Identifying the intrinsic value of your company is an extraordinarily beneficial exercise, especially when business owners are looking to maximize the sale of their company, says Joshua Geffon, a shareholder at Stradling Yocca Carlson & Rauth.
“The crown jewel of an enterprise may be intellectual property (IP), the management team, key customers or brand recognition, and/or any combination of these ingredients. The key for an entrepreneur is to recognize, exploit and promote these attributes to gain maximum value for the enterprise during the acquisition process,” Geffon says.
Smart Business spoke with Geffon about what business owners should know before engaging in the acquisition process.
What are some mistakes owners make that jeopardize the sale of their companies?
A fairly common mistake is not doing enough to secure the company’s IP. Confidentiality and IP assignment agreements, patent filings and related IP protection should be in place to have clear and strong IP ownership and title.
Broad indemnification by the seller on contracts creates risk that buyers of companies don’t like. Material contracts that allow customers, suppliers, service providers or other partners to easily terminate can significantly undermine a seller’s value proposition.
Also, tax and planning is critical. Overlooking tax-related filings often leads to significant turmoil and financial hardship. Inversely, proactive corporate and personal tax planning for founders and executives also can create real economic benefits.
What’s important to have in order before initiating the acquisition process?
Be sure you are prepared to provide copies of well-organized and complete corporate, capitalization and financial records, as well as material contracts, as part of a due diligence review by the buyer. Being well organized on these matters ahead of time will buy a lot of credibility with the buyer. Messy or inaccurate records will cast doubt on the value of your company.
What legal pitfalls often trip up the sale?
Buyers are always concerned about risk. Risk comes from inside your company in the form of personnel — employees, consultants and others — and outside from lawsuits, warranty and return claims, supplier terminations and limits on business operations.
Employees are often the company’s greatest asset and typically a company’s largest expense. Sellers usually engage in pre-emptive measures to entice employees to stay by offering equity, cash and other incentives that require personnel to work as diligently for the buyer as they did prior to the transaction.
Your company’s value proposition may be significantly weakened, and deals have died, if buyers identify agreements that limit rights to develop, manufacture, assemble, distribute, market or sell products.
How do you determine a realistic price?
Depending on the stage of your business and the industry, there are a few methodologies available. The most common are discounted cash flows and price to sales, but this relies upon a history of revenues and costs and/or sales. Early stage companies have a harder time utilizing these valuation methods.
When traditional valuation models are inapplicable, recent transactions in the sector or the valuation of similar public companies can be used. Gauging your value proposition with board members, advisers and strategic partners can help you solidify an approximate value.
Remember that buyers are valuing your business on your financial statements, projections, business plan and opportunities in your industry, along with synergistic opportunities with the buyer.
Who should help a business owner in a sale?
Secure competent, experienced service providers. These people will help you get a better sense of the market, your company’s value and your risk exposures. Get them involved well before the sale to ensure the process runs as efficiently as possible.
A good merger and acquisitions attorney will lead you through the process, identify and mitigate risks, and explore potential resolutions to issues ahead of the transaction. An independent accountant who can review and audit your financial statements also may be needed.
Joshua Geffon is a shareholder at Stradling Yocca Carlson & Rauth. Reach him at (424) 214-7000 or email@example.com.
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Selling a business is challenging. From vetting potential buyers to preparing financial statements to keeping negotiations on track — all while running your company — there’s a lot that can go wrong. In fact, almost no detail is too big or too small to affect the eventual outcome of merger and acquisition (M&A) deals. However, you can reduce the odds of a mistake by knowing where similar transactions have gone astray.
“It’s important to talk to owners who have successfully completed sale transactions and to work with experienced M&A advisers,” says Brian Reed, partner in Transaction Advisory Services at Weaver.
Smart Business spoke with Reed about common M&A mistakes and key items to resolve before closing a deal.
How might sellers hurt their chances before putting their business on the market?
You risk a letdown when you make overly optimistic future earnings projections or put too much weight on variable measurements, such as the sale prices of similar companies in stronger M&A markets. If you won’t budge from an unrealistic sale price, you could drive away an appealing buyer.
Work with a professional adviser to assess your company’s value as well as estimate an offering price the market can support. The two may not match because the price depends on contemporary economic, M&A market and sector conditions.
Where does timing factor into this?
Other critical seller mistakes revolve around timing, whether internal or external. For example, selling at the wrong time, at the end of a market cycle, could mean fewer buyers and possibly lower offers. If your sector has experienced a recent wave of M&A deals, the buyer base could be depleted, and you may want to hold off.
Sometimes sales are spurred by internal circumstances, such as the retirement of a founding owner, but these situations shouldn’t rush the sale. If your company is not ready for the market, consider appointing an interim head to make preparations and screen potential buyers.
Sellers, particularly those selling for the first time, often greatly underestimate the amount of work and hours it takes to prepare for sale. Have you allocated enough time to implement strategies to maximize your sale’s value? Is your company ready to promptly and accurately respond to hundreds of specific buyer requests? If you haven’t assembled a team with the time and resources to handle these requests, it could bring your potential deal to a standstill and deter otherwise interested buyers.
How might housekeeping impact deals?
Housekeeping issues aren’t trivial. They include essential tasks such as ensuring that contracts and legal obligations are in order. Some items that can trip companies up are:
• Poor accounting. If your financial statements and records are not properly organized and presented, it reflects poorly on your management, and the due diligence process will likely take longer. Sloppy accounting errors could mean tax or legal issues after the deal closes.
• Neglecting key players. Buyers want to know that key employees will stay onboard once the sale is completed. Make sure your top performers are offered financial and other incentives to stay.
• Locking in contracts. Don’t renew an expensive vendor contract as you’re about to transfer ownership. Buyers don’t like long-term contracts they didn’t negotiate, particularly if they’ll be penalized for breaking them. Negotiate short-term contracts or push for favorable terms.
What are some common loose ends to watch for and resolve?
Leaving loose ends hanging won’t endear you to your buyer, as they could hinder integration and future profitability. Some common unresolved internal issues involve:
• Minority interests. Buying out minority investors or shareholders before a sale means the buyer won’t need to deal with their demands later.
• Employee controversies. An integration team doesn’t want to deal with open legal issues, for example, while trying to build a new culture.
• Copyright confusion. Make sure all patents, copyrights, trademarks and other intellectual property holdings are in order. If you’ve failed to verify and document ownership, you may risk the deal’s value.
Brian Reed is a partner in Transaction Advisory Services at Weaver. Reach him at (972) 448-6936 or firstname.lastname@example.org.
Blog: To stay current on audit, tax and advisory issues that may impact your business, visit Weaver’s blog.
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When acquiring a company, it’s important that there are no surprises after an agreement has been signed. That’s why it’s critical to do your due diligence to ensure that there are no unknown problems that might arise after the closing.
“Companies that conduct a volume of transactional work — a lot of acquiring of businesses — understand the importance of getting information on the target company and assembling the proper team to review it,” says Patricia A. Gajda, partner and chair of the Corporate Group at Brouse McDowell.
Smart Business spoke with Gajda and Rachael Mauk, an associate at Brouse McDowell, about what areas to look at and the potential pitfalls in the due diligence phase of an M&A transaction.
What is involved in the due diligence process?
From a business, legal and financial perspective, you look at everything in the company that could have a risk or liability associated with it.
Usually the buyer will provide a list of documents for the seller to gather, including:
• Organizational documents.
• Financial documents, including three or four years of audited and unaudited financial statements, monthly statements, any audit reports, receivables, etc.
• Contracts with vendors, customers, etc.
• Real property information such as title documents, deeds, title insurance, zoning variances and leases.
• Permits and certifications.
• Environmental testing reports, remediation records, audit information.
• Intellectual property (IP) including patents, copyrights, trademarks, trade secrets, confidentially agreements, and licenses and software agreements.
• Employee information.
You also want to investigate the company to examine past and pending lawsuits, insurance claims, product liability questions, warranty information — how often there were product warranty claims — and delve into the history.
Due diligence can play an important role in determining the final transaction price. For example, if you find out the target company you intend to buy has a $5 million lawsuit pending against it, you will want to determine if and how that will negatively affect the company, even if you’re not going to take the liability for the lawsuit.
Are there things you find that might cause you to back out of a deal?
It will depend largely on your motivation for acquiring the target company. You may be buying a company because they have the latest product, which you want to incorporate into your product line, only to discover that the target company doesn’t own the IP or the IP associated with the product was not protected. Alternatively, you might uncover product warranty issues that bring into question whether the product works, or review the financial records and find out it’s not a profitable line of business.
It’s not just attorneys who do the due diligence. A company will put a team together to look at the various segments of the business. Accountants will look at the financial statements and tax returns. If there are environmental issues, you might have an environmental consultant do additional testing.
What pitfalls do companies experience in doing due diligence?
They do not allow for adequate time for due diligence. A strategic buyer is generally familiar with the business, so it may think it already knows everything. Things can fall through the cracks, so leave enough time for adequate review, testing and follow up. The process can take from a few weeks to 30 days or more if it’s a complicated business.
Typically, due diligence is done simultaneously with negotiating the purchase agreement. It might result in a purchase price reduction because something discovered doesn’t add up to the price that was originally discussed. You might find there’s the potential for environmental liability and seek an indemnification for that specific item — due diligence can lead to specific requests in the purchase agreement.
Once you’ve completed the due diligence, you’re close to signing the transaction agreement and the purchase can go as planned.
Patricia A. Gajda is a partner and chair of the Corporate Group at Brouse McDowell. Reach her at (216) 830-6830 or email@example.com. Rachael E. Mauk is an associate at Brouse McDowell. Reach her at (216) 830-6846 or firstname.lastname@example.org.
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Competitive intelligence aims to provide as much insight as possible into the trends of an industry and into the strengths, weaknesses and current activities of direct competitors. Such programs can be as simple as monitoring the intellectual property (IP) filings within the U.S. of a single competitor, or as sophisticated as gathering and analyzing IP information for many competitors in different countries throughout the world. Either way, there is business value in establishing and maintaining a competitive intelligence program to understand how competitors are behaving through their IP habits.
Smart Business spoke with Matthew P. Dugan, a partner at Fay Sharpe LLP, about competitive intelligence programs.
What is competitive intelligence?
The term refers to a program to develop and maintain a body of data and information that can be organized and analyzed to provide a better understanding of one or more aspects of a company's business environment. The analysis can provide a broad, high-level view of an industry by identifying trends in a particular area of technology. It also can give a focused view of the activities of a particular competitor or group of competitors. Often, the strategy includes both.
What types of information are included?
Information described in patents and published patent applications often form the backbone of the program. While records from the U.S. Patent and Trademark Office are easily accessible and can provide valuable data for a competitive intelligence program, in some cases other sources may provide access to information on a shorter time frame. For example, companies with foreign competitors should consider searching for patent applications in the competitor’s home country, since patent filings are often made and published there before a corresponding U.S. application is available for review.
Is just the technical information of the patent documents evaluated?
No. Often, useful information can be ascertained from what patents and patent applications a competitor decides not to aggressively pursue. So, once a potentially relevant patent application is identified, the application’s progress can be monitored to try to determine whether the competitor is moving away from that technology. With such an assessment, it can be helpful to ask:
- Has the competitor continued to pursue its initial patent applications for a new concept? Or, did the initial applications go abandoned without further activity?
- Did the competitor file just a single application for this new concept? Or, did it file a whole family of applications that cover a variety of aspects and variations of the concept?
- Did the competitor pursue patent protection in a very limited number of countries? Or, did it go to the expense of filing the application all over the world?
What other information can be included in a competitive intelligence program?
News and announcements, regulatory filings and even domain name registrations can add to the overall effectiveness of a program.
Useful insight can be gained from the trademark and service mark applications filed by a competitor. They are normally available within days or weeks of being filed, so a company can be alerted to the possibility of activity by a competitor much earlier than by monitoring patents alone.
Also, in cases of new products and product lines, trademark applications are often filed in the U.S. based on an intention to use the trademark or service mark with a particular list of goods or services. Such information can be useful in determining that a competitor is working toward offering an updated product or expanded product line.
Why should a company undertake this?
Insight gathered through a competitive intelligence program can help business leaders make more informed decisions about a company’s strategic direction and where to focus marketing and product development resources. It can help identify trends in the evolution of existing technologies, which can impact existing product lines; find developing technologies near core businesses, which could lead to new products and business opportunities; and identify new or emerging players in the industry, which can help in preparing for new competitive threats and eliminate surprises.
Matthew P. Dugan is a partner at Fay Sharpe LLP. Reach him at (216) 363-9167 or email@example.com.
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You don’t have to be pirating software to get in trouble during a compliance audit.
“Where companies get ensnared is in the deployment phase. It’s not that they are trying to get away without paying, they get caught up in the terms of conditions found in the fine print of licensing agreements,” says Heather Barnes, an intellectual property attorney with Brouse McDowell.
Smart Business spoke with Barnes about what businesses can do to make the software audit process go smoothly.
What prompts an audit?
Software companies include the right to request audits as part of the terms and conditions of the software license agreement. The fine print contains the right for the software company to audit your computers and systems. Sometimes audits are performed because that organization received a tip from a discharged employee. There also are companies that conduct audits as a regular course of business, either itself or through a third party, such as The Software Alliance. Because of the economy, software revenues have decreased, so software owners are replacing lost revenue by ramping up enforcement with compliance audits.
Once you’re notified about an audit, what should you do?
If you are an organization with in-house counsel, contact them immediately. Smaller companies should retain outside counsel, because attorneys can make a big difference in the final outcome.
The first thing an attorney will do is assist with the parameters for the audit — how and when it will occur, as well as the scope. If there is a noncompliance issue, legal counsel can draft a settlement agreement; they may even negotiate the settlement to a more reasonable number. Even if there are no compliance issues, you still want a document drafted that acknowledges how the audit was conducted and what was found, as well as a release of any claims the software company could have brought.
What problems can occur if you proceed without legal counsel?
Much is dependent on the particular company, but the audited company wants to prevent the software owner from having free reign of its systems, and that is a role legal counsel can help control. For example, legal counsel can assist in defining the scope of the audit by determining which computers are included in the audit. Do you include every computer? Just computers in use? What about the computers that are older and sitting in a warehouse? A software company could attempt to include any computer you own, even those that are obsolete and unused.
Another potential issue is how the audit concludes. You might come to an agreement at the conclusion of the audit and think a settlement is in place. Without legal counsel involved, a company could find itself with no settlement agreement or other document detailing what occurred and the responsibilities of each side going forward.
What are typical noncompliance issues and how much do they cost to fix?
Terms and conditions of the software license agreement vary by company. Many companies allow you to use older versions of software when you obtain a license for their latest product, but some do not. However, many people think that it’s an industry standard that you can deploy older versions.
Another problem is maintenance of business records proving owned licenses for software. You need to have documentation and keep those records current and accessible. That can be complicated when the software was purchased from multiple third-party vendors and for software that is old. Companies should conduct internal audits to ensure they are in compliance with what their records reflect, which could help mitigate exposure when an audit occurs.
Normally, if you are out of compliance, you’ll be charged the licensing fee you should have paid. If it is $200, $300 or $500 per license, multiply that by the number of computers out of compliance and it can get expensive quickly.
Further, if you’re found to be noncompliant, develop internal procedures to ensure compliance in the future. If you are audited once and are found to have compliance issues, it is just a matter of time before the software owner is back to check again.
Heather Barnes is an intellectual property attorney at Brouse McDowell. Reach her at (330) 535-5711 or firstname.lastname@example.org. Learn more about Heather Barnes.
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Companies have information that gives each of them a competitive advantage over competitors. Patenting this information is sometimes legally impossible or disadvantageous — patents expire, leaving vitally important information publically exposed.
Some companies choose to treat the information as a trade secret because such a designation can offer legal leverage in certain situations. And unlike a patent, a trade secret can last forever.
A patent expires 20 years from its effective date of filing, and that previously protected invention enters the public domain. With a patent, you’re disclosing how to make and practice an invention in exchange for 20 years of exclusive rights to do so,” says Daniel R. Ling, an associate with Fay Sharpe LLP.
He says many companies, especially smaller ones, don’t often consider the role of trade secrets, but in certain instances companies could be well served by recognizing and protecting such valuable information. But there’s one catch: “You have to take reasonable steps to maintain it as a secret.”
Smart Business spoke with Ling about identifying and protecting trade secrets.
What are some examples of information that could be a trade secret?
Customer and supplier lists, the arrangement of equipment in a factory and certain manufacturing processes are examples of valuable proprietary information that may not rise to the level of something that can be patented. Often, it comes down to that which makes your product better than that of your competitors but can’t be patented because it doesn’t meet the basic legal standards, which are that the invention is new, not obvious, useful and eligible to be patented.
How long does trade secret protection last?
Trade secrets last indefinitely, as long as the information is maintained confidential and the holder of the trade secret continues to take reasonable precautions against disclosure.
How are trade secrets best protected?
There are many methods of protecting sensitive information. If it’s a process that involves multiple steps, a company could isolate the responsibility for each of those steps across multiple locations so the entire process isn’t carried out in one place and a single person isn’t privy to the entire production.
It’s also fairly common to include confidentiality agreements and nondisclosure clauses in employment contracts for not only employees who might be aware of a trade secret in its entirety, but also for employees who may have only some knowledge of the process. Companies with such sensitive information should work with a business attorney to put together those agreements.
What can be done if a trade secret is leaked?
If the trade secret was misappropriated — obtained illegally or otherwise improperly disclosed — there are steps that can be taken to prosecute the perpetrator. The Uniform Trade Secrets Act, the general framework of which has been enacted by 46 U.S. states, offers remedies when a trade secret is acquired through improper means or through a breach of confidence. This can provide some relief to a trade secret holder in the form of injunctive relief (e.g., stopping the use of a misappropriated trade secret), monetary damages and/or attorney’s fees.
However, if the information is developed independently or introduced to the public lawfully, nothing can be done. Further, if the secret that was being held is a patentable idea, another company or individual could secure the rights to it and bar others from acting on it. That’s why it’s important to carefully consider what you hold as a trade secret; if it can be easily reverse engineered it’s not right for trade secret protection.
Regardless of whether the secret got out legally or illegally, once it’s widely disclosed the remedies under the law might not be sufficient to make a company whole again — once it’s out, it’s out. The trade secret holder ultimately has an obligation to take reasonable protective measures to guard its secrets.
Daniel R. Ling is an associate at Fay Sharpe LLP. Reach him at (216) 363-9000 or email@example.com.
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When people consider intellectual property (IP) they most often think patent or copyright, which can be very valuable to a business. But, in fact, one form that’s often overlooked is trade secrets.
What constitutes a protectable trade secret varies from state to state, but the gist of what trade-secret law protects is similar in almost every state. A trade secret is any sufficiently valuable, secret information that can be used in the operation of a business to afford an actual or potential economic advantage.
“Given this broad definition, it should come as no surprise that a wide variety of things have been found to constitute trade secrets, including product formulas, data compilations, customer or client lists developed through hard work, manufacturing techniques and some forms of business know-how,” says P. Andrew Fleming, a partner at Novack and Macey LLP. “The point is that many things could be protectable trade secrets if a business took the time to identify and properly protect them. All too often, however, businesses do not do a good job at either.”
Smart Business spoke with Fleming about how your company should be protecting your trade secrets.
How might a company’s trade secrets be vulnerable?
It is hard for a business to protect something unless it knows what it is — a business has to identify its trade secrets before it can protect them. A little common sense goes a long way. Business owners should start by asking a simple question: ‘What does my business do better than the competition that my competition does not know about, and that I do not want them to know about?’
What policies should a company put in place to protect its trade secrets?
The next step is protecting that trade secret. This can be tricky because, as the name implies, a trade secret loses protection when it is no longer secret. Moreover, the law does not protect a trade secret unless its owner takes reasonable steps to keep it secret. Although there is no hard and fast rule, a business should consider:
- Password-protecting computers containing its secrets.
- Limiting access to secrets on a ‘need-to-know’ basis.
- Keeping hard copies of documents containing or describing its secrets under ‘lock and key.’
- Entering into contracts with its employees that requires those employees to maintain secrecy during employment and after their employment ends.
A business also might consider using reasonable non-compete agreements with employees who know trade secrets to keep them from going to the competition. After all, if a former employee cannot work for a competitor, he or she has little incentive to reveal secrets once employment ends.
How has social media affected a company’s ability to protect its trade secrets?
The explosion of information on the Internet has made it more difficult for businesses to argue information or know-how is sufficiently secret to constitute a trade secret. It is now far easier to find descriptions of techniques, know-how and even customer lists — a point underscored in Sasqua Group, Inc. v. Courtney. There, the defendant allegedly took secret and valuable customer information to her new job, and the plaintiff argued the information was a trade secret. The court acknowledged that the customer information could in the early days, i.e. pre-Internet and pre-social media, have been sufficiently secret, but since virtually all of the allegedly protected information could be found on the Internet, including through social media sites, it no longer qualified.
It is not difficult to imagine other scenarios in which a business could lose trade secrets via the Internet or social media. For example, a disgruntled employee could intentionally post secrets so the otherwise secret information loses its protection. Even a happy employee unwittingly could disclose secrets through careless posting, such as establishing links to all customers on a social media page.
There are no easy answers to such problems, but businesses must remain on guard, take care when creating or posting to social media sites, and educate employees about the pitfalls of using social media.
P. Andrew Fleming is a partner at Novack and Macey LLP. Reach him at (312) 419-6900 or firstname.lastname@example.org.
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Securing trademark protection provides a company with legal rights to market and sell its services or products, and offers this same company an opportunity to stop other companies from marketing or selling services or products that are, or could be, infringing upon its protected marks.
However, each country has different criteria guiding the trademark process, which introduces varied time and cost elements that can be difficult to navigate. Ignoring these laws could mean forever losing legal protection and the opportunity to market and sell goods or services under a valued brand name in key markets.
“There is no such thing as an international trademark, but U.S. copyrights can be enforced internationally,” says Tom Speiss, a shareholder at Stradling Yocca Carlson & Rauth, who works as a business adviser and brand manager.
Smart Business spoke with Speiss about managing domestic and global brand portfolios for companies operating at home and abroad.
How can companies protect their brands domestically?
Companies can protect their brands domestically through both trademark and copyright law. For trademark, the U.S. is a common-law country, which means trademark rights begin to be established as soon as a company starts using a mark in commerce. But it’s important to conduct a trademark availability search and, if the mark doesn’t infringe upon another’s mark and appears to be available as a federal trademark, then file an application with the U.S. Patent and Trademark Office to acquire federal trademark protection.
In addition, companies also can file for federal copyright protection through the Copyright Office. To start this process, product packaging, website material or other advertising material can be used as part of a copyright application. Once a copyright registration issues, the registration potentially can protect a company’s product packaging, Web content and advertising content, as well as the design elements of a trademark. The U.S. copyright registrations then may be enforced internationally, through a treaty known as the Berne Convention Treaty.
If a company has plans to expand in foreign markets, when should management consult an intellectual property (IP) attorney?
A company should bring in an IP attorney as soon as it starts thinking about foreign market expansion, even if the plan’s realization is years away. Companies must be advised concerning all trademark rules for the countries in consideration, including possible infringement issues; whether the brand name is even available; the timelines and costs for applications; how use and non-use might affect the rights being granted; and when a company is required to exercise any rights it has been granted before a mark is vulnerable to cancelation. Each of these steps can be measured in years and have a lot of moving pieces, so — as ideas are generated — counsel needs to be involved.
What are the criteria for foreign market selection?
Companies can point to home successes with their products, including sales and brand equity, as they venture out. However, the mark used in their home country may be unavailable in a foreign market, which means the company won’t be able to transfer that equity even though it’s a proven brand.
The recourse is to develop a new name. But that brings risk because then its history at home won’t translate to the new market. This is another reason to bring in an IP attorney at the onset of brand expansion to assist in successful brand development or expansion.
What should you ask your attorney regarding brand management in other countries?
The most important first step is determining whether the target country’s trademark laws are governed by the principle of first-to-use or first-to-file. IP attorneys also can help companies establish timelines, such as when a company needs to start using or selling a product in the target country. Good counsel will thoroughly search to discover if the mark to be used in the foreign market is already in use for the same or similar goods or services. Along the way, counsel can help clients understand what other regulations might be advantageous or impede selling in foreign markets.
Tom Speiss is a shareholder at Stradling Yocca Carlson & Rauth. Reach him at (424) 214-7042 or email@example.com.
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The widespread use and ease of access to digital content has resulted in some of the biggest changes in copyright law — both in terms of new statutes and case law. This can be attributed to the ease with which digital copies can be made and the fact that those copies do not result in any degradation of quality, leading to their widespread distribution — both legally and illegally.
“The nature of digital content makes the license agreement much more important than before,” says Stephen T. Kong, shareholder, Corporate and Intellectual Property Groups at Stradling Yocca Carlson & Rauth. “We as lawyers are always worried about what rights are granted to a client who wants to do something with the digital content because it often is only the specifics of the legal agreement that means the difference between a lawful and an infringing use.”
Smart Business spoke with Kong about licensing digital content to ensure proper legal protections are in place.
What is it about digital content that creates such unique legal issues?
The proliferation of high-speed Internet has made it easy for individuals to create and transmit digital content. Previously, the physical nature of the non-digital good acted as a practical deterrent to infringement. Booksellers couldn’t make illegal copies of books in an efficient and profitable manner for the purpose of reselling them. By contrast, Amazon has many licensing agreements in place to distribute digital versions of books formerly available exclusively on tangible media.
The reality of video streaming paved the way for services such as Hulu and Netflix, which are thriving because people care less and less about owning a copy of a movie as long as they can get a streamed version relatively on demand. All of this adds up to the need for copyright law to adapt.
What does it mean to ‘license’ digital content?
There’s a fundamental difference between licensed and owned content. Many companies are dealing primarily with licensed content, which is owned by someone who has given permission to another to display or distribute their content. Whoever owns the copyright rights can control aspects of the distribution, reproduction, modification and display of the copyrighted content. In the digital world, you generally can’t do anything with digital content that doesn’t involve exercising one of those protected rights.
What drives licensing lawyers crazy is when copyright owners of digital content grant to their licensee the right to ‘use’ digital content. Since ‘use’ is not one of the enumerated rights under copyright law, arguments can arise as to what rights are actually granted.
How is ownership determined?
The general default rule is the creator of a work owns the work; but for companies, there is a key exception. Generally, anything created by employees for their employer in the course of their employment results in the employer owning the copyright rights in the work product. So large media companies employing writers have a large amount of copyrighted works available for distribution in many avenues.
What are some important aspects of licensing digital content?
A licensor can ‘slice and dice’ copyright rights in many ways, usually to preserve markets for other licensees. Certain geographic markets may be set aside for others. The copyright owner may wish to have different licensees exploit different channels of distribution. All of this makes the role of the licensing lawyer very important because the license agreement needs to be carefully reviewed in the context of determining the scope of a licensee’s rights.
Making the licensing lawyer’s task a bit more complicated sometimes is the existence of agreements written before the advent of digital technology. There was no law governing Internet radio royalties until Internet radio became a reality, and older agreements reflect the fact that a freelance writer would not necessarily have thought to grant or explicitly deny rights for republication of an article in different digital formats.
Stephen T. Kong is a shareholder, Corporate and Intellectual Property Groups, at Stradling Yocca Carlson & Rauth. Reach him at (424) 214-7013 or firstname.lastname@example.org.
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Social media tools provide an accessible and inexpensive way for businesses to expand their market footprint. But failure to protect and enforce intellectual property rights may quickly turn a great resource into a major headache, whether or not social media is part of a corporate marketing program, says Alexis Dillett Isztwan of Semanoff Ormsby Greenberg & Torchia LLC.
Together, social media and intellectual property pose internal and external issues. Internally, a business must monitor and control employee use of intellectual property. Given social media’s accessibility, problems can arise and grow rapidly. Imagine an employee prematurely tweeting about a new product launch or information never intended for the public. To reduce risk, businesses should establish a written social media policy that:
? Sets clear guidelines for appropriate topics to be posted on any media, including company and employee personal accounts.
? Identifies personnel permitted to post and the posting approval process.
? Addresses use of third-party trademarks or copyrights or names of individuals or competitors.
? Is clearly and regularly communicated and taught through annual training.
Externally, businesses should police unauthorized use of their intellectual property on social media sites. Defamatory comments can take on a life of their own. Businesses must also contend with trademark misuse or infringement, from someone using your trademark as its domain name to assuming your brand identity online, an aggressive practice called “brand-jacking.” To combat these challenges, businesses should:
? Monitor social media for use of company trademarks.
? Obtain formal protection for intellectual property, e.g., trademark registrations.
? Avoid overreaction; weigh impact of potential negative backlash online against severity of misuse.
? Consider availing itself of the social media site’s enforcement policies.
Alexis Dillett Isztwan, a member at Semanoff Ormsby Greenberg & Torchia LLC, concentrates on intellectual property and technology law.