Practically every business owns intellectual property (IP)—from logos to websites to advertising slogans, and you may be surprised to find out that your business possesses much more intellectual property than that. However, do you know exactly how much you do possess? Is it legally protected? On this edition of “Deal Talk,” Jeff Allen visits with Beverly Berneman, Intellectual Property Partner at Golan & Christie LLP in Chicago. Ms. Berneman will talk about the various types of IP businesses may own and why you need to account for it. She’ll also discuss how identifying AND protecting all your IP can actually lift the value of your company, and that’s particularly important if you plan to sell your business down the line.
In this day and age, intellectual property assets tend to be the most valuable assets of a business.
- Beverly Berneman
Jeff: Protecting your intellectual property rights. If you want to know why this is important as it pertains to the sale of your company and what steps you need to take to get started, you've come to the right place.
From our studio in Southern California, with guest experts from across the country and around the world, this is "Deal Talk," brought to you by Morgan & Westfield, nationwide leader in business sales and appraisals. Now, here's your host, Jeff Allen.
Jeff: Hello and welcome back to the web's number one content source for small business owners committed to building a business for eventual sale. Here on "Deal Talk" it's our mission to provide information and guidance from our vast, growing list of trusted experts worldwide that you and all small business owners can use to help you build your bottom line and improve your company's value. And I think our growing list of trusted experts worldwide has probably grown to about I think 125 experts. We're so glad that they've made us such an important part of what they do. We thank them so much.
Most of us know what intellectual property is. And we all have some of it ourselves. We all own some as part of our businesses. Some of us own way more than others. But not all of us may know exactly how much we have, or in some cases what it is, or why it's so critical, for that matter, to protect our rights to that property.
If you're listening today to gain a fuller understanding of what your intellectual property rights are and why it's important to protect them when the value of your business is at stake, this show is for you. And to help us kind of understand the ins and outs and why this discussion of intellectual property and the protection of your IP rights is so important is Beverly Berneman, Intellectual Property Partner at Golan & Christie, LLP in Chicago. Beverly, welcome to "Deal Talk," so good to have you.
Beverly: Thank you. Thanks for asking me to be here.
Jeff: For those owners, Beverly, who are considering selling their companies at some point down the line, it doesn't necessarily matter when. Why is it necessary to take particular care to see that your intellectual assets are protected?
Beverly: In this day and age IP assets, intellectual property assets, tend to be the most valuable assets of a business. Let me give you some examples from my own clients. I have a manufacturing client who has unique technology. That technology allows it to stay ahead of its competitor.
I have a client who's a microbrewery and they draw customers with their catchy names and their proprietary recipes that they keep secret. And another one, I have an author who wrote a book and she's now being courted by a producer who wants to adapt it for a stage play. In each of these cases it's the intellectual property that's the foundation of the business.
Jeff: I think it's really important here that some of us can kind of see where you're going with this, and you kind of try to crystallize I think for us and very well in some of those examples. What some ideas or examples of intellectual property are. And some of us may already know and have an understanding of the basics here, understanding that you're not a valuation consultant, Beverly. How much might our intellectual property contribute to the value of our business?
Beverly: Value is really a combination of things. And as you pointed out I'm not a valuation expert, so I don't go in and tell you how much it's worth. But I can tell you that in terms of what it means to your business, in terms of that value first you look at the market. Is there a market for your great idea, for your invention, for your service. Because if customers aren't going to call, if nobody wants your services, your IP is not going to have any value.
The second is to look at how that intellectual property Fits into your business. You have to know what place it has, otherwise it's not going to have value. And the third is how you monetize your intellectual property. And for this I think I can come up with an example that will really show how this works.
If you have a franchise, say your McDonald's, you're licensing trademarks, you're licensing recipes, you're licensing the process of how you run the restaurant, how it looks, and so on and so forth. And in return you receive royalties and licensees. So what McDonald's has done is taken all of its intellectual property and monetized it in terms of licensees. So you take all of these things and that's what creates the value.
Protecting your intellectual property assets should not be a matter of dollars and cents, because it's not cost-effective to allow your intellectual property assets to go unprotected.
Jeff: Talking with Beverly Berneman, she's the Intellectual Property Partner at Golan & Christie, LLP in Chicago. I'm so glad that she's managed to kind of carve out some time during her day to talk to us about intellectual property rights. When we talk about rights, Beverly, what are those rights actually? What does that mean to us? Is it different for everyone in terms of the rights that we have to our intellectual property? What kind of rights do we actually have?
Beverly: That's a really good question, and it can be confusing. Let me approach this by type of intellectual property. Let's first talk about patents. Patents are a right to exclude. So it's really more like a monopoly than a property right that we might be used to. You can own real estate, you can own a car, but you don't really own a patent. All you do is own the right to exclude others from using it. So let me give you an example.
If I patent the cure for say the Zika virus. I don't actually have to use it, but I can exclude other people from using it. The patent process warning here or caveat is it can be very time- and money-consuming, so we don't enter into it lightly. For instance, fees can, I'm not going to try to quote fees for other attorneys, but you could expect to spend anywhere from $10,000 to $150,000 for a patent. And it can take anywhere from three to five years.
By the way, speaking of chores, Jonas Salk refused to patent the cure for polio. He wanted to make sure it was available to everyone who needed it. Sometimes the altruistic business model can come into play as well.
Going on to copyrights, copyrights are rights in the authorship of a work that sticks to an intangible means of expression. And copyrights come with what we call a bundle of rights or six primary rights. That's the right to reproduce the work, the right to prepare derivative works, the right to distribute copies of the work. In the case of some types of literary, musical, or dramatic works, the right to create audiovisual works, the right to perform the work. And in the case of sound recording, the right to perform the works digitally.
All of these rights are exclusive to the author and these are more akin to the kind of property rights that we're used to. And one of the interesting things about copyrights is the owner can actually separate up the rights. So the owner of a copyright can license the right to copy and distribute the work to one licensee and the right to perform the work to a different licensee.
Trademarks, Jeff, you made a really good point about the “Golden Arches,” and the trademark, and the fact that it's a source or product identifier. Trademarks again are different from patents and copyrights because they are really a creature of consumer protection. You don't own a trademark, you own the right to use it in connection with your goods or services.
Sometimes I get a call from a potential client saying, "I got the slogan I really like and I want to trademark it." And then I'll ask them what product or service is it connected with and they'll say, "Well, no product or service. I just like it and I want it to be mine." Trademarks don't work that way. You also can't adopt a trademark that's going to cause confusion as to the source of sponsorship of your goods or services.
And the fourth primary type of intellectual property are trade secrets. That's something that's not generally known or easily ascertainable, and that it is such a reasonable measure of secrecy. Trade secrets are sort of a late comer to the IP world. Patents and copyrights are actually covered in our Constitution. Trademarks have been around for hundreds of years, although the statute that protects them here in the U.S. wasn't passed until the 1940s, that's the Lanham Act. But trade secrets sort of came into their own in the mid- to late-20th century. And they are covered usually by state law.
However, as of May of this year the Defend Trade Secrets Act was passed. Now there's a federal cause of action for protecting trade secrets. To give you an idea of what trade secrets are, I'm going to name some famous ones. The Coca-Cola recipe is one, although people say it's not really a protected trade secret. However, recently two employees of Coca-Cola tried to sell the formula to Pepsi, and you got to give Pepsi credit, they called Coke and said, "Guess what, somebody's trying to sell us your trade secret."
Some of the interesting ones are Google's proprietary search algorithm, WD40, some of my favorite comfort food: Mrs. Fields' Chocolate Chip Cookie recipe and the Twinkies recipe.
Jeff: That's actually some of my favorite comfort foods as well, Beverly. Well done.
Beverly: And my favorite one, because I didn't know those until I started doing research into trade secrets, The New York Times Best Seller List, the methodology for figuring out which are their best sellers for their list, that's a trade secret. Nobody knows exactly how they do that except for The New York Times.
Jeff: So what you're trying to say is that maybe The New York Times Best Seller List is actually not a list of best sellers based on volumes sold or number of books sold, but they could be best sellers, in fact, after The New York Times puts the fact that they are on The New York Times Best Seller List and make that public. Then the sales actually start to shoot up. I see how that works.
Beverly: That could be. And there could also be something else in there, evaluating who buys the book, how many libraries buy the book. There could be all kinds of variables that they use to create the list.
Jeff: That's why it's a trade secret. Exactly.
You can own real estate, you can own a car, but you don't really own a patent. All you do is own the right to exclude others from using it.
Beverly: Yeah, that's why it's a trade secret. Keep in mind that all of these types of protection I talked about are for the U.S. only. If your business has an international component there are ways to get cross boarder protection. But there's no system of protection that's going to give you global coverage.
Jeff: I'm just kind of wondering, many business owners have a trademark, or a logo perhaps, or a service mark that they have not registered, and we know this by the little R with a circle around it. It's kind of something that you have to do through a federal office. But how much protection if any do we have, Beverly, as business owners if we don't in fact register that trademark with the federal government?
Beverly: Certainly there are some famous trademarks that have not been federally registered. I think Scrabble is one. You just see a TM on there. But that just says that you're claiming common law rights. And to me this is sort of a last resort if you don't think you can get registration. Should someone begin using a confusingly similar mark and thereby confusing your customers or your clients, your remedies are going to be limited to adjunctive release and national damages.
That's why wherever possible I recommend federally registering your trademark. Not only does it become proof of your rights, it gives you an arsenal of remedies that you wouldn't have otherwise. So you'll get your adjunctive relief in damages but you can also get the defendant's profits. And in some cases you can even get your attorney's fees. So that's very valuable.
And there's one other advantage, and that is if you have registered your mark for more than five years, you can have the mark declared incontestable. And what that means is it limits a defendant's ability to challenge your trademark. For instance, somebody's using a confusingly similar trademark. You sue them and they say, "Your mark is merely descriptive so it shouldn't have been registered in the first place." If it is an incontestable trademark the defendant does not have that defense any longer. So that can be really, really valuable.
Jeff: What is that contingent on? You said five years.
Beverly: Right. You still have to be using it because, as I said, a trademark is based on you. There is a way to protect a trademark that is not already in use, but say you're in product development and you've come up with a very catchy logo design, and you're afraid your competitors knew about this logo design. They might to try to jump in and take it away from you, try to register it out from under you. While you're in development you can file something with the USPTO that's called an Intent to Use Application. And basically it's exactly what it sounds like, I intend to use this at some point in the future within three years, but I'm not ready to use it yet. I want to have that placeholder for it.
So the trademark is going to go through the same vetting process with an examining attorney at the USPTO that a U.S.-based application would. But then they wait for you to file a statement of use. And then once you file the statement of use it relates back to your original date of application. So you've gotten priority in the use of that logo design and you've protected it. For the most part, however, getting your protection you have to use the mark. If you don't use it for three or more years, the law presumes that you've abandoned it. There are some exceptions and there are ways to prove to get around that. But that is a presumption and you got to be careful of it.
Jeff: Fascinating stuff and very important. Beverly Berneman is joining us and she is an Intellectual Property Partner at Golan & Christie, LLP in Chicago. We're talking about intellectual property rights and really why it is so important that you get your arms around your intellectual property. You have an understanding of what it is, all that you own, and what you need to do to protect it, to protect yourself, protect your business, and protect your business's value. Why is that important? Well, because when you go on to sell your business, obviously, you want to get as much as you can out of it. But if there are any issues with your property, intellectual property that is, you could be leaving a lot of money on the table, and you could actually be costing yourself quite a bit of money down the line.
My name is Jeff Allen. Beverly Berneman will be back to join me once again as we continue our discussion on intellectual property rights when "Deal Talk" continues right after this.
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My name is Jeff Allen with special guest Beverly Berneman, our expert today talking to us about the importance of protecting your intellectual property rights with your company. Beverly, we talked about some examples of intellectual property, many of them common and that we have seen throughout the course of our daily existence as consumers. But as business owners, give us some ideas of some other types of intellectual property that we may in fact own, or maybe we haven't given much thought to with respect to our own business.
Beverly: I want to go back to trade secrets, because I think that that's sort of an unsung hero of intellectual property. Just a short story, a client of mine long ago, a long-time client. When I first started with them I went for a site visit to their plant. They took me on a tour, they showed me their inventory of patents and trademarks. And what I realized as I was walking through the plant was that a lot of what my tour guide was telling me was about their tribal knowledge and their proprietary technology that didn't rise to the level of a patent.
And then when I talked to the CFO and the CEO when I debriefed after my tour I said, "You guys have a lot trade secrets here. We’ve got to properly protect them." They were surprised. And what we did was we had a contest and let employees of the company identify trade secrets. And last count we came up with 28 separate secrets that are now being properly protected. You may not know that your tribal knowledge is protectable, is proprietary. And so that's an area that I think really every company, every organization should be looking at.
Second is the digital assets, such as websites, how they look and feel. They can be protected perhaps as trade trust. And domain names, very important in terms of how they're properly protected. A third is your social media. Virtually every merger and acquisitions case matter that I worked on in the last several years we've had to look at and transfer social media accounts.
These are three primary areas that I think people don't often look at and understand that they have value and rights, and should pay attention to them.
Jeff: I appreciate you bringing those things up, very, very important. Now, I'm just kind of wondering then, let's say I am preparing to sell my business and I'm just kind of wondering if there is any difference in the way my company's intellectual property rights should be protected when considering an asset sale versus, for example, a stock sale.
Beverly: The most important issue is proper due diligence, always. You have to know who owns the intellectual property. For instance, I just recently had a situation. A company was selling its assets. When I did the due diligence I found out that the domain names were actually owned by an individual who used to work for the company. That individual was summarily fired years before for reasons that you would probably imagine, and was long gone. But now we have to trace that person down and we had to try to get past the bad blood to get an assignment from that person, and it wasn't pretty. That's an area where due diligence, it could've cost the company the whole sale if the domain name didn't go along with the company.
Another thing to look at is are your federal registrations up to date? Because both patents and trademarks require regular filings to maintain their status. Another thing to look at is are proper measures and secrecy in place for your trade secrets? Again, when somebody knows about your trade secret it's not a trade secret anymore and it can lose value, and it could taint the deal. Whether it's an asset sale, or a stock purchase, or venture capital, any of these sorts of things, it could be a real problem.
And the final thing is to make sure that there are no liens on the assets. There are different ways to attach liens to different types of intellectual property, so the due diligence in this area you really need to have somebody who understands how they all work in order to make sure that there are no liens.
Jeff: And I would imagine that, Beverly, you would probably agree and state with a certain degree of authority on this that you really do have to contact an attorney who likely does specialize in this somehow, someway, or an attorney if you've got your own business attorney already and they may not necessarily specialize in this area, that you need to somehow try to find out if they can refer you to one. Is that correct?
Beverly: That's correct. Because the intellectual property practice has some really unique aspects. One of my partners always says that I make up the rules. Every time he comes and asks me a question it sounds like I'm making up the rules. But his practice doesn't touch this area, so he doesn't quite understand it, but he knows enough to know when his client has an intellectual property problem that I'm the one that should be talking to the client. As you could see from the things that we've been talking about, all of these different rules and how to navigate the protections and the proper registrations, and how to navigate the due diligence, all of those things, an intellectual expert … well, maybe not an expert but an attorney whose practice is emphasized in intellectual property is the proper person to talk to.
Jeff: Would that individual also be the first person that you would recommend that we get in touch with in order to simply identify all of the intellectual assets that we might have so that we don't forget any? Or is that something that we're capable of doing on our own before we call the attorney?
Beverly: An attorney can really hold your hand and walk you through the process of due diligence. When I was talking about due diligence I don't go into the client's headquarters or plant and do the leg work myself, but I ask the right questions and that can be done in-house, that actual leg work to answer my questions.
But I as an intellectual property attorney, I know how to determine whether or not this particular asset is properly protected, whether there are any liens on it, whether you've gotten the assignments from the inventors, which is really important in patents, and all of those things. You really need an intellectual property attorney to help you.
Jeff: In terms of cost on this, and I know it's different for every situation, I understand that, but it seems to me that maybe some business owners don't want to get involved with attorneys in protecting their intellectual property, because, number one, they don't have a clear grasp of what kind of intellectual property they own. Number two, they're not aware of their intellectual property rights. And number three, when they hear the word attorney they're thinking a bunch of money. Not only do I have to pay my attorney but I'm also going to have to pay for whatever kinds of filings are involved here.
In terms of cost and time that it takes to protect ourselves once we have a pretty clear understanding of all of the intellectual assets that we own, what are we looking at here? Are we looking at potentially hundreds of thousands of dollars, or is it something that is probably a little bit more manageable and somewhere kind of in between where we think we might be, and how much we'd love to pay if we knew that we could get away with it?
Beverly: There's two sides to this coin here. The first is protecting your intellectual property assets should not be a matter of dollars and cents because it's not cost-effective to allow your intellectual property assets to go unprotected.
Jeff: Boy, isn't that for sure. Yeah.
Wherever possible I recommend federally registering your trademark. Not only does it become proof of your rights, it gives you an arsenal of remedies that you wouldn't have otherwise.
Beverly: It's way more expensive to not protect it than it is to protect it. For instance, again just from my own practice, I had a client who was basically a software architect and he went into business with three other people. So there's four people altogether. He was the brains. He was the one who created the software and the other three were the money people. And they went into it without any attorneys helping them create their LLC and their operating agreement. And when they had a falling out, my client wanted to leave and they wanted to stop him from taking the software with him.
And so they brought suit against him and we were in litigation about who owned the intellectual property as well as what was the deal, how people were going to get paid, and so on and so forth. It really affected the business because they were so focused on fighting with each other that they actually couldn't operate the business at all.
And in the end the litigation costs were way higher than they would've been had they contacted counsel at the beginning, negotiated an operating agreement, because this was a limited liability company, negotiated an operating agreement that made it clear who owned what and how much people were entitled to. And in the end the business had to shut down and everybody had to go their separate ways.
There's a good example of how if it crossed your company, whereas if you had just started at the beginning with counsel these issues can come up but at least you have a road map for how to deal with them. And I should let you know, it's really important to me that my clients protect their IPSS, so I'm very flexible on my fee arrangements with my clients. I try to really help them with affording me. Because I don't want to be a drain on their resources; I want to help build their resources. And I know that there's a lot of other attorneys out there who are just like me.
Jeff: Beverly, I can't thank you enough for your candidness and really sharing that horror story in real life because it actually did happen and it's just an example right there that had certain conditions been met had they protected their intellectual property rights in the beginning. Maybe those friendships wouldn't have dissolved, maybe the company might still be in business. And look at all of the money, and all of the promise, and all the dreams that were broken that went along with that, and it's just not worth it.
For so many of us our business is such an important part of our lives, it's almost like an appendage, it's part of us. It just doesn't make sense to take and put intellectual property rights and your protection of those rights on the back burner thinking that you're covered, thinking that nothing will happen. Because as soon as you develop that weak mindset stuff happens and it can really impact not just your ability to sell your company but your ability to continue to stay in business at all. And I want to thank you so much for all of your time today.
If someone should in our audience be interested in contacting you about their particular situation about looking into their intellectual property rights and helping them protect those rights, how can they contact you?
Beverly: They contact me by email. That's the best way, at email@example.com. I'm always happy to field questions. Of course I can't give advice until I'm retained, but I can certainly field questions. I also have a weekly blog called IP News for Business. It's accessible under the knowledge tab on the Golan & Christie website. And you can follow me on Twitter @IPBevB.
Jeff: Beverly, just a wealth of information and so good to talk to you. It's been very, very pleasant. We sure do appreciate your time. Thank you so much for joining us today on "Deal Talk."
Beverly: And thank you for having me.
Jeff: That's Beverly Berneman. There she goes. She is Intellectual Property Partner, Golan & Christie, LLP in Chicago, such a treat to have join us and really just a fount of information. I hope you got a lot out of it.
Let us know how we're doing, won't you? We'd love to hear more from you. Send us your comments, compliments and, yes, you can even send your criticisms to us at firstname.lastname@example.org. "Deal Talk" is brought to you by Morgan & Westfield, a nationwide leader in business sales and appraisals. Learn more at morganandwestfield.com. That's morganandwestfield.com, or by calling 888-693-7834. I'm Jeff Allen, until next time, here's to your success.
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