Loose Lips Sink Startups

Technology startups usually begin when an inventor conceives of a new invention that could lead to a new product or service that solves or reduces the severity of a problem, or makes life a little bit easier for mankind. The inventor will often next collaborate with or seek advice from his or her friends, family or advisors regarding the invention, potential products that could arise from the invention, or this risky idea about starting a new company to develop and commercialize a product based on the invention. Then, the inventor may form a company and engage an engineering or design firm to develop a prototype based on the invention. The inventor-turned-entrepreneur is now ready to approach one or more prospective firms or individuals that may be interested in purchasing or investing in the development of a minimally viable product (“MVP”). In some cases, with a little luck, the entrepreneur has a friend or colleague who has connections in the business in which the invention or prototype could be sold or commercialized. The entrepreneur may arm this friend or colleague with materials relating to the prototype, some talking points, or even a prototype as an aid to market the invention and company using his connections and contacts.

For the thousands of entrepreneurs that form technology start-ups every year in the United States, some or all the activities identified above may sound familiar. Additionally, savvy entrepreneurs may retain the services of a consultant or lawyer to assist the startup. For example, the entrepreneur may retain a lawyer to assist with the formation of the company, draft bylaws, operating agreements or business agreements to protect the rights of the company and the entrepreneur as they begin marketing and commercializing the MVP or improved versions thereof.

Before formation or in the early stage of the startup, most entrepreneurs will eventually seek the advice of an intellectual property (“IP”) attorney to determine whether or how to secure their IP rights in their inventions, prototypes, or their companies’ intangible assets. The IP attorney will likely ask any number of questions about the invention, prototype or commercialization activities, such as, for example, have the details of the invention been disclosed to any third party? Has there been any attempted or actual sale of the invention (or rights thereto) to a third party? Has the invention or prototype been used in public? The answers to these questions may very well determine the fate of the startup.

First, any disclosure of the invention or prototype to a third party that is not under an obligation of confidentiality is considered a “Public Disclosure” and has the effect of terminating any trade secret rights in or to the invention or prototype. Worse, the termination of such rights is both forever and irreversible. The loss of trade secret rights severely damages the startup’s flexibility to develop and commercialize the invention or prototype by foreclosing on any possibility of developing, manufacturing, licensing, or sellingthe invention, prototype, or product associated therewith as a trade secret. If the invention is already in the public domain, no reasonable prospective buyer, licensee or investor would be willing pay the startup for the invention or underlying technology if it can be easily acquired and legally used at no cost.

Second, and perhaps more importantly, a Public Disclosure of the invention or prototype likewise forever and irreversibly terminates any patent rights that the startup or the inventor may have in many foreign jurisdictions such Europe and Japan and, depending on the circumstances, China. Thus, the Public Disclosure may have the effect of barring the startup from securing patent rights in some of the largest and richest markets in the world, which may hinder and possibly preclude commercialization in those markets.

Third, a Public Disclosure may forever terminate the startup’s ability to secure patent rights in and to the invention in the United States if the Public Disclosure occurred more than one year before the inventor or startup files a patent application with the United States Patent and Trademark Office. Thus, if the Public Disclosure occurred more than a year ago, the startup may have lost nearly all of its IP rights to the invention or prototype, which may make any attempt to commercialize the invention futile. Why? Because loss of all trade secret and patent rights enables any third party to practice (e.g., make, use, sell, copy, improve, etc.) the invention. More specifically, should the startup begin to make sales of the prototype or any product embodying the invention, any third party (including those with significantly more money and/or technical resources) is free to copy, improve or make and sell competing products that would make it close to impossible for the startup to survive.

In light of the foregoing, the smart entrepreneur would do well to heed the following advice before or during the launch of the startup:

(i) keep the invention secret;

(ii) retain the advice of an IP property attorney to obtain a non-disclosure agreement

(“NDA”) under which all discussions with third parties are conducted;

(iii) do not, under any circumstances, disclose the invention or prototype to any third party

not willing to enter into an NDA;

(iv) engage IP / patent counsel to file a patent application to avoid barring patent rights in

those jurisdictions in which the entrepreneur intends to commercialize the invention;

(v) engage IP / patent counsel to draft IP license agreements, service agreements,

manufacturing agreements and other agreements to protect the startup’s patent rights, trade

secrets and other IP rights when engaging third parties to commercialize the invention, prototype,

or product line; and

(vi) prepare a brief non-confidential description of the startup, the product(s) and the

benefits to the public, without disclosing the invention or prototype details, that can be orally

presented (e.g., sometimes called an “elevator speech”) and/or disclosed in written materials

(e.g., such as a “pitch deck”) for delivery to the public or third parties and for which an NDA is not required.

In sum, remember that the old World War II idiom, “loose lips sink ships,” aptly applies to startups. Unguarded talk of the invention to family, friends, confidants, colleagues, teachers, the government,prototype developers, investors, or any third party (except your lawyer) without an executed NDA or someother legally recognizable obligation of confidentiality will set you adrift and is likely to sink your startup.

DISCLAIMER: THIS ARTICLE IS INTENDED TO PROVIDE GENERAL INFORMATION ON THE TOPICS COVERED. THE

CONTENTS ARE NOT INTENDED AND SHOULD NOT BE CONSTRUED AS LEGAL ADVICE OR LEGAL OPINIONS. READERS SHOULD

CONSULT WITH LEGAL COUNSEL TO OBTAIN LEGAL ADVICE REGARDING PARTICULAR SITUATIONS.

 

By Richard A. Brisbin, Esq. Intellectual Property & Patent Counsel, Haynsworth Sinkler Boyd, P.A. Contact him at rbrisbin@hsblawfirm.com