Minimizing Risks – Klinck LLC

Minimizing Risks

Every company needs a plan to minimize the risk of being accused of infringing IP owned by third parties. IP litigation is no longer solely the province of large corporations and high-tech companies. The vast majority of startups will be accused of infringement at some point during their life cycle, and more traditional brick-and-mortar businesses are increasingly facing similar accusations.

In light of this backdrop, there simply is no justification for a company failing to prepare for a potential lawsuit. This preparation should include taking reasonable steps to avoid a lawsuit and developing plans for how to respond if and when a lawsuit is filed. This chapter lays out how your IP team should go about developing this plan.

Develop Clearance Procedures

The first part of your defensive plan should be to implement systems and procedures to avoid infringement in the first place. This involves developing sensible programs to detect and correct any potential infringement that is occurring at the earliest possible time. You should develop procedures to vet potential issues in each of the four major categories of IP (patents, trademarks, copyright, and trade secrets).

Patent Clearance

The most difficult element of a risk avoidance program is developing a patent-clearance program. The fact is that there is no feasible way to analyze all two million patents that are in force at any given time. Even focusing on patents related to your particular industry will not offer complete peace of mind. In one famous series of cases, a company claimed to own a patent that covered online shopping carts. Thus, any company that sold products online and used a cart feature (i.e., every online sale system) could potentially have been sued. These suits can come out of the middle of nowhere.

Aggravating the situation is the fact that patent litigation is the most expensive form of IP litigation. You will likely need to spend hundreds of thousands of dollars just to win the case. These are sobering facts that should drive home the need to take whatever steps are available to reduce the risk of facing a patent suit.

Although you cannot reasonably search the entire patent database or even a subset that covers your particular industry or technology, it is reasonable to look to see if your closest competitors have any relevant patents. As discussed in the IP audit chapter, this process could start with a review of your competitor's website and products. If your competitors have patents that cover their products, either the products or their packaging should be marked to notify the world that the product is protected by a patent.

Although not all of your competitors will have patents (or markings), most companies will find that at least one competitor has at least one patent. These patents will generally warrant close analysis because they are likely to be at least tangentially related to your business.

Beyond conducting a competitor analysis, you may feel the need to have a third-party search firm conduct a search for potentially relevant patents. There are numerous firms that will perform this service (and a number of lawyers can perform this service as well).

Beyond the challenge of identifying potentially relevant patents, you will need to develop a plan for how your company will analyze these patents that turn up during the search. Patents are not exactly easy to read, and they are certainly not easy to understand. Analyzing whether the patents that you have found pose a threat to your business will likely require a consultation with a patent attorney.

Trademark Clearance

Developing a trademark-clearance program is a bit easier than developing a patent-clearance program, but it also does not come with any guarantees. Trademarks arise automatically through use, so there is no central location where all trademarks are listed. That being said, you can still conduct reasonable searches for trademarks that could be relevant to your business.

First, you should develop a system to search the federal trademark registry any time you begin to use a new mark, name, or logo. The federal registry will let you find all marks that are registered and even prior applications that were abandoned or otherwise not issued.

Second, you can conduct a Google search to look for evidence that others are using the mark, name, or logo without having registered it. If you manage to get several pages deep in the search results without finding any references to someone else using the mark or name, you can feel relatively confident that there is not a conflict.

There are search services available that will search the federal registry and other public databases (e.g., state corporation records) as well as search for domain names. Although these searches can automate the process, they will be caveated with a statement that the results are based purely upon the sources searched and do not make any guarantees that the proposed trademark is not already in use.

Similarly, you could hire a law firm to conduct the search, but this will not provide significantly greater assurance than the third-party search services. I can assure you that any attorney you hire will provide a series of caveats a mile long after providing the results of the search. Rather than hire a lawyer to conduct the search, the best use of funds would be to hire an attorney to evaluate any results that you obtain from other searches.

Copyright Clearance

A copyright-clearance program can be very effective so long as you take the time to develop clear procedures. For the vast majority of small companies, copyrights do not represent significant challenges.

For the typical small business, copyright issues would arise most commonly from the use of copyrighted photos, videos, or music on its website or other promotional material. Thus, for the typical business, developing copyright clearance involves establishing procedures to ensure that your company has obtained the necessary licenses for photos, videos, and music that it is using.

Trade Secret Diligence

Creating a trade-secret-diligence program can be a challenge. Trade secret issues will generally arise when a new employee uses confidential information from a prior employer for your company. Thus, your IP plan needs to include systems and procedures to monitor new employees for signs that they are using confidential information.

This is an area that requires particular attention during the IP planning process. Every business is different, so there is no one-size-fits-all approach to developing these monitoring programs. With that said, there are some areas that you should spend time considering.

Many trade secret disputes arise as a result of an employee taking a customer list (or even a lead list) from one employer to another. Thus, you should develop systems to monitor the activity of any salesperson who is hired from a competitor.

Similarly, a product-development employee who comes from a competitor can bring significant risks. Was the employee privy to confidential information at the prior employer’s business? If so, there is significant risk that the employee will use trade secrets. You need to develop systems to monitor these employees to ensure that this is not happening. In many cases, your IP team may conclude that the only feasible way to accomplish this goal is to ensure that the new employee is not working on any products at your company that are related to products from the employee’s prior job.

Your IP team should think carefully about other areas within your business where employees might be making use of confidential information. The best way to accomplish this is to analyze where your company has trade secrets. Anywhere that your company has trade secrets is an area where you need to monitor new hires for the use of trade secrets from your competitors.

Develop A Plan To Respond To Accusations

In spite of your best efforts, there is no way to eliminate the risk of being accused of infringement. Thus, an important aspect of your IP planning is to develop plans for how you will respond to an accusation.

Taking the time to create these plans at the outset will ensure that you will not have to make these important decisions under the stress of a lawsuit. When you have been accused of infringement, you will be under stress and time pressure—a recipe that does not bode well for making the best decisions. During the planning phase, on the other hand, you have the luxury of time and will not be under the strain of the accusation. This dynamic means that decisions made during the planning phase will tend to be more reasoned and thought-out. With this plan in place, responding to an accusation of wrongdoing will be smoother and less stressful.

As part of the planning process on how to respond to accusations, your company will need to develop a licensing stance and develop a relationship with a lawyer.

Develop A Licensing Stance

As your company grows, it will tend to receive more attention from third-party IP owners. Some of this attention will be from market competitors, while some will come from companies that have purchased IP assets solely for the value of enforcement opportunities (i.e., non-practicing entities). One important element of your response plan is to develop a general stance that you will adopt with respect to licensing IP from non-practicing entities.

Before discussing the options for a licensing stance, it is worth noting that there are multiple breeds of non-practicing entities. Some of these entities focus on asserting high-quality patents. These reputable, non-practicing entities will generally invest considerable assets in acquiring the patents, will spend considerable time investigating potential infringement by those in the market, will approach the companies that they conclude are infringing, and are prepared to litigate cases through trial and appeal if necessary. Although there has been substantial debate about the merits of IP aggregators, these reputable, non-practicing entities generally do not engage in any dishonest tactics or attempt to abuse the litigation process; they simply stand in the shoes of original innovators but have the resources to enforce their IP rights.

There is, however, a seedy underbelly to IP aggregators. These are the so-called trolls. Trolls are companies that buy up IP rights, often at bargain-basement prices, with the goal of accusing scores of businesses of infringement. These trolls often assert low-quality patents against numerous defendants at once without doing much research regarding any individual party. In spite of their bluster, these entities often desperately want to avoid litigating their IP rights. Instead, these entities are banking on the fact that the many companies they accuse of infringement will agree to pay nuisance-value settlements—settlements that are considerably less than the defendant would have to spend to actually mount a defense.

Some companies conclude that the best response to an infringement accusation by one of these less-than-reputable, non-practicing entities is simply to pay the nuisance value to avoid the cost of defending the suit. This is a perfectly reasonable approach and will generally work well for relatively small companies that do not draw regular attention from IP trolls.

While paying these nuisance-value settlements will be infuriating, it is often the best business decision. Notably, this is part of the value of planning. Making the decision, in advance, that paying some nuisance-value settlements is a cost of doing business will prevent you from making an irrational business decision based upon the emotional response to being accused of infringement.

But what about companies that have grown a bit larger and are beginning to attract attention from trolls on a relatively regular basis? Some companies that fall into this category have made the strategic decision that they will not agree to take a license from trolls and will instead litigate. This approach proves expensive at the outset. Over time, however, your company can build a reputation as one that simply will not pay nuisance-value settlements. If you couple your approach with a public-relations campaign that stresses this stance, it will eventually lead you to be less likely to be targeted by trolls. These trolls will eventually decide that they should focus on softer targets and will leave your company alone.

Although there are merits to each approach, the key is consistency. Your company will not build a reputation as one that does not pay trolls unless you begin to take a hardline approach to every assertion by these entities. Thus, if you intend to adopt this approach, it generally will need to be an across-the-board decision (at least with respect to assertions by non-practicing entities). Thus, planning is the key.

Develop A Relationship With Counsel

During the planning process, you should also consider building relationships with lawyers who could defend you in an IP lawsuit. If and when you find yourself accused of IP infringement, you will want to have a lawyer that you can trust to handle your defense. The fact is that the advice you will receive from counsel during the course of defending an IP lawsuit will often be difficult. If you do not have a relationship with the lawyer handling the case prior to the lawsuit, you may be reluctant to accept the hard advice the lawyer provides. If you have taken the time to build a relationship with a lawyer prior to the lawsuit, you will be more likely to take the lawyer’s advice and act on it.

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