Intellectual Property Due Diligence For Startups: Mitigating Risks And Maximizing Value

Introduction

In today’s highly competitive and globalized business landscape, intellectual property rights (IPR) have emerged as a crucial factor in the success of startups. Intellectual property, encompassing trademarks, patents, copyrights, industrial designs, trade secrets, and geographical indications holds immense value for startups as it provides exclusive rights and protections over their innovations, creations, and distinctive brand elements.

Startups rely heavily on their IP assets to differentiate themselves from competitors, attract investors, build brand reputation, and secure market share. Understanding the importance of IP rights and effectively managing them is essential for startups to thrive in their respective industries.

IPR not only grants startups the legal means to protect their innovations and original works but also serves as a significant intangible asset that enhances the overall value of the business. Properly protecting and leveraging IP assets can contribute to the growth, sustainability, and profitability of startups.

Types of IP Rights for Startups

Trademarks

Trademarks refer to any words, symbols, logos, slogans, product packaging, or designs that distinguish goods or services from a particular source. The Trademarks Act 1999[1] governs the protection of trademarks in India. It allows for multiclass applications, provides a ten-year registration term, and recognizes well-known marks.[2]

NICE Classification

In India, trademarks are categorized according to the NICE Classification of Goods and Services. The NICE Classification includes 45 classes, with classes 1-34 for goods and classes 35-45 for services.[3] Choosing the appropriate class is crucial as it ensures streamlined international application processes.

Patents

A patent grants a monopoly to an inventor, allowing them exclusive rights to commercialize and exploit their invention in the market for a certain period. The Patents Act, 1970 governs the protection of Patent rights in India.[4]

Use of Patented Technology or Inventions

Before using any patented technology or invention, startups must ensure they do not infringe on the patent rights of the patentee. Obtaining a license from the patentee is necessary if a startup intends to utilize a patented invention or technology.

Copyright

Copyright refers to the legal right of an author, artist, or originator to protect their original work, expressed in a tangible form, and prevent unauthorized copying or reproduction.

The Copyright Act of 1957 defines “work” as artistic works like paintings, sculptures, drawings, photographs, architectural works, dramatic works, literary works (including computer programs and databases), musical works, sound recordings, and cinematographic films.[5]

Registration of Copyright

In India, copyright registration is not mandatory as it is considered a recordal of a fact. Registration does not create new rights and is not a prerequisite for taking action against infringement. The registration certificate serves as proof of ownership in courts and with police authorities.[6]

Industrial Designs

Under the Designs Act of 2000, “design” refers to the features of shape, configuration, patterns, or ornaments applied to an article through an industrial process or means.[7] It excludes modes or principles of construction, trademarks defined under the Trade Marks Act, or artistic works defined under the Copyright Act. The registration of an industrial design is valid for 15 years.

Trade Secrets

Trade secrets are valuable and confidential information that provides a competitive advantage to a business or enterprise. Examples include the secret recipe of Coca-Cola. To be protected, trade secrets must not be publicly known, voluntarily disclosed, reverse-engineered, or inadequately protected. While Indian law lacks specific statutes for trade secret protection, judicial precedents have recognized its safeguarding through the Copyright Act, 1957, Indian Contract Act, 1872, and actions for breach of confidence.

Geographical Indication (GI)

Geographical Indication (GI) refers to a sign used on products that originate from a specific geographical location and possess unique qualities or a reputation associated with that origin. To qualify as a GI, the sign must indicate the product’s origin. The Geographical Indications of Goods (Registration and Protection) Act, 1999, provides provisions for the protection and registration of GIs, ensuring their authenticity and preventing unauthorized use.[8]

Strategies for Maximising Value and Mitigating Risks in Relation to Intellectual Property for Startups

Open-Source Issues

Startups often overlook the implications of using open-source components in their computer systems and software. While open-source options may appear cost-effective, they often come with conditions that require the resulting code to be made freely available. Failure to comply with these conditions can lead to IP risks and potential non-compliance with third-party rights, which may deter potential investors.[9]

Conduct IP Due Diligence

Startups need to conduct thorough due diligence to ensure they are not infringing on the IP rights of others. This includes researching existing patents, trademarks, copyrights, and trade secrets to avoid potential legal disputes. Understanding the IP landscape and conducting proper clearance searches can help prevent costly litigation and business disruptions.[10]

Trade Secrets Protection

Many startups miss out on the benefits of trade secrets protection because they fail to take reasonable steps to prevent the public disclosure of confidential information. Companies need to carefully control the sharing of key information both internally and externally to maintain the confidentiality necessary for trade secrets protection.

Managing and Monitoring IP Assets

Startups must develop strategies for managing, defending, and exploiting their IP assets. It is crucial to have a plan in place to safeguard against abuse or infringement and to explore opportunities for generating new income streams and expanding market share. This may include sending cease and desist letters, pursuing litigation if necessary, and seeking remedies such as injunctions and damages.

Register IP Rights

Certain IP rights like patents and designs require registration for legal protection. Startups should consider registering their IP rights to strengthen their legal position and provide evidence of ownership. Although registration may not be mandatory for all IP rights (e.g., trademarks and copyrights), it adds value and credibility to the startup’s IP assets.[11]

Country-Specific Clearance Searches

Companies eyeing foreign markets should conduct country-specific clearance searches to determine their freedom to operate in those markets. These searches provide insights into competitors’ strategies, identify potential public domain works for product development, and de-risk expansion into new geographies. Accessing publicly available IP databases, such as WIPO’s PATENTSCOPE and the Global Brand Database,[12] can provide valuable information for positioning the company for acquisition.

Establish Clear IP Policies and Strategies

Startups should develop clear and effective policies and strategies for managing their IP rights. This includes creating an Intellectual Property Policy that outlines the ownership, protection, and enforcement of IP assets.

Assignments, licensing agreements, and user agreements should be drafted carefully to address post-termination IP rights and potential disputes. Further, Non-disclosure agreements (NDAs) should be in place when sharing confidential information with employees, contractors, or business partners.[13] Founders should have proper agreements in place to ensure that any IP created on behalf of the startup belongs to the company.

Educate and Train Employees

Startups should educate and train their employees on the importance of IP rights and the proper handling of confidential information. Creating awareness about IP protection and implementing internal procedures can help prevent accidental disclosures, misuse of IP assets, and potential legal risks.

By implementing these strategies, startups can maximize the value of their IP assets, protect against infringement, and position themselves for long-term success in their respective industries.

Conclusion

In conclusion, intellectual property rights (IPR) play a vital role in the success and sustainability of startups. Protecting and leveraging IP assets is crucial for startups to establish a competitive advantage, attract investors, and create value in the market. By prioritizing IP protection, startups can safeguard their innovations, trademarks, copyrights, designs, and trade secrets.

Registering IP rights where required provides legal recognition and strengthens the startup’s position in case of infringement or legal disputes. Conducting thorough due diligence ensures compliance with existing IP rights and minimizes the risk of costly litigation. Establishing clear IP policies and implementing proper agreements protect the startup’s IP assets and prevent disputes among founders, employees, and third parties. In the rapidly evolving business landscape, startups need to be proactive in understanding, protecting, and exploiting their IP assets. By integrating IP strategies into their business plans, startups can maximize their valuation, enhance their market position, and foster long-term growth and success.

FAQs:

[1] The Trademark Act, 1999 [Act 47 of 1999]

[2] The Trademark Act, 1999 [Act 47 of 1999], Section 25

[3] https://www.wipo.int/classifications/nice/nclpub/

[4] The Patents Act, 1970 [Act No. 39 of 1970, as amended up to Act No. 15 of 2005]

[5] The Copyright Act, 1957 [Act 14 of 1957], Section 13

[6] The Copyright Act, 1957 [Act 14 of 1957], Section 48

[7] The Designs Act, 2000 [Act no. 16 of 2000]

[8] The Geographical Indications of Goods (Registration and Protection) Act, 1999 [Act No. 48 of 1999]

[9] Jag Singh, How startups and SMEs should think about IP: an investor’s perspective https://www.wipo.int/wipo_magazine/en/2021/02/article_0006.html

[10] https://www.wipo.int/edocs/pubdocs/en/wipo_pub_961.pdf

[11] IPR Facilitation for Startups https://ipindia.gov.in/writereaddata/images/pdf/startups_IPRFacilitation_22April2016.pdf

[12] https://branddb.wipo.int/en/quicksearch

[13] https://www.sec.gov/Archives/edgar/data/1103021/000119312510205787/dex102.htm

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