Lisch_111x105Guest Post: Gray Reed intellectual property attorney David Lisch provides this two part series on Basics of Intellectual Property Law for Start-Ups. Part one focuses on trademarks and entity formation

Trademarks

At one point or another, all companies will be faced with the decision if, and how much, to invest in intellectual property protection. Let’s start with trademarks.

A trademark is a word, phrase, symbol, and/or design that identifies and distinguishes the source of the goods of one party from those of others. A “service” mark distinguishes the source of a service, rather than a good, but the two are typically simply referred to as a “trademark” or “mark”.

There are two typical methods of filing a trademark: 1) when the mark is in use, filing a “use-based” or “Section 1(a)” application; and 2) when the mark is not in use yet (e.g., prior to forming the company or selling finished product), filing an “intent-to-use” or “Section 1(b)” application. For the latter, an “extension of time” must be filed every 6 months (for up to a cumulative time of 3 years) until the trademark is in use, otherwise the application will expire and a new application must be filed. The policy behind this is to avoid people “squatting” on a trademark for extended periods of time. Once the trademark is in use, a “statement of use” is filed with a specimen (example) showing the mark as used in connection with the described goods or services.

One should file a trademark prior to, or near the conception of a business. A trademark is relatively inexpensive, typically costing $225 in USPTO fees plus some time for an attorney to do brief search for potentially conflicting marks, search for which “classes” the mark should be filed in, and actually filing the mark. It is advantageous for a business to file a trademark early in the business cycle to assure (to the extent possible) that their mark is not conflicting with another’s mark. If such a conflict does occur, it is substantially cheaper to change the company name and perform rebranding early on. Moreover, if there are no conflicting marks, the company assures others will be precluded from filing “confusingly similar” marks.

While possible to file a pro-se trademark application, it is highly recommended to hire an attorney due to inflexibility of the rules regarding trademarks. For example, importantly, in general, the trademark should be filed under the entity name, not an individual’s name. This is because, while an individual may be the sole owner, CEO, President, etc. of a company, it is the company which has an intent-to-use, or is currently using the trademark. Should the later occur, where the mark is filed in the name of an individual, the trademark may later be deemed void. 37 C.F.R. § 2.71(d); TMEP §§ 803.06, 1201.02(b) (“An application is void if it was filed in the name of a party who did not own, or was not entitled to use, the applied-for mark on the application filing date.”). Moreover, unfortunately, such an error cannot be cured by amendment or assignment. TMEP §§ 803.06, 1201.02(b). There are also rules limiting recourse and future actions after filing the above-mentioned statement of use and specimen which an attorney will be integrally familiar with.

In sum, it is highly advantageous to register for a trademark soon after formation of an entity or early in the business cycle to assure both availability and protection of the business name, logo, slogan or services.

P.S. We would be remiss by not mentioning that there are some common law and/or state law remedies available without filing a federal trademark, however those will be saved for another discussion.

Form an Entity First

As discussed above, but worth reiterating, it is advisable to form an entity prior to filing any intellectual property. With trademarks, the mark should be filed with the entity as the owner due to the law essentially prohibiting assignment or correction of an intent-to-use application. If filed incorrectly, the application may be deemed void, and all money and efforts are lost and a new trademark must be filed which can only claim a newer filing date, thus allowing a greater possibility of other preceding marks being conflicted.

A patent (further discussed in the next segment of this series) is slightly different in that the initial owner of the patent are the (joint) inventor(s). While a proper employment agreement will require the employee to assign rights to the company, such is not always the case, especially with startups who are likely focused on tackling other initial challenges when just opening shop. Even if this isn’t the case, assuming the inventors are still cordial and willing, the patent application (or granted patent) can be assigned to an entity at any point in time. It is advantageous to have this assignment executed earlier rather than later to assure the inventors are still on good-terms with each other and the company and will easily comply.

Lastly, having all intellectual property held by the entity enables a cleaner presentation to current and potential investors. The entity, or anyone representative thereof, can state there are no hurdles to owning the IP, and the IP can be easily transferred in a merger or acquisition of the entity.

In the next segment, David will provide the basics of patent law and its importance for a start-up.

 

Sometimes, I like to talk basics and this time it’s something as basic as “tell the truth.”  I’ve never had a client come to me and say, “I would like to lie as much as possible in my advertising, can you help me?” It’s never that simple. 

The general rule is advertising cannot be deceptive – which means it should be the whole truth and fair.  You should not have to justify a claim with a lot of explanations. It’s a matter of context and not simply a matter of whether the statement, in a vacuum, is technically true.

According to the FTC’s Deception Policy Statement, an ad is deceptive if it contains a statement – or omits information – that “is likely to mislead consumers acting reasonably under the circumstances; and is ‘material’ – that is, important to a consumer’s decision to buy or use the product.” An ad is unfair if “it causes or is likely to cause substantial consumer injury which a consumer could not reasonably avoid and it is not outweighed by the benefit to consumers.” The FTC looks at advertisements from the reasonable consumer standpoint. If a scientist may understand the half-truth in your claim, but Aunt Myrtle surfing Facebook would be fooled by it, you might find trouble.

The FTC uses the following example to illustrate their contextual, reasonable circumstances approach. If your mouthwash says it kills the germs that cause the cold, that may technically be true. It implies to the average consumer, however, that your mouthwash prevents colds even though you never said that. Therefore, you could be in trouble.

Advertising agencies need to be wary as well. You can’t simply rely upon the client to be truthful because you can also be held liable depending on the extent of the agency’s participation in the preparation of the challenged ad and whether the agency knew or should have known that the ad included false or deceptive claims.

The Online Disclosure

The same rules apply online and off.  Disclosures should be clear and conspicuous so consumers will see and understand them. Disclosures tucked away in a small link not clearly identified or on a completely separate page are not likely to be effective. There is no hard-and-fast rule about the size of font or location of the disclosure or link; the FTC generally asks whether a consumer is likely to find it.

When using online disclosures, you should place disclosures near, but certainly on the same screen where the claim is. Links are acceptable as long as the link is obvious, appropriately labeled and easy to find. You should track the click-through rates on the disclosure in case you ever have to defend yourself. Make sure the disclosure is made prior to purchase and not hidden on the last page of a multi-step ordering process.

The Comparison – Four out of five clients say my lawyer can beat up your lawyer.*

Comparative advertising is legal — if truthful. You can generally use the competitor’s name and trademarks when making the comparison too. The Lanham Act, however, gives your competitor the right to sue if the comparative advertising is deceptive. If you are going to use comparative advertising and surveys, make sure the sample is large enough to be legitimate. Asking my five best clients and only my five best clients would not be a legitimate survey — nevermind that my fifth best client doesn’t love me as much as I thought they did.

Case Studies

The FDA Doesn’t “Like” Facebook

The Food and Drug Administration issued a Warning Letter on February 26, 2013, because a company “liked” a Facebook post from one of their customers. The customer wrote: “PolyMVA has done wonders for me. I take it intravenously 2x a week and it has helped me tremendously. It enabled me to keep cancer at bay without the use of chemo and radiation…Thank you AMARC.” The FDA said “liking” the post was an endorsement of the message and therefore it was as if the company promoted the drug as a cure or treatment for cancer in violation of the Federal Food, Drug and Cosmetic Act. You can read more here.

Pomegranate Juice makes you healthy, more attractive and just an overall better person.

The makers of POM Wonderful 100% Pomegranate Juice claimed their products could treat, prevent or reduce the risk of heart disease, prostate cancer and erectile dysfunction. While there was some evidence to arguably make such claims, the advertising was still considered deceptive by the FTC and later upheld by a judge. The FTC issued an order prohibiting POM from making any such health-related claims unless it is supported by two randomized, well-controlled, human clinical trials. POM Wonderful spent $35 million in peer-reviewed scientific research and relied upon “centuries of traditional medicine and plain common sense have taught us: antioxidant-rich pomegranate products are good for you.”

Undoubtedly, there are some health benefits to pomegranate juice. Saying the juice helped “cheat death” may have taken things too far. In the ruling, the FTC examined the “net impression” of medical claims (see the mouthwash example above) even if POM did not expressly claim the juice was a cure all. The FTC also did not let POM off the hook for using such qualifiers as “preliminary,” “promising,” “may,” or “can” when it came to health claims.

When is a foot long not 12 inches?

As first publicized by a teenager in Australia through Facebook with the picture to the left, Subway’s “footlongs” do not always measure up. Now, the lawyers have filed several pending state and federal class action cases. Even product names, as opposed to marketing campaigns, can bring on a challenge. If you are going to call something a footlong, it should predominantly be twelve inches long.  The results of this case may depend on the percentage of footlongs not actually twelve inches and whether 11 and ¾” sandwiches are deceptive. On the other hand, Subway put lots of stock in branding the “footlongs,” which is a promise to the consumer they should keep.

So, what can you do?

If you make a claim, have the evidence to back it up which means a “reasonable basis” to make the claim including “competent and reliable scientific evidence” for health and safety claims.

Stay subjective. Saying your drink tastes great or that this is the best column ever is something the consumers can judge for themselves. Opinions are not verifiable facts and rarely can create liability.

Be careful online.  Your “liking,” “re-tweeting,” or other actions can be an endorsement of someone else’s comments and violate regulatory rules that govern your industry.  If you are in those industries, train the people running the official company channels.

The Business Guidance section of FTC’s website provides some good resources to help stay out of trouble.

*comments made in jest and not subject to verification unless you ask my mother.

Our last back to basics was on the use of images on the web.