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Intellectual Property for the General Lawyer: Transactions and Litigation Pitfalls

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Intellectual Property for the General Lawyer: Transactions and Litigation Pitfalls

In this IP analysis for transactional lawyers in due diligence or representing small/medium businesses, we look at the major areas of IP law to understand what the IP assets are exactly, how to make sure they are valuable assets and scheduled properly, how to assess if there is potential value that is being missed, and registration regimes for different IP classes to guarantee the most protection. Along the way we offer lots of practice pointers for issue spotting so you do not make mistakes interacting with IP assets, which in many respects differ in basal assumptions about ownership compared to real property assets.



Peter Afrasiabi: Hello and welcome. My name is Peter Afrasiabi. I'm a partner at the law firm of One LLP. We are an intellectual property boutique with offices in Newport Beach in Beverly Hills, California. We specialize in intellectual property litigation, as well as intellectual property prosecution. That is the securing acquisition from the government of patents, trademarks and copyrights. The views expressed in this program are only my views, so if you don't like them, by all means reach out to me and ascribe them to me. I take ownership of them all. Today's program is called, Intellectual Property for the General Lawyer. Transactions and Litigation Pitfalls. The focus today really is on looking at the four major areas of intellectual property, and understanding what they are and what they cover, and also what they don't cover. One of the big issues that this program is built around today, is looking at how you as a general lawyer, perhaps you're a transactional lawyer doing due diligence in a corporate transaction, or you're a generalist helping your client either acquire a business or sell a business.

  In that realm, you need to understand when you are looking at assets and trying to figure out what assets exist or what may be there, you need to understand if you own assets or if you don't. The way to do that is to have a proper understanding of intellectual property. One of the overarching themes that you will see distilled from today's program is that much of intellectual property law is not actually intuitive, it doesn't harmonize with the very basic standards we all know when it comes to real property. In terms of acquiring assets, owning them and knowing safely that you own them. There are weird little quirks, we can call them, of intellectual property law that pop up, whether you're in copyright patent, trademark, or trade secret, that can run a foul of your general disposition for thinking. And so, today's program really is to identify those issues that really lurk there, in terms of transactional problems that can go awry, and create litigation exposure.

  For me as an intellectual property litigator, I have seen many of these transactions explode and end up in litigation, and see companies in positions that they never could have contemplated themselves being in, but they're there because there wasn't a robust enough understanding of the intellectual property legal overlay out of the gate. And so, this program really is built around identifying those issues and helping you, when you do due diligence in transactions, make sure that you do your client justice and you don't make any mistakes. Along the way, of course, we're going to have tips and practice pointers so that you can avoid these litigation problems, so that you can actually, and fundamentally, increase the asset value of your client. You can protect the intellectual property, and you're going to have some good checklists for IP transactional, and just for general client health checkups and reviews, if you're doing them with clients and wanting to make sure that they're in a good position, vis-a-vis their intellectual property.

  So, let's get going, and we're going to start with copyright law. Copyright protects original works of expression that are fixed in a tangible medium. One of the fundamental issues to understand when we're talking about copyright is that it's governed only by Federal law. That is, Federal principles on copyright define what it is you own when you own a copyright, how you can get a copyright, and what you can do with that copyright. And indeed, they preempt all state laws that fall within the vicinity of trying to regulate what would otherwise be copyrightable. So, when we're talking about copyright, we are looking at original works of expression, that are fixed in a tangible medium.

  So, we can think of fantastic works like Van Gogh's paintings or amazing sculptures and the like, but we can also think about things such as perhaps you're listening right now and you're already bored, and you're doing some really cool doodle, and you're drawing it all up on the piece of paper as you're listening to me drone on about copyright law, and you are actually, yep, you are, you're creating an original work of expression, and you're fixing it in a tangible medium. Which is another way of saying you are permanently reducing it in some form. Your pen to paper is that fixation in a tangible medium. Now, what this means of course, is that if you right now come up with the most incredible poem or haiku of all time, that's going to make you a millionaire and you can retire from this practice of law, and you decide to put it up in the sky with a plane, doing those smoke messages in the air. You put it up there in the sky, you have issued your work to the public, but you've not fixed it in a tangible medium.

  And so, as of that moment, you actually don't have a copyright yet. So, it does require a permanent recording of some kind. Not much, pen to paper suffices, but it can't be ephemeral like your haiku poem to your loved one in the air from the airplane. What types of things then, fall within the realm of copyright? And the types of assets we could call them that you want to think about when you are doing due diligence into companies, and you're trying to figure out what copyrights may exist, or you're looking at a schedule of alleged copyrights, and you want to figure out could there be more? Or things such as books and other writings. Other writings is broad. I mean, think about marketing materials, business programming ideas and the like. Music, film, photographs, artwork, software and source code, very important one to think about.

  Architectural designs and plans can have Federal protection at the copyright level. Even clothing designs, which have become a very big area in the last several years, pantomimes, choreographs, plays and the like. So, it is a very, very vast realm when you think about it, and it makes sense because copyright protects any original work of expression that one has, that they reduce to a permanent form. Now, let's talk real quick about first requirement of originality. What does that mean? It means it's original to the source. So, the author simply has to be the originator of this exact form of expression. Courts treat this as a very, very low threshold. The courts have historically, for hundreds of years really, not wanted to get involved in disputes over whether something is sufficiently original. Whether it has sufficient artistic merit to be original, or whether it's just too unoriginal, let's say.

  And so, what the Supreme Court has said, and Feist versus Rural Company, and 499 US 340, at page 345, this is a 1991 Supreme Court case, where the Supreme Court said it is a minimal degree of creativity, extremely low. That idea really hearkens back over 100 years, and it's based on this idea that courts simply are not going to get involved in artistic merits battles. So, your doodle, you may not think much of it, someone else may think it's a pretty incredible doodle. It's probably got a copyright, because it's original to you, and the courts aren't going to get embroiled in a battle over whether it's really high art, or if it's too low brow art. So, keep doodling away, but please keep listening too.

  On the next slide, you can see here a great quote from Justice Holmes, and this is from the Bleistein versus Donaldson Lithographing Company case, reported at 188 US, 239, page 251, and this is from 1903. This is what Justice Holmes said. "It would be a dangerous undertaking for persons trained only to the law to constitute themselves final judges of the worth of pictorial illustrations, outside of the narrowest and most obvious limits. At one extreme, some works of genius would be sure to miss appreciation. At the other end, copyright would be denied to pictures which appealed to a public less educated than the judge."

  So, that's the core principle, and that makes it very good for you as an intellectual property reviewer, or a transactional lawyer, trying to look into a company to figure out if there's a copyright there. Original works created by that business, or that entity, are going to have a copyright protection. Now, let's get back to fixation. I alluded to it earlier. Your sky writing's not going to work. It requires a tangible medium in which something's fixed. And so, that tangible medium could be pen to paper, it could even be you typing on your keyboard, because as you type on that keyboard it's being saved to the hard drive, and it's being recorded with a whole bunch of zeros and ones in a way that I candidly don't understand. But nonetheless, it's being permanently recorded, and so it's being fixed sufficiently for the Copyright Act. Drawing with a pencil or playing around with pottery when you're making a sculpture would also count.

  So, let's take a look at what this issue of expression is, because copyright protects expression, but it doesn't protect general ideas. And so, this is a very important dichotomy in copyright law. It's a critical concept to understand, and we can look at it through the prism of this case, Kepner versus Leadership Software at 12F.3d 527, and it comes from the fifth circuit in 1994. What you had is some software that had been created that was an expression really of a specific business model. And it was these leadership questions that would get posed, and then there were problem attributes that would come from it. And all of this was a form of software within this business model, designed to really improve management and decision making. And so, the question is what was the copyright in? And what the courts made clear is that the questions and processes in general, may well convey unprotectable ideas. IE do you yell a lot?

  Do you listen to people before you get back to them? I mean, these types of questions. These are ideas. But the very, very specific wording that was employed here, and the structure and ordering, did have the capacity to be protectable expression. And so, this is a very, very good example of the type of business you may represent, where many, many businesses have different kind of management materials, training materials, marketing materials, in terms of how to do things better. And they are all, at a high level, really just ideas, that don't have protection. You can't monopolize the process of making a cup of coffee, obviously. But you could, representing a company, know that your specific encanted version as written down on that piece of paper may have protection. And it may only protect that very, very specific articulation, such that small changes would get around the copyright for someone else. But nonetheless, there can be protection.

  Another way to think about this is just think of Einstein's relativity theory, which distills it, as we all know, to E=MC squared. While we obviously all don't understand how light moves and bends around the universe and all that, we do understand that was Einstein's developed theory. Now, Einstein doesn't have a copyright in the idea of relativity. Even though he discovered this explanation for the universe and the world, and put together the mathematical formula, he doesn't have a copyright in that because it's an idea. But he does have a copyright. The paper he wrote describing the theory of relativity, his famous paper, that was his expression that encapsulated and articulated that idea. And so, that specific expression that he put down had copyright protection. Which means if someone Xeroxes his paper or they just cut and paste it and they use it all, they're infringing his copyright.

  Now, it also means that other people can write the theory of relativity themselves, and write their own paper from scratch using his idea and his theory, and their version would have copyright protection also. So, it's a limited form of protection against other people, but nonetheless it's protection, and it's important to keep in mind, because many, many companies have things that constitute copyright which are literally copied by employees who leave and compete, or competitors. And that literal copying can actually trip copyright wires and give your client an advantage, if they knew they had a copyright, in litigation. Now, the question that you have to ask is, when does copyright exist? Well, it exists at the moment that expression is fixed in a tangible medium. So, you're doodling along and you have a copyright right here right now, as you're listening to this program, you've earned a copyright.

  One of the very, very important issues to understand is that there is no registration requirement in order to secure a copyright. It simply is achieved when you affix permanently your original creation. Now, there are massive benefits to registering copyrights. The most significant benefit is that if you have a registered copyright before the defendant infringes it, then you are eligible for statutory damages and attorney's fees. And those statutory damages, if the infringement was willful, can reach up to $150,000. And so, what this means at a very practical level is that, if your client has some form of a copyrighted item, that they believe gives their business some benefit, and that work is registered. And then a defendant comes along and infringes it, you can go speak to a lawyer, an intellectual property lawyer like me, and say, "Hey. I've got this copyright. It was infringed by a competitor. Will you take the case?"

  And lawyers will look at it and say, "Yep. You can get statutory damages. We can collect from the defendant. We'll even take it on contingency so you don't have to go out of pocket, because you registered your copyright." Now, if you don't register your copyright, the conversation with litigation counsel is a little bit different. Litigation counsel says, "Of course I can take your case, and I can sue your competitor. But we cannot get statuary damages or attorney's fees, which means the only remedy you have available are your actual damages or their profits. So, what is the value of this copyright of yours?" And it may, and it often, turns out that the market value of the work may be very, very low. Maybe it's 10, 15, 20 grand, something like that. Maybe it's only five grand. It can often be far less than what one can get in a statutory damages award.

  And then, you are stuck having a lawyer tell you, "Yeah. I can't take that on contingency since there's only a $10,000 upside. But, look. You want to shut down your competitor and stop them, pay me hourly, we bill $550 an hour. Let's go." And this often puts many businesses in a great pickle. They have to expend a significant amount of money to stop something that is annoying and irritating to them, and if they had simply registered the copyright, they could get lawyers to essentially do it for free. So, there's a massive benefit to registering the copyright. And now, as of 2020, in order to sue someone, you have to register the copyright anyway. So, if you have a copyright set of assets within a company, that you ever could conceivably need to sue someone over, you're going to have to register them anyway, so you may as well register them now, and then have the option to get statutory damages, as opposed to waiting for an infringer, and then wanting to sue. And then you've got to register to even file the lawsuit anyway.

  And the great benefit is, registration's cheap. It's 50, 60, 70 bucks. It's really very inexpensive at the copyright office. It's not hard to do. If you don't know how to do it, you can reach out to copyright lawyers who can help you, but your clients probably can even figure out how to do it themselves. So, one of the very practice pointers and big tips that you want to take here is that, when you are looking at schedules of intellectual property, and companies list their copyrights, they may list, we have this software and we have that app, and we have these marketing brochures and these photographs that are very valuable that we took and we use in our marketing, and they list all these copyrights.

  You don't want to assume that those are valuable assets from a litigation perspective, unless you actually know, were they registered? So, part of your diligence in this scenario has to be getting to the bottom of registration. The other huge issue, and this is where we'll talk in a moment about a litigation example of a case I had, which is not a typical case, but this comes up all the time, especially for small business, or maybe now it's a big business that's making a lot of money. But it started out as a small business. And the question is, who owns the copyright? And this is where we start getting a disconnect between your general principles of property and copyright law. Copyright law says, "The author is the owner and ownership vests in the author." But we have a work-for-hire doctrine, so that works created by employees within the course and scope of their employment are deemed works for hire, making the author the employer.

  So, if you, for example, are listening, you have a law firm, and you create all sorts of great internal marketing materials, and you have your paralegals and your associates write it all up for you. They are W2 employees and so the works they create in the course and scope of their employment are works such that your law firm is the vested author. But here's the practice pointer, and here's what's important. Independent contractors are not employees. And so, if you retain an independent contractor to write an article for you or create your marketing materials, and you pay that independent contractor a whole bunch of money, and they give you all the materials they create, they still own the copyright in those materials. And this is a very important principle that's often lost, it's especially injurious to small businesses, who obviously, because of the economics of a small business, often engage with independent contractors.

  And so, what you see often are small companies, they need software or apps made. They get an independent contractor, they pay them 20 grand, they 1099 them, and the independent contractor writes the code. They deliver the software, and that independent contractor technically still owns the copyright, even though you paid for it. And this is where there's a disconnect. You pay Ford 20 grand, they give you a car. You own the car, no doubt about it. You're not leasing it, it's not something Ford can take back, it's yours. This is not the same. So, if you are going to use an independent contractor, or if you are representing small clients and businesses who are using independent contractors to create copyright type content, you want to make sure that that independent contractor agreement has a correct and valid copyright assignment in it, going back from the independent contractor to the company, so that you know 100% the company owns the copyright.

  Good examples that come up in litigation. I've seen it. 50, 100 million dollar company going through a sale transaction, super successful, started by two guys in a garage. They built it up. It was a software company and 10 years later they're going to sell for 100 million dollars. And in the due diligence process, what one gets to the bottom of is they find that the original code that's the crown jewel, was paid for by these two guys to an independent contractor on a 1099 basis. And that independent contractor never signed an assignment. And so, now you have a problem. You actually can't give clear title to the copyright. The buyer is going to be very nervous, because they know this person could come out of the woodwork and say, "I want my share." And worse yet, that person, when they learn that this thing's being sold for 100 million dollars and they realize, wait a second. I own a piece of that. Pops up out of the woodwork and yep, you got it right.

  I've seen this litigation. I've been involved in it. And says, "Holy cow. Thank you for paying me that 30 grand, 10 years ago. I'd like a couple million dollars right now to assign you my copyright. And if you don't give it, that's okay. I own the copyright and I'm going to interfere with your transaction." And that person then ends up making a lot of money being picked off. So, that is something, and you could be on both sides of that transaction, and it could be fantastic for you or horrendous for you and your client, depending on what side of the transaction you're on. But it's a very important line to understand and to be very aware of. And so, here are the factors that you look at to figure out really, whether someone's an employee or an independent contractor. The general rule is that a W2 employee, their works belong to the employer, and the independent contractor, they don't.

  Now, how do we figure out? It's actually a complicated test and it's not even identical to the test that the IRS may use to figure out if someone's an employee or an independent contractor. The courts in the copyright realm look at whether the employer had the right to control the work in hours. What was the skill level of the person doing the work, the source of the tools they used? Whether the hiring party can assign tasks and duties, the duration of the relationship. Employee benefits being given, the tax treatment being given. There's a whole bunch of factors that make it complicated, and the factors may not line up with the IRS's test. They may not even line up with the state common law test in whatever state you're in, where those states figure out whether someone's an I contractor or an employee. So, it's a very, very murky, critical area, and it's so easy to fix on the front end.

  On the front end, the independent contractor will always assign away the copyright to what they're creating, because they themselves don't perceive that they should be holding onto it. Now, let's say you have a copyright, what does that mean? It means you have certain exclusive rights under Federal law, and those are the right to reproduce, and that means to make copies of it. So, if it's a song, you have the right to make thousands of DVDs or CDs, and sell that song on a CD. Or millions of copies of the book and sell it. It also is the right to engage in transformation or adaptation of the original work. And so, that you can think of as derivative works and derivative rights. And so, maybe your client wrote a screenplay, and your client owns the copyright to the screenplay, which means your client has the exclusive right to authorize that screenplay to be made into a movie.

  It also includes the right to distribute to the public the work, and the right to publicly perform the work, and the right to publicly display the work. And there are very limited moral rights in the United States. And these are European centric protections that are built really around protecting fine art, and specific examples of original art, and sculptures, under the Visual Artists Rights Act. And those protect the moral rights of the author, the artist, not to have the work defaced or destroyed, and not to have that author's attribution stripped from it.

  What is an infringement cause of action if you're in a copyright piece of litigation? It looks like this. You have to show actual copying, which you show by the defendant having had access, and by very probative similarity. Now, true independent creation is not unlawful, and this is what's important to understand, so that if someone genuinely sat down and had never definitively been exposed to say John Lennon's song, Imagine. Never seen it, never heard of it. Let's say an alien landed on Earth and never heard any of it, and just somehow magically went into a closed room and came out with a song, Imagine, or something very close to it. That would actually not be copyright infringement, because it was genuinely created independently. Now, almost all the time when you get near identical copying of things as complicated as that, there's rarely independent creation.

  Although there often is independent creation, and things that may appear remarkably original and incapable of being made but for independent creation, it does happen sometimes. But you look to access and probative similarity, and this is different across all the circuit courts in the United States. But basically it looks to then figure out, is there substantial similarity across different elements of the work? And those elements vary. Photography will look at the angle, the lighting, the subjects, and that type of stuff. Literary works and movies look at, is there similarity across things such as the theme, the setting, the plot, the dialogue, the character development and the like? And it just differs for the subject matter that you're in. Fair-Use is another very important thing to understand, and this is something that trips up businesses and transactions all the time.

  I mean, you may be representing a small company that's got a very successful YouTube channel, and they're making all sorts of public commentary videos, and they're literally using all sorts of other works out there, and they're content and comfortable. They believe, oh no, it's all Fair-Use. Not a problem. Fair-Use is very murky, very difficult to assess, and it looks at the purpose and character of the defendant's use of the work, including whether the use is of a commercial nature, or if it's truly nonprofit educational. The nature of the copyrighted work at issue, that is the plaintiff's work, the amount substantiality of the portion used in relation to the copyrighted work as a whole, and the effect of the use upon the potential market or the value of the copyrighted work. So, you can see there, those are very, very, very elastic factors. And what they basically mean as a basic reality for businesses is that it is very, very hard for any law firm to give a formal opinion letter that says, yep. What you're doing is Fair-Use. Don't worry about it. You have no risk of exposure from the original copyright owner.

  Indeed, it's almost impossible. I think maybe my law firm has issued one or two such letters in 25 years across all our partners involved in intellectual property litigation, where we were able to comfortably say, yes. You are okay. It is almost always the case that it's unclear, even if the use sometimes is an educational use, or it's an nonprofit use, or it's a totally different space to the original. It is very hard to give a Fair-Use opinion letter. And what that means is that companies often then take the risk and they don't get sued and they think they're okay, but on any given day they may not be okay. And so, if they are engaged in the borrowing and use of other people's works, you want to be very aware of that so that you can understand that there's embedded risk.

  Now, we can look at some of the uses that are generally deemed fair ones. Criticism. So, if you're quoting a work in a review for purposes of illustration or comment, so for example, you're doing a review of a book in the New York Times, and you quote parts of that book in order to illustrate or discuss it, that quoting those sentences you may have taken out of the book are going to be generally Fair-Use ones. News uses, where they're summarizing news stories or articles, and where there's limited quotes in news reports for that, quoting in scholarly, scientific or technical works, where you're doing research. Nonprofit educational uses generally, some photocopying for classroom use can be okay, but there are again many cases where even educational institutions who have put together course packets, have been sued and hit heavily with copyright infringement. And then parody. Parodies are works that humorously mock the original, and parodies can find Fair-Use protection.

  But satires don't, and there's a very, very fine line between satire and between parody, and this idea that the work is actually mocking the original, as opposed to using the original to mock something else. And so, you can think of, for example, Weird Al Yankovic's music and his famous song, Fat, where he does a video and a song, and it's using the music of Michael Jackson's, Bad, and he's doing fat, and he's humorously mocking the original in a sense, and it may be a parody. But even that's sufficiently close that he generally goes out and is careful to go get a license to use the work, so that he doesn't run into an infringement problem. So, that satire line is very, very close, very fine, and I've actually litigated a significant case where my client was sued by Don Henley.

  And here's a good example of this parody, satire line being a difficult one to tread for people. And so, Don Henley, as you know, The Eagles, he, in his solo career, did the song, Boys of Summer. And we had a client who was running as a US Senate candidate here in California. And this Senate candidate made a video and he sang Don Henley's... He used the music of Don Henley's, Boys of Summer, but he changed the words. And yeah, I mean, honestly, you can probably still find the song on YouTube. I mean, no offense to my Senate candidate client, but his voice wasn't great, as I think he would agree. But nonetheless, he sings this song and it's basically making fun of Obama and the Democrats, and it's just a bit of a thing on that about how their promises haven't come true, and they're looking in their rear view mirror at all these problems and whatnot.

  And so, it picks up on the Don Henley song in that sense, but it wasn't making fun of Don Henley, or the Boys of Summer. It was really using, the court said, that music in order to poke fun at someone else. And so, we represented him and Don Henley had their lawyers, and Don Henley sued, and we asserted Fair-Use based on parody. And the court ultimately concluded that it was not a periodical use, it was a satirical use, and so it would not get Fair-Use protection. And so, if you wanted to take the risk of going to trial, you had to go to trial. And so, that's a good example of this difficult line that you have to be very careful of and understand.

  The next question, and this is again where property rights are not intuitive here. What if you have clients who may have created content, and they assign their content and their copyright away, and they've signed assignments? And they're saying, "Yikes. I've got this publishing company or the small business, we assigned all our copyrights away some number of years ago or decades ago." Maybe the parents did it decades ago. Intuitively as a lawyer, you would look at it the same way you look at any kind of a real estate, or real property transaction. You sell your house, it sold forever. You can't get it back. You sell your car, you can't go back 10 years later and get that car back from the buyer, unless you pay them new money. Now, there's a very strange quirk to copyright law.

  And that is that, assignments of copyrights can be undone. It's incredibly complicated when it can be done and how it's done, it depends whether the work was made before 1978 or after 1978. The basic rule for works made after 1978 is that, if the copyright was assigned away in a specific window of time, 35 years after the assignment, the original assignee, the author that is who assigned it, can go reclaim it. So, imagine, Madonna's early works from the early 1980s, she got given some amount of money. She assigned the copyright to the label. 35 years later, she can go take that copyright back from the label and say, "I'm going to go get back my music I assigned to you, all my copyright interests. And I will now be able to exploit and monetize this music into the future, for the duration of the copyright." That right to reclaim ancient assignments and undo them, exists across all manner of copyright areas.

  So, you want to be on the lookout for that, and add that to your checklist, in terms of making sure when you go through client's portfolios or maybe your individuals, and you're going through their estate, figuring out what assets they own, figure out if mom and dad, who have now passed away, if maybe they had created content and assigned it away. Because it can be stuff that if you speak to a copyright lawyer, and you thread the needle, you can reclaim it and it can be incredibly valuable. So, here's a copyright issue spotting checklist. You want to figure out if there is created content or expression. You want to know if your clients have been borrowing from the internet to create their works. If they have, tell them to stop, because you cannot trust that just because it's on the internet, and even on the internet where it says it's public domain, it may not be public domain.

  So, you want to make sure that they are genuinely creating original works themselves, and not taking it. Find out if there's software or source code that's been created to run some of the operations that could be valuable if taken by a competitor. And if there is, you want to know that you have a copyright in that. And any time you're looking to see if there's value in a competitive space, whether it's the website look and feel, the content, the manuals, database structures, other creative works, figure it out, because if there is such works, then there can be value in registering the copyright. Also, look, remember, were these things created by employees or independent contractors, get to the root documents and understand who got paid and how they got paid, so you can know where you are. And if there are prior assignments, you can undo them.

  Now, let's pivot from copyright to trademark. What is a trademark? The common synonym of a trademark you would think of is a brand name. So, think of it as Coke, 7UP, Chevy, Google. The types of things that can constitute trademarks are almost limitless. Words, sounds, numbers, shapes, even smells. And they must connote a given company's goods or services. So, a trademark functions as a source identifier. You say Google, you think of this search engine company that does its thing. And so, you associate the word Google with a source. Coca-Cola, you associate it with a source that's making this caramel flavored bubbly beverage. Chevy, 7UP, you name it. When a trademark is used as it attaches to goods, we call it a trademark. And when it attaches to services, we technically call it a service mark.

  So, my law firm, One LLP, we're a service provider, that's technically a service mark within the realm of trademarks. Sachs or Citibank can be similar. Now, what's important about trademarks is, trademarks can even extend to product packaging and certain nonfunctional product configuration features, and that's what we call trade dress. And so, you can think of trade dress as being nonfunctional product features. For example, we've litigated many cases over, for example, the tread design on a tire, or the sole design on a golf shoe as trade dress. Or you can look at trade dress as being in some of the auto aftermarket parts, you may buy these cool spoilers or diffusers for your sports car, and the look and feel and shape and design of them, if they're nonfunctional, that product configuration look and feel can be source identifying with a particular brand, and thus can be a trademark.

  You can also think about website look and feel. It could be the color motif, the font motif, the use of certain model photographs in certain ways, such that several different elements across a website can overall connote a particular look and feel, that could be source identifying of the brand, and therefore could be a trademark. And we would call it trade dress, but it's still a trademark. What is the focus of trademark law? The focus of trademark law is to identify the origin of the article, to provide quality assurance to the consumers that this product is associated with the company that stands behind it. So, you see a swoosh on a pair of shoes, and it identifies Nike, it tells the consumer that there's quality assurance. You know this is a good shoe, that's made by a good company. You know them, you trust them and all that. It didn't just come out of some banana republic where it's not going to have any proper padding in the sole, and it's going to fray and fall apart the first time you wear it, that type of thing.

  And this symbol of goodwill is what's known as commercial magnetism, that there's this value in the brand that connotes and identifies the brand to a company for the consuming public. There's also the use of TM versus a little R with a circle. And you use the little R with a circle when you have a registered trademark, you can put it next to the actual trademark name. If you have a pending trademark application, you can put TM. Now, here again, this is like copyright, very important to understand. There is no registration requirement, but again, like copyright, there are massive benefits to registering your trademark. Let me explain some of those to you. You have trademark rights when you are using a mark in commerce, in your space, and you start developing trademark rights the moment you start using that brand in commerce. So, if you start your new shoe company today, and you put some funky logo on it that you've created, you now have a trademark in that logo for shoes in the space in which you're selling the shoes.

  And that develops the moment you are using it in commerce. If you register your trademark with the Federal government, and again, it's like copyright, not expensive. It's a little bit more, it's 275 or 325 bucks generally, depending upon the number of classes you get. But if you register it, you now have a national footprint, so if you have some cool new logo and you've only been selling your shoes in Orange County, California, at a couple little local stores down in Laguna Beach, and you haven't really been advertising, you don't have a website up yet. You're just local here. Your common law trademark rights would leave you limited to your basic geography where you're selling. But if you register and get your registration from the United States Patent Trademark Office, you now have Federal protection. So, you now are protected and you can make sure that no one is going to go start a shoe business using your exact logo in New York.

  And you can go shut them down, even though you haven't gone to New York yet. Fundamentally the focus of trademark law then is to protect against consumer confusion, to make sure that consumers connote brands and trademarks with companies, and that they're not consumed, confused or deceived as consumers into going to the wrong place, because they've been diverted by trademark infringement. Now, let's talk about, what are the categories of marks that can constitute trademarks, and what cannot constitute a trademark? And we start with this general hierarchy that goes, generic, descriptive, suggestive, arbitrary/fanciful. And at the beginning level, generic are the types of marks that get no trademark protection, and the best trademark protection is arbitrary/fanciful, and then descriptive and suggestive can have trademark protection depending upon facts and circumstances. So, let's go through them.

  What's a generic mark? A generic mark is the common term for a product that's used by many, and there's really no trademark protection for generic marks. So, if my law firm is called Intellectual Property Law Firm, that is simply the common term for that service that's used by many, and there's not going to be any intellectual property monopoly type protection I can get on that. Anyone who practices intellectual property law can say they're intellectual property lawyers. Other examples can be consumer electronics for a magazine, national bank for a bank, light for low calorie drinks, safari for hunting gear. Those are simply not capable of having trademark protection. So, if you're due diligence and you're looking and people are listing all the trademarks they have, and they say, "It's all great. We have all these marks." You want to know, do they or do they not? They may, but they may not. It could be generic.

  Now, descriptive is where you get most trademarks, and descriptives are often the most logical places people start when they create trademarks to describe their business because they want something that's descriptive of what they're doing to try to make consumers understand it, what it is they're doing. If you go full arbitrary out of the gate, people don't even know what to make of it. So, for example, if you were starting a law firm in the year 1999, and you said, "I'm just going to call it Google." You wouldn't do it because no one would even understand what it means, the word Google. And what does it have to do with a law firm? And you would just be so arbitrary that you wouldn't really do it, and no one did do it it turns out.

  But arbitrary marks are the best, we'll get there in a minute, which is why things like Google are great. But what most businesses do is descriptive. And a mark is descriptive if it conveys an immediate idea of the qualities, characteristics, ingredients of the goods. And you can get protection for descriptive mark if you show secondary meaning. If you show that in the mind of the consuming public, over time, due to your use of it, your exclusive use of it, your advertising spend on it, those types of things, that you have developed over time a connection between this descriptive mark and your company as a source identifier. So, some examples are, Baby Brie for cheese, Honey Baked for ham, Vision Center for optics clinics. Those are descriptive of what the businesses are doing, and they convey an immediate idea of the qualities, but they have been held to be allowed to get protection upon a showing of secondary meaning.

  The next markup is suggestive, and this is the best place to be if you're trying to be a little descriptive to help people, so that you can get that consumer traction, but you also don't want to be stuck in this land where you may not be able to get a trademark because you may not be able to show secondary meaning. You go to something suggestive, and a suggestive term is a mark that echoes some aspect of the product or service, but the connection is not immediate and it requires some imagination or perception to connect it to the product. And basically it's the type of thing that requires one mental leap to connect that mark to what it is that the product or service is doing. So, it's one degree of separation. As opposed to Vision Center, where you know immediately it's a center for vision.

  This would require a slight mental leap, and so some examples you can think of are, Contact for adhesive paper. It's not immediately obvious, the word contact would apply to adhesive paper, but you can make one mental leap and go, yeah. It's contacting, it's sticking, it's connecting. Contact adhesive paper makes sense, it's good, suggestive. Playboy for a men's magazine. It's suggestive. It's not descriptive because it doesn't really describe boys playing or something like that. But it is suggestive. Or Q-Tips for cotton swabs is another example of a suggestive mark. Or you could think, if you're doing, for example, protection services for maybe celebrity protection services, let's say you may call it Sentinel. And the word Sentinel doesn't immediately connote protecting celebrities, but it's the idea of guarding, protecting, and so you go from guarding and protecting to being a bodyguard. Okay, it's a mental leap. Suggestive. Those are good.

  The best are arbitrary/fanciful. And an arbitrary term is simply a term that's used in a completely unfamiliar arbitrary way. And that has immediate trademark rights, and it's the strongest form of a trademark. And so, examples include Camel for cigarettes, Ivory for soap, Rolex for watches, Google, as we talked about. I mean, and the ultimate trademark then that you can encourage your clients to get is something that's arbitrary or fanciful, because it has complete protection out of the gate, no matter what. What happens if you are acquiring this company or doing diligence, you want to figure out, can I stop competitors? There's all these other people out there. We have trademarks. Can we sue them? How hard is it going to be? You need to understand, what does it really mean to have a trademark in the real world of litigation, what's going to happen?

  And the real world of litigation gets funneled through the likelihood of consumer confusion test. And what courts look at is they compare the plaintiff's trademark and the defendants alleged infringement, and they really want to figure out if there's infringement based upon whether there's a likelihood of consumer confusion out there. And this is to delimit the ability of someone to fully monopolize terminal spaces. And so, what they look at is the strength of the mark, and the stronger the mark, the more likely you can stop them. So, Google, incredibly strong mark, you can't start a car company called Google and just say, "Well, Google's never made cars so I can call it Google." Can't do it.

  Look to the degree of similarity between the plaintiff and the defendant's use, the good or bad faith of the defendant in taking and appropriating the plaintiff's mark. If there's any evidence of actual consumer confusion, and the evidence of actual confusion is very important to help courts figure out if the two are likely to be confused, such that they can enjoin it and stop the defendant. The sophistication of the market, you can think, for example, a knockoff pack of chewing gum at a checkout stand that costs 99 cents. It's not the type of product that consumers buying it are super, super careful and cautious about, and would be hyper sophisticated about paying attention to brand. And so, they could very easily be deceived. It's a a cheap, quick product you pick out checkout stand. And so, if there's something that is a knockoff of the Wrigley's trademark, you could easily be deceived.

  The Contra case, for example, is like buying a Ferrari. If there's a car that looks like a Ferrari, but it's clearly not a Ferrari, you know it's not a Ferrari, and it's a very sophisticated market. And then the quality differential between the two, is another factor that courts look at out when they're trying to figure out likelihood of consumer confusion. There's also a trademark Fair-Use defense, but again, it's very difficult to be guaranteed that you have. It's got similar first amendment underpinnings to copyright. And the basic premise of trademark Fair-Use is that a competitor can use another's mark in a non trademark sense generally to mention or discuss a product, or in comparative advertising. So, for example, if you are saying that 7UP has 100 calories, my soda has 90 calories. 7UP has 500 milligrams of sodium, my product has 300 milligrams. In the act of engaging in that comparative advertising you're necessarily using the mark 7UP. You're saying it. That is an example of Fair-Use.

  Now, the Fair-Use defense forbids a trademark registrant to appropriate a descriptive term for his exclusive use, and so to prevent others from accurately describing a characteristic of their good. Again, this is a problem with descriptive marks, because you are going to have much harder time when you're confronting a Fair-Use defense from a defendant, in terms of stopping them. Precisely because it's descriptive, and people have the right to descriptively explain and describe their goods. So, I have the right to descriptively explain that this is a center that provides vision care for people. And so, the words, vision and center are going to show up somewhere, or vision care, and that's a problem for maybe the plaintiff trademark holder. But the problem is they shouldn't have got something that's so descriptive, because there's going to end up being people who use very, very similar things to describe their business.

  The Fair-Use defense ultimately allows a junior user, that's the second user, to use a descriptive term in good faith in its primary descriptive sense other than a trademark. So, it's got to also actually have been used by the junior user in a descriptive sense, as opposed to cutely and secretly, and perhaps in some wily fashion really use it as a trademark to trade off of the original owners. So, here are some issue spottings, issues that we're going to look at before we turn to our next segment on patents. And that is, use caution in selecting a proper name for your business on day one. Remember, encourage your clients, go arbitrary, suggestive if they can. Be careful with generic, you're not going to have anything, even though it's great to drive traffic. With descriptive, yep. You can get it, but you've got to show secondary meaning.

  So, you want to make sure then that you're telling your clients, if they're doing descriptive things, memorialize and track ad spends. The fact that consumers are associating it, so you can prove secondary meaning later. Secure registration, again, not required, but like copyright it has benefits. So, if you don't have trademarks in your client companies, or you're looking to buy a company that has a bunch of slogans and marks and they haven't registered them, get them registered. And it creates deeper protection, which creates more business value, and that's ultimately what's really, really important. So, look also for the look and feel of stuff that could be trade dress. It could be your advertising, your website look and feel and stuff. There could be actual trademark protection there too. Now, let's turn patents.

  Now, let's look at patents. Patents cover new inventions and new ways of doing certain things. Patents, unlike copyright and trademark, have a mandatory registration application process. So, you do not, and cannot, have a patent unless you have applied for one, you have navigated the patent prosecution process with your lawyers and the patent office, and you have actually secured a patent on some particular set of claims for your invention. Patents generally cover new, novel, and non obvious useful type inventions. And that's the trifecta of what you want to be looking for when you're talking about patents, something that's new, novel and non obvious. What kinds of things do we get here for these inventions? They can be new inventions on new speakers, or new processes for creating stick proof glass or whatever it could be. Products, devices, they can also be methods.

  And even to some extent, business methods or processes, there can even be situations of software processes that can find patent protection. We also have design patents, which are a subset of utility patents. And unlike utility patents, which are really for very functional creations, design patents protect non-functional ornamental designs. So, things like trade dress, you could think of, if you have very cool tire tread on a tire, or very cool looking sole of a Nike shoe, that could get trademark protection if consumers associate it with Nike. But it could also get design patent protection if they apply to get a design patent on that exact cool looking sole design. Now, you have to seek protection within a year of any public showing. Very, very important. And the issues that come up in litigation then all the time are, people come up with great inventions for patents.

  They show it around, perhaps at some trade shows. They then apply for a patent, they then get a patent. Then they sue someone down the road. And what comes up in litigation always then, when we're defending these cases as patent litigators, is we want to figure out, when did you first, as the plaintiff patentee, show that invention to the public? And if you did it more than a year before you sought patent protection, then your patent can be invalid. And so, what's critical here to make sure that you're looking at and you're understanding for your clients is, if they have things that can be patented, make sure they don't publicly show them, or if they do they file for patent within a year. And if you even have clients who have a bunch of patents and they feel great about all these awesome patents they've got, you want to actually know that they didn't publicly show it more than a year before they filed.

  And so, those are some of the diligence things to look at in a checklist, just so you can know that you're safe here, in terms of the patent rule. Finally, an important practice pointer I think to walk away with is this. There is much that is patentable that you or I, or especially your clients who are laypeople, don't think is remotely inventive or fantastic. Patents do not have to be breakthrough things like inventing the light bulb. They are often, in fact almost all the time, they are combinations of a bunch of preexisting things, and they are incremental builds on prior technologies or prior art as it's known, or they are the combination of several different things, which together can yield something new. And those types of efforts can get patent protection, even though to the person doing it, the person thinks, oh, it's no big deal. It's just an incremental development on the existing technology or art form.

  And that lay assumption is often fatal. And so, what often happens is, companies doing engineer or product design work and development work, are developing things and they don't think much of what they're doing, because they just think they have this lay understanding of patent law and they think it's all no big deal. But really it's a big deal. And so, one of the best pieces of advice you can give your clients is, don't assume that their inventions are not patentable because they're thinking of this in some Albert Einstein type way, or Thomas Edison light bulb way or something like that. And get patent lawyers to come in and talk to your clients and give them a tutorial. I have patent partners that do presentations for companies all the time, just in terms of tutorials on the patent process and what's patentable, because it's fascinating and it's liberating and it means companies can unlock new value that they may not otherwise have.

  Now, let's talk about the patent cause of action. You have to get a patent from the patent office in order to be able to sue someone for patent infringement. And if you get the patent, it lives for 20 years. Now, the analysis is complicated, because the analysis is, what exactly are the claims of the patent, and what exactly do they cover? And there's often a disconnect. There's often a disconnect between even the title of the patent and what the patent covers. There's a disconnect between what the inventor and the company that has this portfolio of patents, what they think they have versus what they really have. And this is where problems come up all the time in the due diligence process. You will be looking at a company and they'll list two or three patents they have.

  And it says, microphone patent, microphone, computer patent and microphone for computers, and augmented reality patent. And they think they have a patent on being able to use a microphone in augmented reality. And that's maybe what the title of the patent is, and you read the first paragraph of the patent and it sounds like that. But that's not what the patent is. A patent is defined by its claims. Think of it like the exact boundaries of your real property. 332 feet east at nine degrees, turn west for a second at four degrees. I mean that type of thing in real property. And patents, they're called claims, and they're at the very end of a patent. So, they're after the general description of the invention and the summary of the space, you finally get down to what's claimed. And often what is exactly claimed is not remotely as broad or valuable as the patent owner even thinks or understands.

  And it can often be very, very, very specific narrow aspect of a microphone and augmented reality, which may or may not have commercial value. But it requires a very good understanding of what those claims are. So, the most important thing you can do is, not assume that these patents have some incredible monopoly value, and you're going to stop everyone from doing whatever the title of the patent is, or whatever the first paragraph of the patent is. You've got to do a claim, assessment and analysis, which is complicated and nuanced, and it's almost always the case that the claims are very, very narrow compared to what the patent team may think they are.

  Now, you then do an analysis of how those claims read on the defendant's product, and if all the claim elements are present, then you can have infringement. But if even one of them is missing, then there can be non-infringement. Although there can be some differences, if they are very insubstantial, you can still claim infringement under what's known as The Doctrine of Equivalence, but that's very, very hard. You really need to have a situation of literal infringement of the patent to have the patent have value. And so, one of the things that if you're doing due diligence you want to find out is, has this patent ever been litigated? If it has been litigated, you want to know what's in the record of the litigation. If it's not been litigated, you want to know if it's ever even been asserted. Maybe people have sent cease and desist... The company you're looking at buying has sent cease and desist letters, and they've received letters back from people telling them, go [inaudible 00:56:06], your patents invalid because of these three patents.

  You want to know that record. It's critical to help understand whether the patent even has validity, which means does it have any value or could it have negative value if you spend money on legal fees only to have it thrown out of court? So, you want to look at the litigation history, you want to look at the license history. If there is a license history, who is paying and how much are they paying? That can help illuminate and show a greater likelihood that it's a valid patent. And you want to look at and have an understanding of, what did the inventors of this patent give the patent office in terms of the prior art? Did they hide anything or did they not? I mean, you may not know, but you want to do a little diligence into those inventors, and make sure that you have some comfort level that they didn't pull a fast one in the patent office and hide some secret stuff that they knew about, and they just hid it away.

  Because the one thing you can be sure of in litigation is, invalidating prior art, even if it was never shown in the patent office, there can be all manner of prior art that still invalidates a patent, and you'd be stunned at the stuff that we discover and dig up in litigation. There are entire businesses built around finding invalidating prior art references. And they find things in the most obscure places, like Japanese journal publications, or German journal publications, that ultimately invalidate all manner of patents. And so, you really do want to know if there's stuff out there that these inventors knew and maybe they hid. Get to the bottom of that.

  The next issue is patent defenses. What are they if you're in litigation? Well, there's invalidity as we just spoke about, due to the prior art, and this can even be prior art that was considered by the PTO already once. It can still invalidate a patent, even if they've looked at it once during the prosecution process. There can be invalidity due to obviousness to one skilled in the art. And that's basically the standard that, to a person skilled in this art form of this technology, it would've been obvious to do ABC and D, which are the patent claims. And so, that's a very expert driven space and courts can bounce patents on obviousness grounds. And then, inequitable conduct by the patentee during the patent prosecution with the patent office can be a basis to bounce a patent that requires a showing of specific intent and mislead known material prior art, that goes to the issue I was talking about before, about getting to the bottom of inventors.

  And so, here some additional practice pointers you want to think about. Are there existing patents? If so, remember, get those inventor documents and make sure the inventors have assigned them to the company, so that you know the company actually owns the patents. Is there an open patent family still? This is a huge issue to ask for. If there is an open patent family, you are in the best position possible. Those patents are far more valuable than if there is not an open patent family. And that is because, good patent prosecution lawyers, like partners in my firm, and many patent prosecutors you'll find, like having open patent families because they can continue to add new patents, harkening back to the original date in certain circumstances, to gain additional and further protection if people try to do creative, deceitful things to get around the patent.

  So, an open patent family, very, very valuable. If the patent family's been closed, it's not as valuable. And so, one of the things to make sure that you give your clients, if they're going to get patents, is make sure they talk to their patent prosecutors about maintaining an open patent family to protect them. And remember, what the patent covers can differ drastically to what the title of it is, or what even the owner thinks it is, so you've got to check the actual claims. Now, let's shift real quick to Trade Secrets before we wrap up. Trade Secrets are the latest addition to the Federal Intellectual Property Regime. They're protected at state levels by state statutes all over the country. But now there's a Federal Trade Secret Statute that provides damages and enhanced damages for the willful theft of Trade Secrets. There is no registration requirement.

  The secrets can be preserved in litigation with protective orders. So, you don't have to worry about suing someone and then the trade secret getting out. The trade secret will be kept under seal in the court. The question though, of course, is what's a trade secret? And this is all forms and types of financial business, scientific, technical, economic, engineering information, patterns, plans, compilations, programs, devices, formulas, methods of techniques, whether or how they're stored. If the owner's taken reasonable measures to keep them secret, the information has independent economic value by not being known, and it's not readily ascertainable. So, the key thing here to understand, and these are the practice pointers are that, trade secrets have to have been treated like trade secrets. You have to have taken reasonable measures to keep them secret, and they have to have independent economic value. So, what you want to, if you're doing diligence into a company, or if you're advising a small company who has trade secrets, and almost all businesses have some number of trade secrets, they need to act like it.

  Make sure all their employee agreements or independent contractor agreements, specify that trade secrets are protected. They cannot be disclosed or shared with anyone else, because those agreements are very important evidence later to show that you treated it like a secret. If there are trade secret materials on computers or servers, they should be password protected, and they should be limited in terms of who can access those computers. You just can't let anyone in the company get it, it should only be the people who need to know the trade secrets or use them. So, take those steps. And then, nondisclosure agreements. Be very, very careful. Look at them in the record file of this company and make sure that, if they are sharing their ideas with third parties for purpose of doing business transactions, make sure that they are protecting the stuff they're sharing with nondisclosure agreements, make sure it's mutual, and make sure and look for burn off periods versus no sunsets. Because you don't want these things to burn off such that your client accidentally hands over all of its trade secrets to a potential party in a transaction.

  So, let's tie all this together now, for our transactional stuff, and this is a bit of a summary of all the different checklists. We've looked at the four IP asset classes within any given entity that you're doing diligence in or helping. We understand what they think they have asset wise, but we have to see what they have in fact. You've got to ask the right questions that we've gone through here, and you've got your notes from this program, of course, to help you with that. You want to understand who owns it, and make sure you don't have a split ownership problem, that can happen with employees versus independent contractors. Look to see if there's, in the public records databases, actual copyrights, trademarks, and patents that have been registered and secured, and you know that there's registration. If there isn't, register them at the Federal level if you need to, for copyrights and trademarks. Also, check state databases to see if any UCC liens may have been recorded against the IP assets by lenders over time.

  Talk to patent inventors to make sure there's proper assignments, and make sure you preserve all their lab development work. You'll need to prove it and show it down the road. Look at existing license and assignment agreements, so you can trace that IP asset to see who has what rights. There may be a great patent, but if an exclusive license has been given to someone, you don't have anything you can do with it anymore. You need to know that. And then of course, if there's been prior litigation over these assets, you need to understand it, and what it may have done to cast a cloud of title over them.

  So, fundamentally the conclusions are that all four areas of IP law are federally regulated. We have dual regimes and we have exclusive regimes. These IP assets are often overlooked or misunderstood, and I think today's program should help demystify that so you can now ask the right questions to get to the bottom of that. And we've looked at this in terms of registration, employment agreements, in terms of the need to be careful about taking content. But fundamentally, all small businesses, whether they're starting, whether you're helping them and they're running it, whether they're growing, whether you're doing due diligence, they have intellectual property in their possession. Either it's theirs or they're infringing.

  You need to know this. You need to make sure they're protected. You need to make sure they're not infringing on others. And this ultimately is how you can create more value for your clients, because these assets can be under used, undervalued, and they can be monetized and turned into incredibly valuable assets through litigation, if you understand how to use the IP laws properly. As always, if you have any questions, please email me. I love hearing from you. I love taking questions and talking about this stuff. Good luck in all your transactional work, and keep working on the IP front. Thank you.

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