This document discusses various legal issues that entrepreneurs should consider, including intellectual property (patents, trademarks, copyrights, and trade secrets), selecting lawyers, patent types and processes, trademarks, copyrights, trade secrets, licensing, product safety and liability, insurance, the Sarbanes-Oxley Act, and contracts. It provides information on each topic and considerations for entrepreneurs.

1. Hisrich
Peters
Shepherd
Chapter 6
Protecting the Idea
and
Other Legal Issues for the
Entrepreneur
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

2. 6-2
What is Intellectual Property?
 It includes patents, trademarks, copyrights,
and trade secrets.
 These represents important assets to the
entrepreneur.
 Intellectual property should be understood
even before engaging the services of an
attorney.

3. 6-3
How to Select a Lawyer
 An entrepreneur needs to be aware of any
regulations that may affect a venture.
 A lawyer may work on a retainer basis or
may be hired for a one-time fee.
 A good working relationship with a lawyer:
 Eases some of the risk in starting a new
business.
 Gives the entrepreneur necessary confidence.
 Entrepreneur can offer the lawyer stock in
exchange for services.

4. 6-4
Patents
 Patent - Grants holder protection from
others making, using, or selling similar
idea; issued by the Patent and Trademark
Office (PTO).
 Utility patent – Protection of new, useful, and
unobvious processes, machines, compositions of
matter, and articles of manufacture; term of 20
years.
 Design patent – Covers new, original,
ornamental, and unobvious designs for articles
of manufacture; term of 14 years.
 Plant patent - Given for new varieties of plants.

5. 6-5
 International Patents
 The Patent Cooperation Treaty (PCT) was
established to facilitate patent filings in multiple
countries in one office.
 It is administered by the World Intellectual
Property Organization (WIPO) in Geneva,
Switzerland; has over 100 participants.
 It provides a preliminary search that assesses
whether the filing firm will face infringements in
any country.
 Differences may exists in the patent laws of
each of these countries.
Patents (cont.)

6. 6-6
 The Provisional Application
 It is the initial application to the PTO providing
evidence of first to market.
 Replaces the disclosure document that was
previously accepted by the PTO.
 Gives the rights to the patent based on the
concept of first to file.
 The actual filing of the patent in its final form
must occur no later than 12 months after the
provisional disclosure document if filed.
Patents (cont.)

7. 6-7
 The Patent Application
 Introduction – Consists of the background and
advantages of the invention, the problems that
it overcomes, and how the invention differs from
existing offerings.
 Description of invention – Includes a detailed
description of the invention and of the drawings
that accompany it.
 Claims - Specify what the entrepreneur is trying
to patent.
 The application should contain a declaration
signed by the inventor(s).
Patents (cont.)

8. 6-8
 Patent Infringement
 Many businesses, inventions, or innovations are
results of improvements on, or modifications of,
existing products.
 Copying and improving on a product may be
perfectly legal and a good business strategy.
 If patent infringement is unavoidable, the
entrepreneur may try to license the product
from the patent holder.
 It is advisable to hire a patent attorney to
ensure there is no possibility of infringement.
Patents (cont.)

9. 6-9
Table 6.1 - Checklist for Minimizing
Patent Risks
Table 6.1

10. 6-10
Business Method Patents
 The growth of Internet use and software
development has given rise to business
method patents.
 Firms use these patents to assault
competitors and subsequently provide
income from royalties or licensing fees.
 Concerns have evolved regarding these
patents.
 Not all start-ups will have a product or
concept that is patentable.

11. 6-11
Trademarks
 A distinguishing word, name, or symbol
used to identify a product.
 It can last indefinitely.
 It can be filed solely on the intent to use the
trademark in interstate or foreign commerce;
also with the intent to use in the future.
 Categories:
 Coined marks.
 Arbitrary marks.
 Suggestive marks.
 Descriptive marks.

12. 6-12
 Registering the Trademark
 Filing must meet four requirements:
 Completion of the written form.
 A drawing of the mark.
 Five specimens showing actual use of the mark.
 The fee.
 Initial determination of suitability takes 3
months.
 Objections must be raise within six months, or
application is considered abandoned.
 The entrepreneur has the right to appeal in case
of refusal.
Trademarks (cont.)

13. 6-13
 Once accepted, trademark is published in the
Trademark Official Gazette to allow any party 30
days to oppose or request an extension to
oppose.
 Registration is issued if no opposition is filed.
 Procedure takes about 13 months from initial
filing.
Trademarks (cont.)

14. 6-14
Table 6.2 - Benefits of a Registered
Trademark
Table 6.2

15. 6-15
Copyrights
 Right given to prevent others from printing,
copying, or publishing any original works of
authorship.
 Issues surrounding access to material on
the Internet have led to major legal battles
for the entertainment industry.
 Copyrights are registered with the Library
of Congress.
 Term of the copyright is the life of the
author plus 70 years.

16. 6-16
Trade Secrets
 Provides protection against others revealing
or disclosing information that could be
damaging to business.
 Trade secrets have a life as long as the idea or
process remains a secret.
 It is not covered by any federal law but is
recognized under a governing body of common
laws in each state.
 Employees may be asked to sign a confidential
information agreement.
 Entrepreneur needs to take proper precautions.
 Legal action is possible only after the secret has
been revealed.

17. 6-17
Licensing
 A contractual agreement giving rights to
others to use intellectual property in return
for a royalty or fee.
 Types of licensing:
 Patent license agreements - Specify how the
licensee would have access to the patent.
 Trademark license agreements - Involve a
franchising agreement.
 Copyright license agreements - Involve rights to
use or copy books, software, music,
photographs, plays, etc.

18. 6-18
 Factors to be considered:
 Customers’ recognition of licensed property.
 Whether licensed property complements existing
products or services.
 Entrepreneur’s experience with the licensed
property.
 Long-term outlook for the licensed property.
 Kind of protection provided by the agreement.
 Commitments in terms of payment of royalties,
sales quotas, and so on.
 Renewal options.
Licensing (cont.)

19. 6-19
Product Safety and Liability
 It is the responsibility of a company to meet
any legal specifications regarding a new
product covered by the Consumer Product
Safety Act.
 The Act created a commission with the
responsibility of prescribing safety standards.
 The development of stricter regulations
regarding labeling and advertising is also part of
the commission’s responsibility.
 Large fines as well as product recalls are the
typical outcomes of any action enforced by the
commission.

20. 6-20
Insurance
 It provides a means of managing risk in the
new business.
 Some insurances are required by law and
cannot be avoided while others are may be
necessary to protect the financial net worth
of the venture.
 Skyrocketing medical costs can have a
significant impact on insurance premiums.
 Entrepreneurs also have to consider health
care coverage.

21. 6-21
Table 6.4 - Types of Insurance and
Possible Coverage

22. 6-22
Sarbanes-Oxley Act
 Congress passed the Act in 2002.
 Provides a mechanism for greater control over
the financial activities of public companies.
 Under this law:
 CEOs need to vouch for financial statements
through a series of internal control mechanisms
and reports.
 Directors must meet background, length of
service, and responsibilities requirements
regarding internal auditing and control.

23. 6-23
 Attempts to influence or impede the internal
auditing process is a criminal act.
 Law covers bank fraud, securities fraud, and
fraud by wire, radio, or TV.
 There has been some concern as to the
interpretation of this law and subsequent
directors’ liability.
 There are conflicts with the provisions of
the new law and the laws of foreign
countries.
Sarbanes-Oxley Act (cont.)

24. 6-24
 Though private companies are not included,
they are subject to control if they:
 Consult with a public company.
 Influence that public company in any
wrongdoing established by the Sarbanes-Oxley
Act.
 Entrepreneurs can set up a board of
advisors instead of an extended board of
directors.
Sarbanes-Oxley Act (cont.)

25. 6-25
Contracts
 A legally binding agreement between two
parties.
 Often business deals are concluded with a
handshake.
 The rule is to not to rely on a handshake if
a deal cannot be completed within one
year.
 Courts insist on a written contract for all
transactions over $500.

26. 6-26
Table 6.5 - Contract Conditions and
Results of a Breach of Contract

27. 6-27
 Four essential items in an agreement to
provide the best legal protection:
 Understand the terms and conditions in the
contract.
 Cross out anything that you do not agree to.
 Do not sign if there are blank spaces (these can
be crossed out).
 Make a copy for your files after signing.
Contracts (cont.)