Lately many of my technology clients have been negotiating deals involving the purchase or sale intellectual property, so this Forbes story on choosing the right acquisition partner caught my attention. The author carried an interesting analogy about dating through the piece, and listed a number of considerations that a business should have before pursuing either side of an acquisition. I am in complete agreement with the author that parties should be cautious in pursuing these kinds of transactions before they decide to seriously engage in talks to close an IP deal. It has been my experience that parties are always extremely eager to close a deal while it is still “hot,” and they aren’t necessarily prepared for the issues that arise in the negotiation itself–and even less prepared for what comes afterwards.
Taking the marriage analogy one step further, one issue I have seen come up multiple times is simply the issue of cold feet. When you talk to the proposed partner, how committed does that party really seem to be about doing the deal? In the software/internet/technology space, it’s not unusual to see deals on the table with a company that is still being managed entirely by the original founder, where that founder has spent years of his life developing and growing precisely what the prospective partner is looking to acquire. While this founder may want at some level to “cash out,” is he or she really ready to give up control over what he or she has built? If the prospective partner starts calling the negotiations off, making take it or leave it demands, and engaging in other behavior suggesting that he or she might not be easy to close a deal with, you may very well have a situation where the party on the other side of the table is simply experiencing cold feet. Contrary to what many clients think, we attorneys cannot force anyone to close a transaction, or to be cooperative after the deal is closed. If your prospective partner is not ready to take the next step, it may be time to move on to the next candidate.
Another issue to consider is the quality of the intellectual property that is under consideration for purchase and the quality of the extent that the seller was truly prepared to do the deal. Is the seller truly prepared to do the transaction? It’s not unusual for clients to tell me as IP transactions counsel that they want to “keep it simple” and do minimal due diligence, but it’s not unusual at all to find if appropriate due diligence is conducted that the intellectual property at the heart of the deal being considered has not been properly protected–or even acquired. The copyrights may very well still be owned by the original developer rather than the company you are buying them from, the trademarks may never have been registered or a search even conducted, the patents may not have been filed by competent patent counsel, and the past agreements relating to the IP may have been drafted and negotiated by someone with minimal IP transactions legal expertise. So, it’s important to fully consider whether or not the IP is truly ready to be acquired, or if the seller needs to have some time to do some clean-up with the help of one or more IP lawyers? Is the buyer okay with purchasing assets that require significant clean-up and may have enforcement issues? Or is the buyer looking for a partner whose assets are in perfect shape?
Another issue: the financial considerations that go along with walking down the aisle, so to speak. You may have agreed to the price of the wedding, but are you really and truly in agreement on when and how the price will be paid? More often than not, serious disagreement arises over the structuring of whatever consideration has been agreed on. Sometimes this is because the prospective “suitor” really doesn’t have the cash necessary to pay the consideration agreed on, sometimes this is because the acquirer has particular tax requirements for the deal, and sometimes this is because the acquirer wants to procure certain services or other performance out of the founder before paying the bulk of the consideration. In a recent deal, there was even an issue with the non-cash consideration actually being transferable as agreed upon. Obviously, for both parties to walk away happy, they need to be walking away with what they are expecting to get out of the deal.
In my Silicon Valley industry niche, there is generally an expectation that the key IP developers are going to continue on with the acquirer after the big wedding date. In my experience, while the parties are almost always adamant before the deal closes that this type of ongoing relationship will go smoothly, it rarely does. In fact, in many cases the ink on the paper barely dries before the fighting and legal threats start. These problems are often foreseeable. If your visions for the business diverge and are in no way compatible, or if you have a strong aversion to one another or problems communicating before the deal closes, is it really going to work so smoothly after the money has been exchanged? Or are bigger headaches, stress, and tension in the partners’ future? Partners are rarely honest about their plans and expectations in the negotiation stage, which doesn’t do much to head off problems after the deal is closed.
The bottom line is that before you rush into closing an IP deal with a potential partner, it does make sense to conduct your due diligence on the partner just like you would do before rushing into making any other major life decision, so that you can make sure that it is really going to be the right fit, and to seriously consider the red flags that your IP deal counsel communicates to you before the deal is closed. I have seen my share of clients who regretted the “marriage” almost immediately after they walked down the aisle, which is never a good point from which to start a new “life” with a partner. The dating and marriage analogy are absolutely good frameworks by which to consider the compatibility of any two parties for moving forward.
Should You Follow the Advice of this Start-up if Approached with a Demand Letter by a So-Called ‘Patent Troll’?
Tech Crunch published an interesting commentary today written by Chris Hulls, Chief Executive Officer of Life360, in which Mr. Hulls shares his story of taking on a patent troll and urges other start-ups to do the same.
For those of you who are unfamiliar with the Life360 patent case, Ars Technica recently published an article on the case, which provided some additional background on Life360’s patent infringement fight against Advanced Ground Information Systems (“AGIS”). Apparently Life360 received a demand letter after closing a third round of funding for $50 million demanding that Life360 license the AGIS patents, and issued a rather colorful response to the demand letter, which fast-tracked the matter into court.
Mr. Hulls’ commentary is striking on a variety of levels. His story itself is unusual, as it is not everyday that you hear of start-ups making the gutsy move to fight a patent infringement case. Of course, even rarer is the occasion when a start-up makes such a decision and achieves a good outcome as a result of the fight. But beyond the facts themselves, Mr. Hull’s colorful language and editorializing of the case after the fact is noteworthy.
The advice itself that Mr. Hulls offers to start-ups can be summarized in three points: (a) publicly call out the “troll or predatory law firm”; (b) pool resources with other start-ups as a defensive strategy; and (c) commit to the fight without backing down.
While I think this particular story, as well as the takeaway advice provided by Mr. Hulls, merits discussion, and certainly should be viewed by patent holders who might fall in the category of constituting a ‘patent troll’ with concern, I would urge start-ups in Silicon Valley and elsewhere to be cautious in following in Mr. Hulls’ footsteps and adopting his advice in its entirety.
First of all, I will state the obvious: if you take on a fight like this, you need to have the money to finance it. While as a start-up, you may find it challenging to pay your attorney bill in normal circumstances, but if you decide to take on any litigation rather than resolving it via settlement, you will most likely incur far more significant legal bills than you will ever incur for any other type of legal matter. In the discussion after the Hulls’ editorial, Chris Hulls conceded that his legal bill in this matter exceeded $1 million. Many, if not most, start-ups simply do not have the resources to be able to finance $1 million or more in legal fees. Of course, even when they do, the investors may not be happy about their burning so much cash–and human resources–on a patent infringement battle that could have been settled.
Second of all, start-ups need to independently evaluate the facts and the legal risks of their particular dispute independently from what happened in Mr. Hulls’ case. Not every start-up who takes on this type of patent infringement battle will see a favorable outcome to their case, and start-ups should not automatically assume that they will get the same result if they take the same approach. Seek the counsel of an attorney you trust to advise you on the merits of your particular case, and make an educated decision as to how to proceed only after considering the advice you receive from your trusted counsel.
Third, I would urge start-ups to be cautious about launching a public campaign against a law firm or other third party, as you could easily create new legal problems for your company and yourself by what you say and do in that campaign. If you are going to take on any third party in the media as a start-up, you want to make sure that you are seeking both legal and public relations advice in conjunction with your strategy. You definitely are not going to win any friends by taking a campaign against a third party public, so it would be wise to think through your strategy with advisors who are in a position to guide you away from making major missteps in how you approach the campaign.
Having said all this, I agree that the pooling of resources can at times can be a very effective defensive strategy. Information is power, which is why larger companies have been known to pool resources with other companies in particular situations. There is no reason why start-ups should not take the same approach when appropriate. Of course, if your start-up shares information against its own interests, that could backfire, so some caution should be taken before adverse information is shared with any third party, even a fellow start-up. Also, being prepared to take a strong legal position when the facts are in your favor or the negotiation power is in your hands should be applauded, as start-ups traditionally have a hard time drawing lines in the sand not only against legal bullies but also just in deal negotiation generally.
So, my advice to start-ups reading about this case: be cautious in following in Mr. Hulls and Life360’s example. This case proves that the little guy can win a patent fight; however, this is a unique story with a highly unusual outcome, and start-ups would likely be wise to view this story in just that light.
Copyright Reform on the Table in Congress: Songwriter Equity Act of 2015 Introduced in the House of Representatives
Copyright reform is on the table again in Congress. A bill to amend the Copyright Act has just been introduced: the Songwriter Equity Act of 2015. The text of the bill is available at the attached link.
Surprisingly, the bill was introduced by Rep. Doug Collins from the 9th District of Georgia. While the Atlanta area is the home to a number of rap musicians, as an attorney who once practiced in Georgia before relocating to the Silicon Valley, I can say with some authority that Georgia is generally not a state in which you would expect to see copyright-focused legislation to protect songwriters introduced. However, what is perhaps far less surprising is that there is significant bipartisan support for the bill in the neighboring state of Tennessee, which of course is the home to the country music industry as well as a fairly significant part of the lesser known Christian music industry. The Tennessean reports that Senators Lamar Alexander and Bob Corker and Representatives Jim Cooper and Marsha Blackburn, both from the Nashville area but from opposite sides of the aisle, are all supporting the bill. Additionally, according to The Tennessean, the bill has the support of music industry associations such as ASCAP, BMI, and the National Music Publishers Association.
So, if you are wondering what argument bill supporters are making for copyright reform in this case, the argument is that the compensation paid to songwriters and music publishers for digital royalty payments as set by the copyright royalty board is too low and that they should be paid fair market value for the music they write. The argument is that performance artists are getting paid significantly higher royalties, but that the copyright royalty board is not currently permitted to take into account privately negotiated royalty deals for performance of the music when it sets royalty rates for digital distribution of the music, so the law needs to be changed to enable the copyright royalty board to set royalty rates based on what the music is actually worth in the marketplace.
While the principles behind the bill seem reasonable enough, the argument against bill is that reforming copyright law to address this issue will drive up the costs of doing business for online radio companies. The Tennessean addresses this issue in its recent article on the bill. But in my opinion, this argument is weak: if copyright law as written is establishing an artificially low cap on royalty rates that is not in line with the market value of the music, then the artificially low cap should be removed to allow the market to determine the rates. While Rep. Collins has argued in a recent interview with Billboard.com that this is a fairness issue, I would argue that it is really more of a free market issue, where one particular segment of our intellectual property system is not being permitted to commercialize its intellectual property rights to the same extent that other intellectual property holders are being able to do so.
Obviously, this issue is not getting much attention in the Silicon Valley, since our tech-focused community does not generally follow music industry issues, but with copyright reform on the table in the current Congress, perhaps Silicon Valley should be asking itself what other reforms should be introduced. I can certainly identify a few areas where the copyright system in existence seems out of sync with the realities of the market. What do you think? Is a broader overhaul of the U.S. copyright system needed?
A verdict was reached earlier this week in the copyright infringement case between Robin Thicke and Pharrell Williams and the children of Marvin Gaye, finding that the 2013 song “Blurred Lines” infringed on the copyright in Marvin Gaye’s 1977 song “Got to Give it Up.” Tech Times reported that Gaye’s children have been awarded $4 million in actual damages and $3.4 million in profits, and also provided links to postings of both songs on YouTube.com. According to The New York Times, the decision is one of the largest damage awards in a music copyright case, recalling the 1994 jury verdict for $5.4 million against Michael Bolton and Sony for infringing a 1960s song by the Isley Brothers.
If you have followed the commentary this week in the news on this case, much has been made of the detrimental precedent that this ruling is anticipated to set for the music industry. The fear articulated is that this will discourage artists in the future from creating music that recalls earlier musical eras. Joe Caramanica editorialized for The New York Times that the jury instructions in this case ordering the jury to base its decision on the copyrighted sheet music ” reflects how inadequate copyright law is when it comes to contemporary songwriting and production practices.” Hardeep Phull opined for The New York Post that “So it’s decided. Marvin Gaye owns a certain type of “feel”” and argued that ” [the] vast majority of pop music is based on the same chords, played much the same way, and at a similar speed.” The online publication Quartz warned that “the true cost” will be when an “unknown musical genius tries to create a new song that evokes a particular era, and is sued into oblivion” due to the fact that the new song “kind of sounds the same” as a song that was previously written.
The commentary following this ruling is not unlike the commentary voiced after rulings in copyright infringement cases where technology rather than music was at the heart of the debate, and commentators have warned about how a particular decision would hurt innovation and stifle creativity. The only distinction here is that we are dealing with music and not technology.
I would argue, however, there is a lesson to be learned in this case: when you are “lifting” the creative works of others, you should take the time and make the effort to procure a copyright license authorizing the planned use rather than attempting to circumvent the unlicensed use. L.A Now reported that ‘Blurred Lines’ generated $5.6 million for Thicke, $5.2 million for Williams, and $5-6 million for the record company. It seems to me that all three parties made quite enough off of the song in question to have been able to afford to pay copyright royalties on the infringing lines taken from the Marvin Gaye song. So, the question I have: why not negotiate the license? If they were truly ‘evoking an era’, doesn’t that mean that they had some idea in advance of the music which had inspired them?
Now, if you were to assert that the copyright office database is not as search-friendly as the USPTO databases are, then I would have to agree with you that there are definitely short-comings with the Copyright Office that make searching for prior registered works more challenging than you would ideally like it to be. The copyright search functionality currently available is minimal at best. However, I think that artists who are “inspired” by a particular genre or era of music should know enough about the genre or era that they are evoking to be able to identify potential infringement issues that need to be further researched, and that they–like all creators of creative works–should be held accountable when they use third party creative works without permission. The bottom line is that works appropriated from other works are merely derivative works of the original creative work, and only the author of the original creative work has the right to authorize the creation of the derivative
But even if the Marvin Gaye song was never the original work from which the new song derived, it seems to me that the smart play here would have been to immediately negotiate a backdated copyright license or settlement once Williams and Thicke were notified of the potential infringement. While a license or settlement would have cut into their profit margins, it is unlikely that it would have been for such a high amount as the damage award, and that the attorneys fees incurred would have been much lower. So, why make the decision not to pursue this strategy?
It seems clear to me that the take-away lesson from this case is that when creative works are similar enough to existing works to potentially be deemed to be infringing, creators should pursue copyright license agreements with the owners of the original works. The procurement of a copyright license can save creators a lot of headaches–and potentially money–down the road. I would argue that the cost should be viewed–not as an unnecessary expense to be avoided–but as a form of insurance against potential legal claims from the original work holder. Commercialization of older works through licensing can easily be a win-win for all sides of a negotiation. The fact that this matter was played out in a courtroom rather than over a negotiating table was a real oversight by Williams and Thicke.
Pitfalls in Negotiating and Drafting Exclusive Licensing Deals: Lessons from Macy’s Dispute with JcPenney’s Over its Martha Stewart Product Line
When a new client contacts me for assistance in negotiating a licensing deal, the client almost always informs me that the deal is going to be an exclusive licensing arrangement. However, when I engage the client further to tell me more about the proposed exclusivity deal, in most cases the proposed terms on the table are extremely murky and so convoluted that the exclusivity being extended is entirely subject to interpretation and often looks more like a nonexclusive relationship than the exclusive relationship that is supposedly intended.
A Forbes report on the latest developments in Macy’s ongoing case against JcPenney’s is a good reminder of why parties should exercise caution in entering into murky exclusive licensing contracts. In that case, Martha Stewart had entered into an exclusive licensing agreement in 2006 with Macy’s and then entered into a second exclusive licensing agreement in 2011 with JcPenney’s that attempted to work around the prior agreement with Macy’s. As might be expected. a dispute ensued and ended up in litigation, which continues four years later.
In general, I always encourage clients not to jump head-first into exclusive licensing deals because they will inevitably tie their hands with respect to limiting their ability to capitalize on future licensing opportunities, as clearly happened with Martha Stewart in its contract with Macy’s. However, clients tend to disregard this advice when they have a potential licensing deal on the table and proceed anyway, typically opting to limit the scope of exclusivity to the extent possible. Thus, I tend to see creative drafting proposed in such agreements with terms that are only understood by the two parties in discussions and not by anyone who is not directly involved in the negotiations. Obviously the danger in such arrangements is that the other side may conveniently decide at some point to “forget” the agreed upon interpretation and no one else will apply the same interpretation to the language previously agreed upon by the parties.
So, what are some lessons to take away from this dispute about licensing negotiations?
First of all, if you are looking to maximize the commercial licensing value of intellectual property that you own, stick to nonexclusive license negotiations and refrain from entertaining exclusive licensing offers. Exclusive licensing offers should have a higher price tag attached to them, but just because a potential licensee is pressuring you to make your licensing offer “exclusive” does not mean that you have to cave in to its demands.
Second of all, if you agree to offer an exclusive license, refrain from offering a worldwide license and limit the scope of the license by clearly defined geographic territories such as states or regions. Worldwide territories obviously leave open very little room for negotiation with third parties for other licensing rights. Besides, it may make more sense to test out the commercial success of a limited territory first with the licensee before expanding the licensee’s territory further.
Third of all, if you try to carve down the scope of exclusivity by something other than a geographic territory, define the scope by a clearly defined “field of use” such as an industry or specialty field. If whatever field you limit exclusivity to is not defined so clearly that any third party could pick up the contract and understand what is intended, then your field is not sufficiently clear. A well-drafted field of use clause will only have one easily understood interpretation and will not require further explanation by either you or the licensee to be understood.
Fourth, build in parameters to the license so that if the licensee is not meeting your revenue requirements, you can either terminate the agreement, or eliminate the exclusivity. If you are not making the money you expected to off the business arrangement, why be stuck in a long-term, unprofitable relationship? You are more likely to make bad decisions that get you into trouble if you are stuck in bad relationship that you cannot get out of than you would be if you had a limited arrangement that proved not to work out, since you will then have the ability to walk away from the unprofitable deal.
Fifth, consider limiting the period of exclusivity so that you can re-evaluate the scope of the relationship from time to time, and move on from a relationship that is not generating the revenues you were anticipating. If you have a fixed time when you can terminate an unprofitable relationship, this will allow you to jump ship and make you less inclined to try to circumvent an existing unprofitable licensing agreement.
Sixth, do not hesitate to buy a third party out of an agreement that is not working for you so that you can move on to an arrangement that is. When you enter into a bad deal, sometimes asking for a “divorce” is the best option. Indeed, putting some money on the table to buy your way out of the arrangement may make more sense than attempting to circumvent the existing deal, creating bad feelings with the existing licensee, and ultimately stumbling into an expensive litigation. If the relationship is not profitable for you, it is unlikely to be profitable for the licensee either, and a mutual agreement to part ways with a buy out attached may make more sense than continuing on in a relationship that is no longer beneficial for either party.
All in all, I think that the Macy’s dispute provides a good example of why intellectual property owners should proceed with caution when presented with exclusive licensing opportunities. While exclusive offers can be very tempting, the party receiving exclusivity generally has to pay dearly for that right and is going to be commercially inclined to defend its rights to preserve the exclusivity. The inclination to propose creative wording to carve out the scope of exclusivity is likely a good sign that you have reservations about the relationship that should probably prompt you to step back and reconsider whether a nonexclusive relationship is a better fit for your commercial needs than the exclusive relationship that has been proposed.
Given my Silicon Valley location, I often am consulted by entrepreneurs and start-ups who have just started a business and are seeking advice on how to protect their trademarks. However, more often than not, I quickly determine that the name that the entrepreneur or start-up has selected is a poor mark and my advice ends up being to think about changing the trademark immediately before the company gets further established and changing the mark becomes more difficult.
Why is it that this issue comes up so often? In all likelihood, it arises on a recurring basis because entrepreneurs starting a new business are so focused on other aspects of starting their company when they launch that they don’t give the choice of name the attention it merits.
To be honest, I am guilty of this as well. When I started my law firm after the collapse of my prior firm, I barely gave the issue of naming my law firm any consideration. As a result, I did what many lawyers do and just began using my last name as the name of the firm. More than a decade later, I am still in private practice and continue to build my Silicon Valley firm, have become somewhat marketing-savvy, and I frequently find myself wishing I could rebrand. However, in today’s world, the practical consequences of rebranding an established business are huge, since such a name change will affect your web presence, and in the case of a small firm that relies on its web presence to generate business, rebranding is a huge business risk that could have a tremendous upside or a huge downside. Also, there is the expense you will deal with in such a case of reprinting marketing materials, which can be very costly, depending on the extent of marketing materials, which have been printed for you. In my case, I made a significant investment early on in marketing materials which I might have reconsidered in retrospect. So, to date, I’ve done nothing but I continue having recurring thoughts of wishing I could easily facilitate a smart rebranding move. If only I could have been as business-savvy when I started my law firm as I now am more than a decade later. . . . but, as the familiar saying goes, hindsight is 20/20.
However, some entrepreneurs and start-ups end up selecting such a bad name initially that they have no choice but to rebrand, simply because at some point they retain a trademark attorney and realize that the mark they selected could be determined to be infringing another mark, or else because the owner of other mark holder sends them a cease and desist letter and actually threatens them with a lawsuit, and they realize that the most cost-effective and prudent manner of handling the situation is to simply rebrand and stop using the disputed trademark. While these entrepreneurs and start-ups have a different reason to rebrand, they often find themselves in the very same dilemma I find myself in: they realize that they will be essentially starting over with a clean slate on the web and they will lose whatever marketing foothold they’ve previously achieved on the Internet by erasing their existing web presence, which can often be very detrimental to an established business.
A perhaps even more common scenario for entrepreneurs and start-ups to find themselves in is to realize–not that they are using an infringing mark but that they are using a completely unprotectable mark. Generally, the entrepreneurs and start-ups in this situation will discover that their mark is descriptive or has some other deficiency which will render in unprotectable with the USPTO.
So, what can a savvy entrepreneur or start-up do to proactively avoid finding themselves in a trademark dilemma down the road?
First and foremost, when you choose a name for a new business you need to determine if there is any possible way that the name you have chosen could be deemed to infringe on another company’s business. While having a trademark attorney run some searches for you is ideal, you don’t need a trademark lawyer to make this determination. You can visit the USPTO.gov website yourself and search for your proposed business name and any possible variations of your business name to see what comes up. If your name is so unique that your search generates no similar names, then you can move on to searching any possible variations or other spellings of your name to see if anything comes up. If something does come up in the search then you want to look for names that are similar to yours that are in the same industry as you will be or offer products and services similar to yours. If you find any similar marks, then you may want to give some consideration to changing your name. Obviously unique names are generally a safer choice than a common name.
Second of all, when you choose a name for a new business you need to avoid descriptive names. By descriptive I mean names that are based in any way on what your business will be doing. The USPTO will generally not grant a trademark on a descriptive name. There is a natural tendency for many entrepreneurs or start-ups to adopt clever, descriptive names, but those names will generally not be protected as trademarks by the USPTO. While being descriptive is not the only reason a trademark can be refused, it is probably the most common reason for refusal after being confusingly similar to another mark.
Third, as soon as you have the resources to do it, you should probably file an intent to use application with the USPTO to reserve your name. If you can file before you actually launch, this is ideal, since you will then know if your mark can be granted before you actually start using the mark in interstate commerce. Intent to use applications are usually fairly easy to file, but you will need to set aside enough funds to cover the USPTO filing fee and any legal expenses you incur.
The USPTO has published some information intended for public viewing about choosing a strong mark, which may be helpful to you in selecting your name at the following website: http://www.uspto.gov/trademarks-getting-started/trademark-basics.
All in all, I would encourage anyone starting a business to give serious thought to the choice of name very early in the process of launching a business and not postpone all such name related issues to a later date, as the investment of time and money early on can save you from having to throw out thousands of dollars in marketing materials or re-establish an established web presence down the road. It is far easier to choose the right name when you launch than it is to rebrand years later, which will inevitably be a risky proposition, even if handled in an optimal marketing fashion.
I recently gave a webinar on Negotiating License Agreements with Start-Ups, and wanted to follow up on that program with some comments for Silicon Valley IP Licensing Law Blog readers on some of the challenges that companies may face when negotiating an IP licensing deal with a start-up.
In the years that I have worked as a tech transactions attorney in Silicon Valley, I have represented a large number of start-ups in negotiating deals with large companies, and I have found that there is a tendency of large companies to approach deals with start-ups with the expectation that the deal is going to be really easy to close due to the perceived imbalance of negotiating power between the two companies. While there is no question that this imbalance of power clearly exists in this type of negotiation, companies who approach these types of deals with the expectation that the negotiation is going to be a cakewalk may be setting themselves up for failure. The very act of entering into a negotiation with a start-up brings to the table a set of unique complications that must be dealt with by the company on the other side of the table.
One of the first issues that a company negotiating with a start-up must contend with is the fact that the start-up on the other side of the table is likely to have a very low tolerance for negotiation. While large companies enter into negotiations as a normal course of business, start-ups often have absolutely no experience with negotiation, which may even rise to the level of outright aversion to negotiation. In some cases this is because they are relying on friends and family with law degrees to advise them who have absolutely no experience in deal negotiation themselves. In other cases, they may have skilled counsel that they rely on but just are unwilling to allocate the necessary financial resources to procure the assistance. It may also be simply due to a lack of comfort with the negotiating process generally.
A second issue that a company negotiating with a start-up will have to overcome is the inexperience factor, which can have a huge impact on the negotiation process. In my role as IP transactions counsel, I often find that an important aspect of my job in working with a start-up involves educating the business on the business model and even the standard terms that would be found in the type of transaction they are negotiating. More often than not, I find that start-up clients have never been involved in a negotiation of the type of deal they are engaged in and that they have never even seen a well-written contract for such a transaction. The lack of familiarity with deal terms may prompt start-ups to negotiate deal terms that are not even appropriate for the type of deal they are doing, and to even remove deal terms from drafts that are essential to the type of transaction they are negotiating. For example, I ran into a situation recently where a client removed a license grant clause from a draft being negotiated in a licensing deal on the grounds that the other side would never agree to it. The inexperience factor often results in start-ups being unable to make decisions in a negotiating context, or reversing their position on critical negotiating points mid-way during the negotiation. It also is not unusual for them to be unsure about where they want to involve outside counsel in the negotiation, including him or her in non-essential conference calls with the other side and excluding outside counsel altogether on calls at key points in the negotiation.
A third issue that a company negotiating with a start-up will often have to address is its confusion over how to manage the negotiation process. It has been my experience that a start-up may put all its energy and focus in lining up the prospective deal partner to do the deal but then find itself unclear on how to proceed and get the deal closed. This uncertainty can put the party on the other side of the negotiating table in a bind, prompting the more sophisticated larger company to take charge of driving the negotiation if it serious about pursuing the deal. However, taking over the deal management role for a start-up you are negotiating with will not necessarily move the deal forward either, since critical negotiation steps may be trampled over in the interest of deal management, and the larger company may put a standard template on the table that has no semblance to the deal that the start-up was proposing to the larger company. To make matters worse, the start-up may then be advised by friends, family, or trusted advisors with no deal negotiating experience that they should just sign whatever the larger company puts in front of them, which often leaves the start-up even more confused and the deal at a complete stand-still.
Of course, there are a number of other issues that may come up in the start-up licensing deal negotiation, but the bottom-line is that they are far from “easy” deals to close and they inevitably present their own unique challenges. Does that mean that as a larger company you should shy away from these types of deals? Absolutely not. Most of the innovation in this country–and even the world–is coming out of start-ups who are uniquely able to nurture and develop new technologies and business models. The level of innovation that I see among the entrepreneurs I have the privilege of working with consistently amazes and inspires me. So, as a large company, it makes a tremendous amount of sense to look to start-ups for innovation and corporate growth. Having said this, in pursuing deals with start-ups, successful companies should approach negotiations with their eyes wide-open about some of the challenges they are likely to face in moving forward with the deals. Appreciating the considerations of the start-up can go a long way to getting your deals closed with early stage companies.
TechCrunch posted an article this afternoon written by attorney David Soofian, which caught my attention, addressing the issue of what to do as a young start-up if you are sued for patent infringement. In particular, the article addressed the challenges posed by so-called patent trolls, who use “weak patents to go after young tech startups” seeking licensing deals.
In the article, Soofian recommended that start-ups consider two key strategies to addressing patent suits.
First of all, if the patent at issue is on software, Soofian urged start-ups to challenge the eligibility of the patent, looking to recent court decisions in Ultramercial v. Hulu and Alice v. CLS Bank International for guidance.
Second of all, Soofian advised start-ups to pursue an Inter Partes Review at the Patent Office and to challenge the patent on grounds that it is not innovative and that it is obvious. Soofian explains that while this type of review was not traditionally available until a significant amount of expense had already been incurred in litigation proceedings, recent legislation has now made the proceeding more readily available to a start-up company with limited resources. Soofian identifies a number of advantages to pursuing this type of proceeding as a start-up over federal court proceedings such as the speed of the proceeding, the limited discovery required in such a proceeding, the fact that the burden of proof is lower, and most importantly, the fact that the court proceeding is stayed while the review occurs.
While Soofian’s article suggests that start-ups need not throw in the towel on their business efforts when they find themselves faced with the prospect of patent infringement litigation looming over them, as a transactional attorney who advises entrepreneurs and start-ups, I would caution businesses who receive demand letters–whether patent or otherwise–not to respond to those letters in a way that invites litigation. The mistake I often see many young start-ups and entrepreneurs make is that they either ignore demand letters altogether or they respond without the assistance of legal counsel and do it in such a way that is unhelpful to their position. In most cases, what is really in the best interests of the start-up is to make the claim go away as quickly as possible–not instigating a fight with the claimant.
As Soofian acknowledges in his article, most infringement demand letters are sent with the objective of procuring a license fee from the recipient, and in many cases, it is going to be far cheaper for the entrepreneur or start-up to settle the claim, whether legitimate or not, than to run up legal fees in litigation. While there is no question that so-called patent trolls and other bad actors may take advantage of this reality, the savvy demand letter recipient will conduct his or her due diligence of the available options and respond accordingly with the information in hand.
The bottom line: Soofian’s article should give hope to start-ups facing patent infringement disputes that will not necessarily run out of money and have to shut down simply because they have found themselves in a legal dispute. However, the savvy start-up will still deal with an intellectual property dispute in a timely fashion when it arises and try to resolve the problem long before it gets to the point of a filed complaint.
Trademark Commissioner Deborah Cohn was reported by The Washington Times to have announced her resignation today after allegations were reportedly made against her that she had violated nepotism laws. A Federal Times article from July provides some additional background on the reported scandal.
This particular Washington scandal has received virtually no coverage outside of the Beltway, so it was a little surprising to receive notices today that the Trademark Commissioner had resigned over a nepotism scandal.
If you are unfamiliar with the departing Trademark Commissioner, IP Watchdog published an interview of Commissioner Cohn in February, 2012, in which she indicated that her career with the Patent and Trademark Office began in 1983 as a trademark examiner, so she will have been with the agency for some 31 years when she steps down. (The second part of the interview is attached here). Commissioner Cohn was apparently not an appointee from the private sector but rather a career Patent and Trademark Office employee.
It is unfortunate to see yet another federal government agency affected by scandal, particularly the Patent and Trademark Office. With so many Washington scandals in the news right now, is it any wonder that many Americans have such a negative perception of the federal government? With all the tax dollars and fees that we Americans are sending to our government each year, wouldn’t it be nice if we could run our federal government a little more transparently and feel like so much of the money that we are sending them out of our pockets was not being misused? Washington D.C. sometimes seems a world away from Silicon Valley, and frequent scandals only increase that perception.
But the underlying story here is still just how very hard it is to land employment for many Americans–even lawyers. For those of us working, we sometimes forget. Perhaps this story would never have developed but for that reality. Who among us hasn’t been asked to do a favor for someone struggling to find work–or even perhaps asked for a favor ourselves?
All in all, this is not the kind of news you want to see come out of the Patent and Trademark Office. Or Washington.