On the Brink of an IPO? Consider These Key Steps First

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Diana Szego Fassbender Kristin S. Cornuelle

By Diana Szego Fassbender and Kristin S. Cornuelle

Kristin Cornuelle is an of counsel in Orrick’s Intellectual Property Group where she focuses on U.S. and international trademark and copyright matters. Diana Szego Fassbender is a senior associate in Orrick’s Intellectual Property Group. She has significant experience in a broad array of IP matters, including patent, copyright and trademark issues.

While all companies should view intellectual property as a critical business asset (rather than something to think about only once your business is up and running), seriously examining one’s IP needs and protections is especially germane for startups and other companies intending to go public. Intellectual property can directly affect the profitability and success of a company. Startups looking for funding from venture capital firms can expect to undergo substantial IP due diligence and will be questioned about what they own and what they’ve protected. Likewise, companies attempting to crowdsource funding must thoroughly protect their IP before disclosing critical details about their businesses or inventions. Similarly, companies going public may find that IP issues not adequately addressed or altogether ignored suddenly become major problems leading up to or following an IPO.

The variety of IP issues that can emerge and the resulting consequences can be seen in many real life examples. For example, more than one company has faced class action shareholder suits after an IPO when IP issues cause stock prices to tumble. In addition, a company may need to acknowledge in its public disclosures if it holds insufficient patents to adequately protect its products or services, or if it has received claims of misappropriation or infringement of third party IP that could expose it to significant liability or time-consuming legal battles regardless of the merit of the claims.

Given the potential consequences to a company’s value and the exposure from failing to satisfactorily handle the protection and/or enforcement of intellectual property, it’s critical to address such issues at company formation or soon after. Here are a few key areas of intellectual property that should be carefully considered before seeking seed or Series funding, or considering an IPO.

1. Trademarks. Clear and register key trademarks and service marks (including prominent slogans, taglines and logos) in the United States with the United States Patent and Trademark Office ( www.uspto.gov). If you expect international or global traction within 3-5 years, consider filing in relevant foreign jurisdictions that grant rights to those holders who are “first to file”. You can file in foreign countries within six months of your U.S. filing and maintain your U.S. filing date, which can be rather helpful in those “first to file” countries. Once rights are established, police misuse of marks. Watch notices are relatively inexpensive and can be a good line of first defense. So can Google alerts or other media sources. Consider developing brand guidelines and trademark usage guidelines not only for your employees, but also for any pertinent developers or partners.

2. Social Media and Domains. As early as possible register the trademark or brand and product names as domain names, in addition to any domain that will be actively used by the company. Domains can be registered through a domain registrar such as GoDaddy.com or Name.com. Police against cybersquatting of domain names that have been registered and used with bad faith intent to trade off your company trademarks or goodwill. Grab any social media handles with the brand or product names to ensure fewer issues later if your product or service is heavily consumer facing. Utilize the complaint systems through Apple, Google and others to ward off any infringers who use the same name to divert customers or launch competing applications.

3. Trade Secrets. Establish a company policy that makes clear the importance of maintaining the confidentiality of trade secrets and detailing the safeguards that must be taken to keep company proprietary information confidential. What constitutes a trade secret depends on the particular business, and may include items such as products under development; manufacturing processes; ingredients; customer lists; financial information; or a company business plan. Be specific when identifying the trade secret information so that there is no confusion among employees about what must be kept confidential. Require employees and third party contractors to enter nondisclosure agreements to create a binding obligation to protect company trade secrets. It also may be appropriate to ask customers to enter confidentiality agreements depending on the industry and services provided. Learn more about protecting trade secrets and related issues at https://blogs.orrick.com/trade-secrets-watch/.

4. Employment Agreements. In addition to requiring employees to undertake confidentiality obligations, a company should require invention assignment agreements or work-for-hire agreements that establish ownership of any inventions or IP in the company rather than the employees. A non-compete provision also may be wise as part of an employment agreement to prevent an employee from working for a competitor or using company information for a competitive advantage after their employment ends. Because the legality of non-compete clauses can vary significantly by state, counsel should be engaged to ensure that specific non-compete restraints are enforceable in the event of a violation.

5. Patent Rights. File patent applications with the U.S. Patent and Trademark Office ( www.uspto.gov) on key inventions in the U.S. within one year of the invention in public use, on sale, or otherwise available to the public. Patent protection may be critical in some industries where a weak patent portfolio may cause investors to question whether the company has a competitive advantage. For other areas, patent rights may be less meaningful to the bottom line. Discuss patents with a patent prosecutor familiar with your industry to determine if this is the right place to put your IP resources.

6. Copyright. Copyright applications may be filed with the U.S. Copyright Office ( www.copyright.gov). Copyright applications are inexpensive and last a long time. Consider filing copyright applications on unique designs, visual art, or images. Owning a copyright registration can be a prerequisite to filing litigation in some states, and in many cases, it can act as a deterrent to copycats given the fear of statutory damages. Even computer programs can be eligible for copyright protection, which may be beneficial depending on whether you’re using open source or proprietary code

7. IP License Agreements. Scrutinize the terms of license and development agreements, including any licenses to copyrighted software. Identify the scope of IP rights granted by the license and the company products to which the licensed IP applies in order to estimate royalty obligations that would be due under the particular license if the company’s business plan were realized. If the company discovers that a license has become unnecessary due to changes in technology (which can be a frequent occurrence), attempt to terminate or renegotiate the license so that royalties are not needlessly owed.

8. Avoiding Litigation. Sometimes despite best efforts, third parties may send you a cease and desist letter or even file a lawsuit alleging IP infringement. If patents are critical to your business model, consider an analysis of third party patents to confirm that no patents are infringed by the company’s existing technology or products (as well contemplated technology or products), ideally before receiving a third party infringement claim. Because performing an evaluation of all potentially relevant patents can be a huge and expensive undertaking, consider focusing on the technology of primary competitors as a starting point. Retaining outside counsel to perform the analysis and prepare an opinion of non-infringement will lead to greater accuracy and legitimacy, and can also serve as a defense against any later claims of willful infringement.

If you receive an objection to your trademarks, assess the third party trademark and determine if changing the company mark or agreeing to other use or registration limitations is an effective way to resolve the issue rather than engaging in litigation. Given the costs, litigation may not be prudent even if you have the better case or the stronger argument. Rather, in trademark, as well as copyright litigation, settlement may be more practical and often, a welcome solution to both sides. In addition, consider securing IP infringement liability insurance coverage for future defense and indemnification costs if you’re entering an industry where you suspect potential litigation.

Intellectual property can sometimes be daunting. However, IP protection and enforcement are key areas to add to your budget and should be the first places to address once you have some working capital. Finding the right counsel to assist you in these areas will better position your company for funding or a public offering, and ultimately result in greater profitability and long-term success.

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