Got Intellectual Property? Part II

This is the second in a series articles about Intellectual Property by Mary Juetten. Click here to read Part I and look out for Part III coming soon.

Many startups or even small businesses may answer, “I do not have any Intellectual Property (IP) because I am not a technology company” or “I have all my patents filed.” 

Few business owners understand that IP falls into one of four distinct categories: Copyright; Trademark or Servicemark; Patent; and Trade Secrets.  Identifying and protecting your IP is not just a legal issue, it is a business strategy. As such, ignoring IP can place a business at risk, impede growth, and even kill deals. 

Missing from the Balance Sheet 

Most IP is an intangible asset. Some famous examples include the Nike logo, the Coke bottle, the patents held by Apple or Exxon, and the trade secret Kentucky Fried Chicken recipe. 

Without delving too far into the mechanics of accounting, when a company creates a brand or invents a product, the value of that IP does not normally appear as an asset on the balance sheet. Instead the cost of the associated IP, namely filing and attorney fees, may appear. Generally speaking, the companies display only the purchased assets, such as computers, buildings, or equipment on the balance sheet. 

The difference between the total market value of a company and the company’s balance sheet total of purchased net assets is the intangible assets. That intrinsic value is not necessarily tied to any particular asset.  For the valuation of a private company, the market value is what an independent person is willing to pay for the company. Alternatively in the case of a public company, the value of all the outstanding shares on a public share exchange is the market value. Often this intangible difference between market value and balance sheet amount is thought of as goodwill that investors would be willing to pay for the company. However that market value includes IP. 

An excellent illustration is Coca-Cola, considered to be the world’s most valuable brand. The balance sheet value of the Coca-Cola corporation net assets is approximately 10% of the company market value. The Coca-Cola NYSE value was slightly over $100 billion when the reported net assets were approximately $12 billion.[i]  Studies show that almost 40% of US companies’ value is made up of intangibles absent from the balance sheet. EU companies have more than 50% of similar intangibles unrecorded on the balance sheet.[ii] Thus, for small private entities not listed and valued on any stock exchange, there is a real risk of undervaluing the business if IP is not identified and protected. 

Don’t risk being stumped by potential investors

Identifying your IP is good business practice.  Investors or Purchasers want to know that you understand your IP and have a protection and monetization strategy.

Investors tend to fund sustainable, scalable ventures with solid, proven management teams. If simple IP questions are unanswered or bungled, the management team test may not be met and in turn investors may question the sustainability and scalability of the venture. 

When preparing an executive summary or an investor presentation, ensure that there is a clear identification of IP and ownership, plus a plan for exploiting the IP.  Describe the stage of each type of IP and remember to consider the international implications if going global is in your plans. 

At a recent Entrepreneurship panel, an Angel investor told a story of a round of financing that closed and the checks were written before it was discovered that the CEO did not own the rights to the IP.

Cease and desist letters were issued and the company was forced into bankruptcy. 

A rather embarrassing public example from 1998 shows that even big companies make IP errors. Volkswagen (VW) outbid BMW for the Rolls Royce (RR) assets, however VW did not purchase the RR trademark.  Not only did VW have to spend over £500 million redoing the factory and removing all RR logos, the lack of trademark stopped them from creating and selling a single vehicle with the RR name.[iii] 

What a Trademark Is and Is Not 

The United States Patent and Trademark Office (USPTO) defines a trademark as: 

… a brand name. A trademark or service mark includes any word, name, symbol, device, or any combination, used or intended to be used to identify and distinguish the goods/services of one seller or provider from those of others, and to indicate the source of the goods/services.[iv] (emphasis added)

In other words, the product is tied to a particular brand. The RR brand would guarantee RR quality to consumers and avoid confusion with other car brands, including VW.

Recently a couple of budding entrepreneurs in the US explained that they had multiple domain names reserved for various versions of their new product, including common misspellings of the product name. Thus, they thought they were protected from trademark issues.  They had not searched the local State company database to see other company names used in the area nor had they searched the US database of the registered and pending trademarks.

Luckily the product name was not taken and the two could proceed with filing an intention to use trademark application for the correct spelling of the product name. Always check the local trademark laws to see how to protect the potential trademark before you spend money on brand, logo, marketing materials or domain names.

Receiving the Dreaded Cease & Desist

The “Cease & Desist” letter is feared amongst inventors and entrepreneurs. Often the first impulse is to ignore or run from the letter.

The following example illustrates an all too familiar trademark issue but with a unique response.[v]

Two sisters had created the “Heirloom Binky Bracelet” which is a hand-made sterling silver pacifier holder for either the baby’s or mother’s wrist.  The mompreneurs’ bracelet was wildly popular and had even garnered a celebrity group of purchasers.

However, the Playtex Corporation had trademarked the name “Binky” for its pacifier product. The sisters received a cease and desist order to remove the trademark-protected word “Binky” from the “Heirloom Binky Bracelet” name.

These mompreneurs turned a nightmare into a national contest to rename the product. The sisters gathered support and publicity from other small businesses and they re-launched the product as The Heirloom Bijou BraceletTM. Although the mompreneurs ended up creating a huge win in terms of exposure and sales, this is another case where some early stage research or filing for an actual trademark at inception would have avoided the nasty surprise of a cease and desist letter.

The next article will focus on some additional misconceptions in the area of patents with case studies to help others avoid some of the common traps when considering whether to patent your IP. Subsequent articles will discuss IP ownership strategies, special copyright challenges with respect to software development, trade dress issues, and patents versus trade secrets. But please remember, when in doubt, consult an attorney.  

This article was written by Mary Juetten, founder of Traklight.com, a site that provides inventors, creators, and small businesses with the tools to identify, secure, and manage intellectual property. Traklight.com products include the IP VaultTM, which enables users to time-stamp and store IP to prove that they created it first.

Visit www.traklight.com and take the free quiz to assess the risk of losing your IP. Sign up for beta testing at gotintellectualproperty.com. ID your IPTM is the Traklight questionnaire that identifies potential IP and provides next steps & strategic IP business tips. For larger companies, Ms. Juetten also conducts in person IP Audits and provides IP Strategy & Education with her partner at InnovaPro Consulting, see www.innovaproconsulting.com 

Disclaimer:  This article is intended to be general information and nothing in this article constitutes legal advice. Please consult with an attorney before making any intellectual property decisions.

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