App-to-Market: Understanding Who Owns What with Intellectual Property

Developers develop and sometimes that becomes the basis of a startup's IP. So, who owns it now? Here's how to sort it all out.

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Now that you've gotten deep into thinking about your startup, it's time to think about the meaning of intellectual property. So, what is it and why is it important to define it in the context of your startup?

You're familiar with personal property as well as business property. Personal and business property – those are fairly tangible items. It encompasses things like the desks, chairs, the computer equipment, the office lease. But your startup is riding on the code you – and maybe a team of other developers or people you might contract out for hire -- create and it's not as tangible.

So, have you given any thought to what encompasses your startup's Intellectual property, or IP? I bet it wasn't the first thing that came to mind when you started thinking about a startup or even when you were in the middle of doing the work necessary to get your startup off the ground. But guess what? It's incredibly important because, as you'll soon realize, your IP is the foundation of your startup. Let's look at the basics of IP, what make up the various types of items in an IP, what's their value, and what you should be doing to protect them.

Note: This article covers issues in the United States of America and its Patent Office. Other countries will have different laws regarding patents. Please consult a local legal expert.

A patent is a right granted by a government to an inventor. A patent gives the owner the right to exclude others from making, using, or selling an invention for a given period of time. This exclusion right is provided in exchange for the public disclosure of the invention.

The first question with patents becomes "What is patentable?" The law in the United States says that for an invention to be patentable, it must be useful, novel, and nonobvious.

"Useful" means that the subject matter has a useful purpose. In addition, it must be operable. This means that the item must operate as intended. "Novelty" is defined by patent law. For example, an invention is not patentable if:

  • An invention was known or used by others in the United States before the patent applicant filed its application.
  • An invention was patented or described in a printed publication by someone other than the applicant before the patent applicant filed its application. We had a discussion in one of our patent applications regarding an item that I had written about in a published magazine article. Broadcasting the idea before applying for a patent will invalidate any potential patent application.
  • An invention was patented or described in a printed publication by the applicant in any country more than one year prior to the inventor's patent application in the United States. You are not able to take an invention from outside of the United States that has been in widespread use, run to the patent office in the United States, patent it, and lock the existing owner out of the market in the United States.
  • An invention has been in public sale, or use, in the United States more than one year prior to the inventor's patent application. In other words, you can't try to patent the wheel.

"Nonobviousness" means that if something is obvious, it is not patentable. So, if it is nonobvious, then it would be patentable. For example, using two different types of sugar interchangeably in a patented cake, does not make both cakes patentable. Because there are sugars involved that chemically are very close to each other, the use of the second type of sugar does not mean that the second cake is now patentable.

Prior to June, 2014, many things were being patented that are very obvious, but only to a technologist. If a technologist checked your patent application, they may decide "no, this is incredibly obvious." However, it a non-technologist reviewed your patent application, they may look at the application and decide, "wow, this is nonobvious, so, this is patentable." It was somewhat the luck of the draw.

Please note that in the United States, patents are based on the first to file.

Patent Trolls
Patents provide value in that they protect people from blatantly copying ideas. The problem is that the United States Patent Office, and many other patent offices around the world, simply don't have the personnel or expertise to decide on the merits of some patent applications.

A patent troll will attempt to exploit these situations and attempt to force others in a similar marketplace to license their patents. A patent troll may or may not be actively selling a product. Instead, a patent troll tends to fall into at least one of these areas:

  • Purchases a patent with the intention of obtaining licensing fees by either a legal agreement or suing a company/individual.
  • Attempts to enforce a patent without intending to manufacture a product or supply a service.
  • Focuses a majority of its efforts in the legal area.
  • Attempts to assert claims against a large industry segment.

One of the most interesting patent-related cases is the case of Lodsys and in-app purchasing in mobile games running on Android and iOS. Basically, there was a patent that both Apple and Google felt had enough value to license from Lodsys regarding in-app purchasing. Unfortunately, this was just the beginning, as Lodsys filed suits against numerous mobile app makers as well as large companies. What Lodsys wanted was a quick settlement where the app maker would pay a percentage of revenue back to Lodsys.

Lodsys' strategy was to settle at a lower amount than a trial would cost. Thankfully, one company (Kaspersky Lab) stood up to this attempt at a shakedown. Instead of going to court, Lodsys decided to just walk away. The cost for Lodsys to prove patent infringement would have also been significant.

This story has a somewhat happy ending as Lodsys appears to be shutdown at this time (early 2017), but not all do.

Software Patents
Let's be honest: Software patents have gotten out of control. It seemed that everyone in the technology industry had some type of patent and many were using these patents to sue someone else and try to force competitors out of business or pay some licensing fee. The patent office is overworked and quite frankly, doesn't have the personnel or expertise in software to determine the validity software patents.

Thankfully, some elements of normality have come to the world of patents. In June, 2014, the Supreme Court decided that just placing an abstract idea on a computer does not make the concept patentable.

What does this mean? It means that sending text messages via an app isn't patentable. It means that the concept of virtual memory, and paging tables, and lots of other computer science concepts that we use every day are not patentable. Basically, the SCOTUS decided that merely adding the words "on a computer" or "done with technology" no longer would make a concept patentable. For many of us working in the startup area, we have much less fear of patent trolls than a few years ago.

As a result of the general problems with technology patents, Congress passed a law and the Patent Office put in a review process that allowed for the review of patents even after they had been awarded. This was challenged in the case of Cuozzo v. Lee. SCOTUS determined that the Patent Office does have the right to review published patents to determine if they are patentable given the problems of technology patents.

The Cuozzo case was an interesting one. A company named Cuozzo had been awarded a patent for a speedometer that would notify the driver that they were speeding. Cuozzo sued Ford, GM, and a few other companies for patent infringement. After a review by the Patent Office, the claims of the patent were cancelled. Cuozzo sued, and the result was the SCOTUS decision in Cuozzo v. Lee.

Trade Secrets
A trade secret has a secretive definition, as its name implies. A trade secret is in general information that:

  • Not generally known to the public.
  • Knowledge about it contains some sort of economic advantage/benefit.
  • Efforts are made to maintain secrecy about the trade secret.

The exact definition of a trade secret depends on the jurisdiction.

A trademark is a recognizable sign, design, or expression that identifies products or services of one source from another source. A trademark may be located on a physical package, label, web site, application, or other place. At the US Federal level, Trade Secrets are no defined at that level.

A copyright is the legal right that grants the creator of an original work exclusive rights for its use and distribution. The legal right to exclusive use is for a limited time. The exclusive use is not absolute but has some type of limitation, such as fair use.

What Do You Do?
I am not a lawyer, but I want to share what I've done in this area. The first thing that I suggest is that you hire a lawyer that specializes in intellectual property. In the first meeting, you will need to:

  • Take your cofounders to meet with them to discuss everything.
  • Put all potential items out on the table for discussion. Discuss what IP your group has, what your plan is, what you need to protect, and how to protect yourself individually and as a company.
  • Regarding patents, you need to follow what your lawyer says. Lawyers are there to help you. We worked to file the necessary provisional patents and used the time provided by the provisional patent to determine if the marketplace would accept what we were working on.
  • You need to have your attorney verify your contracts. Specifically, many contracts have sneaky provisions that attempt to take ownership of IP. Verify that all contracts you have individually, via your company, or via some employment contract allow you to retain ownership of your IP.
  • Create employment and business contracts that keep your business as the owner of its IP. This is important because an employment agreement does not automatically provide your business with ownership of code development. There is a misunderstanding that "work for hire" provides a business ownership of the code development. All contracts need to have a statement that provides for ownership of all IP created.
  • If you are accused of patent infringement, get your lawyer involved immediately.
  • Remember one thing, getting sued means you've made something of value it in the startup world. Nobody sues anyone that doesn't have any money.

IP is the basis for your business. You will need to make sure that you protect it. Work with your lawyer and your team to make sure that everything is properly covered and done properly.

Additional Resources

Lodsys Case (from Wikipedia)
Alice Case (from Wikipedia)
Cuozzo v. Lee (Fortune Magazine)

Many thanks to Matt Googe for reviewing this article. He is a patent attorney for Robinson IP Law in Knoxville, Tenn. I will always owe his grandfather a debt for helping me to get into Georgia Tech back in 1986.


About the Author

Wallace (Wally) B. McClure has authored books on iPhone programming with Mono/Monotouch, Android programming with Mono for Android, application architecture, ADO.NET, SQL Server and AJAX. He's a Microsoft MVP, an ASPInsider and a partner at Scalable Development Inc. He maintains a blog, and can be followed on Twitter.

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