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Case Studies On Protecting Intellectual Property Rights

Case Studies On Protecting Intellectual Property Rights

T. Randolph Catanese, Esq. © 2000. All Rights Reserved.

The first three articles in this series on intellectual property rights focused on identifying intellectual property, discussing how it is protected at the state and federal level, addressing common instances of infringement and how the holder of the intellectual property can stop the infringement and what constitutes a trade secret.  In this last article in this series, the focus will be on case studies and examples touching upon one or all of these points.

Generally speaking, most investment bankers, venture capital groups and angel groups refuse to sign non-disclosure and non-circumvention agreements.  Their argument is that if they were to do so they would be less likely to consider business plans and would subject themselves to enormous litigation risk.  However, as is often the case in life, there are occasions where an entrepreneur has been known to complain that their business plan was shown to an investment bank or venture capitalist and when the plan was returned with the rejection notice, the investment banker or venture capitalist later went on to do the same business utilizing a different company or management team.  So, given this situation, what is the budding entrepreneur or existing businessman to do?  Initially, take advantage of the statutes which provide for trademark, copyright and patent protection.  By having the intellectual property protected even if the money source wanted to act upon your idea or intellectual property, it would be difficult if it were already trademarked, copyrighted or patented.  Since, if they wanted to pursue the same or similar concept they may have to start all over which would cause an unacceptable time delay for the money source hopefully causing them to return to the originator of the plan.

Assume that two entrepreneurs with a unique idea for an Internet site hire a business consultant to advise them and assist in the preparation of a business plan.  However, before an engagement agreement is signed and without a non-disclosure agreement they describe to the consultant their business model.  They divulge to him what is unique and special about the business.  Then, the business consultant quotes them his fee for developing the plan which the start-up entrepreneurs believe is excessive.  Ultimately, they cannot agree to the business consultant’s terms and so no formal engagement is reached.  The parties then go their separate ways.  Several months later the young entrepreneurs are still searching for venture capital when they come across an Internet site that is suspiciously similar to their business model and in some areas is exactly the same.  As they investigate the matter further they find out that the business consultant is one of the owners of the up-start/competitive Internet site.  What remedies, if any, do they have?  Assuming for the moment that the up-start entrepreneurs did not open their own Internet site and failed to produce any product for sale and assuming further that no trademarks or copyright protection was in place, there would be an uphill argument that there was any trademark or copyright infringement.  Does that mean that the entrepreneurs are out of luck?  Yes and no.  Yes in the sense that they would have a difficult time proving any violation of intellectual property rights, particularly because they disclosed the intellectual property rights in the absence of a non-disclosure agreement and since no relationship was consummated between the business consultant and the entrepreneurs.  But, the entrepreneurs might be able to claim some kind of unfair business practices by the business consultant on the basis that they disclosed to the consultant in trust their proprietary information and the business consultant utilized it for his benefit at their expense.  However, this argument would be weak at best and more likely than not may not be viewed very favorably by the court.  A larger problem too is the fact that in the absence of any money to hire an attorney (unless they could convince an attorney to take the case on contingency which would be unlikely) the up-start entrepreneurs may lack the capacity to protect what little proprietary rights they have left in the marketplace.

Take the same example noted above and assume the following facts.  First, the entrepreneurs before describing any proprietary information about their company or their concept first obtained a non-disclosure agreement with a trade secret clause from the business consultant.  Assume further that when they delivered their executive summary to the business consultant it was marked trade secret and confidential.  Lastly, assume that the business consultant returned the confidential executive summary to the up-start entrepreneurs when an agreement could not be reached for consulting services.  In light of these changed facts, if the business consultant pursued an Internet site as stated above, the entrepreneurs would be in a much better position to protect their rights.  They would have the right to claim breach of contract – specifically that the consultant violated the non-disclosure agreement and if the non-disclosure agreement was properly worded they could probably seek injunctive relief enjoining any further publication of the Internet site by the business consultant.  Further, they would be able to claim damages under the breach of contract theory and also under a fraud theory on the basis of the breach of the non-disclosure agreement, but also under a theory that the business consultant induced them to disclose their proprietary information by falsely stating he would honor the promise in the non-disclosure agreement of not competing with them.  Moreover, given this scenario they would have a much better chance of convincing an attorney to take the matter on a contingency (assuming they lack the funds to pay on an hourly rate) due to these better facts.

In this last example, assume that XYZ Internet company hires a vice-president of marketing.  Assume further that the vice-president of marketing does sign a non-disclosure agreement and an employment agreement which provides for the non use of trade secrets.  But, the company fails to mark proprietary information as “trade secret” or “confidential.”  Specifically, the company fails to denote a vendor and client list as confidential and proprietary.  Later, the V.P. of marketing elects to leave to take another job at a competing Internet company.  When he does so it is determined later that he is soliciting customers and vendors of the company which the company deems to be “trade secret.”  What is the likelihood that the company could persuade a court that its customers and vendors were trade secrets and that the former employee should not be permitted to solicit them for his new employer?  Chances are the case would turn or fall on the facts and circumstances surrounding the company’s efforts to identify and protect this information as trade secret.  The court would also look very carefully at how difficult it would be for someone else to create the same customer list or vendor list.  If the court determined that little if any effort was made to protect the information as a trade secret and that the information could be obtained through diligent efforts by a third party, although difficult, the court might well conclude that the information was not a trade secret and would deny any relief to the company.  (That is not to say the court might otherwise grant relief under an interference with prospective business advantage theory – meaning, the court might grant relief if it found under that theory there was interference with existing contractual relations or the opportunity to obtain profit from an existing or future contractual relationship).  The problem with this scenario is it is left up to the discretion of the court to determine who is right and who is wrong.  In litigation this is a very difficult and uncomfortable position for any plaintiff.  On the other hand, if the company had taken efforts to identify the client list and the vendor list as confidential and trade secret, then, more likely than not, an initial letter from the company’s attorney to the competing company would be sufficient to obtain an agreement from the competing company and the former employee that no further solicitation of trade secret clients or vendors would occur.

What is to be learned by all of the above?  First and foremost, take steps to protect intellectual property rights.  This could very well be the difference between success and failure of the business.  Second, if there is a violation of an intellectual property right, act quickly and decisively to notify the infringing party to cease the offense.  Third, take steps from the beginning and throughout the company’s existence to identify its trade secrets and to protect them.  By doing so, not only will the company enhance its value, but it will also assist its legal counsel in the event of any dispute involving infringement or unconsented use of the intellectual property.