increasingly common to use consultants to perform similar services. Such arrangements provide companies with more flexibility to tap into specialized skills available through consultants without the added expense of creating an employment relationship. If a client will using consultants for technical work on a regular basis it will be useful to create a comprehensive consulting agreement that is tailored to engagements in which the consultant will be creating and/or receiving confidential information to be owned by the client and will be developing inventions and other items eligible for protection under intellectual property laws that will be assigned to the client by the consultant. The agreement will be similar in many ways to an employer-employee relationship; however, the agreement should clearly lay out guidelines for provision of the services that are intended to fall within the definition of an independent contractor relationship even though the consultant may receive equity in the client as part of the compensation. The confidential information and assignment of inventions agreement should include restrictions on the consultant’s activities with respect to solicitation of the client’s employees and other consultants, as well as restrictions on the consultant’s ability to provide services to other organizations that might be deemed competitors of the client. Westlaw Next subscribers can access a template for a consultant's confidentiality and inventions assignment agreement at § 51:141.50 of Business Transactions Solution.
Changes are coming to the rules promulgated under the Children’s
Online Privacy Protection Act (COPPA) and I launched a series of posts on those
changes on the Law & Technology Blog on Legal Solutions by looking at steps
that have been taken to expand the types of website operators subject to COPPA
and its rules. To learn more click here.
This issue of Business Counselor Update describes changes that have been made over the last quarter in the Westlaw database Business Transactions Solutions (BTS). Access to further information requires a Westlaw subscription, which can be obtained by using the contact and ordering information below. The most notable development has been the passage of sweeping changes to the US patent laws after years of debate and controversy. Business counselors should review the new rules carefully in order to inform and advise their clients.
Trade secrets are a valuable competitive tool for many companies; however, the value of trade secrets in global markets is often quite uncertain due to the differences among countries with respect to the legal protection available for trade secrets. This report provides a short summary of some of the main differences in global trade secret laws.
This month’s Business Counselor Update highlights the adoption of final rules by the Securities and Exchange Commission implementing required shareholder votes on executive compensation and golden parachute compensation and the latest developments in the ongoing efforts to reform the US patent laws.
Trade secret protection has been made available to a wide array of items and proper design of a trade secret protection program begins with identifying trade secrets that are kept and used within the company. Once the universe of trade secrets has been defined the company can determine the most appropriate types of security procedures. This post includes a report that describes the process of identifying trade secrets in general as well as particular issues that may arise with a particularly important and sensitive item–customer lists!
Some of the most talented researchers in the world maintain their "day jobs" at public and private universities. Businesses looking to tap into this resource will often approach university scientists and engineers with requests for consulting services in those areas of their expertise that overlap with the needs of the for-profit entity. The terms of such an arrangement, which must be approved by the university, will be set out in a customized form of consulting agreement. This week I am providing an annotated consulting agreement for a university researcher that describes some of the issues that can arise.