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Chapter 06 – Protecting the Idea and Other Legal Issues for the Entrepreneur

Chapter 06 PROTECTING THE IDEA AND OTHER LEGAL ISSUES FOR THE ENTREPRENEUR LEARNING OBJECTIVES

01: To identify and distinguish intellectual property assets of a new venture including software and websites. 02: To understand the nature of patents, the rights they provide, and the filing process. 03: To understand the purpose of a trademark and the procedure for filing. 04: To learn the purpose of a copyright and how to file for one. 05: To identify procedures that can protect a venture’s trade secrets. 06: To understand the value of licensing to either expand a business or start a new venture. 07: To recognize the implications of new legislation that affects board of directors and internal auditing processes for public companies. 08: To illustrate important issues related to contracts, insurance, and product safety and liability.

6-1 Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 06 – Protecting the Idea and Other Legal Issues for the Entrepreneur

CHAPTER OUTLINE AND TEACHING NOTES OPENING PROFILE – Martin Floreani

I.

Learning Objective 01 To identify and distinguish intellectual property assets of a new venture including software and websites.

WHAT IS INTELLECTUAL PROPERTY? A. Intellectual property, which includes patents, trademarks, copyrights, and trade secrets, represents important assets to the entrepreneur.

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Intellectual property Any patents, trademarks, copyrights, or trade secrets held by the entrepreneur

B. Because entrepreneurs often do not understand intellectual property, they ignore steps that should be taken to protect these assets.

II.

NEED FOR A LAWYER A. All business is regulated by law. 1. The entrepreneur needs to be aware of regulations that affect the new venture.

Discussion point: The American Bar Association (http://www.abanet.org) offers links that may be helpful to a small business.

2. At different stages of company growth, the entrepreneur will need legal advice. 3. The legal expertise required will vary based on such factors as whether the new venture is a franchise, an independent startup, or a buyout etc. B. The entrepreneur should carefully evaluate his or her needs before hiring a lawyer. 6-2 Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 06 – Protecting the Idea and Other Legal Issues for the Entrepreneur

III.

HOW TO SELECT A LAWYER A. Why Hire a Lawyer 1. The entrepreneur does not usually have the expertise to handle possible risks associated with difficult laws and regulations. 2. A competent attorney is in a better position to understand all outcomes related to any legal action. B. Fees 1. The lawyer may work on a retainer basis (stated amount per month) which provides office and consulting time. 2. This does not include court time or other legal fees. 3. The lawyer may be hired for a one-time fee, i.e. filing for a patent. C. Choosing a lawyer is like hiring an employee— the lawyer you work with should be someone to whom you can relate personally. D. When resources are limited, the entrepreneur may offer the lawyer stock in exchange for his or her services.

IV.

In the Press: Some general rules about dealing with lawyers: 1. If you are being sued, it’s too late to start looking for an attorney. 2. Larger law firms tend to charge more, BUT they are likely to offer services in nearly all areas you might need as you grow your business. Some questions to ask your attorney or yourself before selecting an attorney: 1. Are you experienced in small businesses? 2. Are you well-connected to be able to refer me to another expert if needed? 3. Do you have other clients in my industry? 4. Are you a good teacher? 5. Will you be flexible in your billing? 6. Does this person communicate well? 7. Are the offices conveniently located? 8. Do I like this person? (Ennico, Cliff “How to Hire an Attorney” Entrepreneur January 20, 2006, http://www.entrepreneur.com /howto/attorney/index.html)

A patent attorney may be hired as a specialist to help obtain a patent.

AS SEEN IN BUSINESS NEWS: Can a Halloween Costume Actually Infringe on Someone’s Intellectual Property?

LEGAL ISSUES IN SETTING UP THE ORGANIZATION 6-3 Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 06 – Protecting the Idea and Other Legal Issues for the Entrepreneur

A. Since there are many options an entrepreneur can choose in setting up an organization, it will be necessary to understand all the advantages and disadvantages of each option.

The form of organization as well as franchise agreements are discussed in Chapters 09 and 14.

B. Legal advice is necessary to ensure that the most appropriate decisions have been made.

V.

PATENTS A. A patent is a contract between the government and an inventor. 1. The government grants the inventor exclusivity for a specified amount of time.

Discussion point: The United States government offers information through their Patent and Trademark Office website http://www.uspto.gov.

Learning Objective 02 To understand the nature of patents, the rights they provide, and the filing process. K EY TER M

Patent Grants holder protection from others making, using, or selling a similar idea

2. At the end, the government publishes the invention, and it becomes part of the public domain. 3. The patent gives the owners a negative right, preventing anyone from making, using, or selling the invention. B. Types of Patents 1. Utility Patents a. A utility patent has a term of 20 years, beginning on the date of filing with the Patent and Trademark Office (PTO). b. Patents on any invention requiring FDA approval are extended by the amount of 6-4

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Chapter 06 – Protecting the Idea and Other Legal Issues for the Entrepreneur

time it takes the FDA to review the invention. c. Initial filing fees for a utility patent for a small entity can vary $70 electronically and $140 by mail. Additional fees exist depending on the number of claims made in the patent application. d. The patent grants the owner protection from anyone making, using, and/or selling the invention. 2. Design Patents

Entrepreneur in Action: Chip Wilson started yoga in 1997 and decided that Lycra wasn’t made for “average people.” From this observation sprung Lululemon, a clothing design company specializing in yoga clothing. Seams are less chafing; hoodies have “pony-tail holes.” There’s even an iPod pouch on some versions. Many of their ideas are trade-mark protected. (Anderson, Diane “Stretching for Success” Business 2.0 October 2006 pg. 58 http://money.cnn.com/magazines /business2/business2_archive/ 2006/05/01/8375911/index.htm)

a. Covering new, original, ornamental, and unobvious designs for articles of manufacture, a design patent reflects an object’s appearance. b. These are for a 14-year term and provide a negative right, excluding others from making, using, or selling an article having the same ornamental appearance. c. Initial filing fees are lower than for utility patents - $90 for a small entity. d. Although design patents have traditionally been viewed as useless, there has been renewed interest recently.

Examples are shoe companies such as Reebok and Nike who are interested in obtaining design patents as a means of protecting their ornamental designs.

3. Plant patents are issued under the same 6-5 Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 06 – Protecting the Idea and Other Legal Issues for the Entrepreneur

provisions as utility patents and are for new varieties of plants. C. Patents are issued by the Patent and Trademark Office (PTO). 1. This office also administers other programs and many online services for the entrepreneur, such as software for filing patents and forms for trademarks and copyrights. 2. In 2011, the America Invents Act, designed to streamline the USPTO system, passed. 3. The new legislation changed the system to a first-to-file system that rewards firms that can file quickly. D. International Patents

In the Press: The USPTO offers extensive advice on how to apply for a patent. 1.Make sure your product isn’t infringing on someone else’s patent. 2.Be prepared to establish the novelty of your product. 3.Hire a patent attorney or agent. 4.Consider patenting your method of doing business. https://www.uspto.gov/patent

1. The concerns over imitations and knock-offs resulted in International Patenting become a significant IP strategy for many startups. 2. The USPTO has established the Office of International Patent Cooperation in order to establish a more harmonized patent system. 3. Joint efforts between the USPTO and the European Patent Office has established a common classification process. 4. The Global Dossier allows applicants to have 6-6 Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 06 – Protecting the Idea and Other Legal Issues for the Entrepreneur

one stop access for applications in five of the largest patent offices in the world. 4. The major efforts by the USPO have been with the European Patent Office, the Japan Patent Office, and the Korean Patent Office. K EY TER M

E. The Provisional Application 1. The entrepreneur should first file a provisional patent application to establish a date of conception of the invention. 2. The provisional application is consistent with European procedures and can be critical when there is a foreign company involved in the patent application. 4. In addition to the written material, drawings may be included, if deemed necessary to understand the invention. 5. The actual filing of the patent in its final form must occur no later than 12 months after the provisional disclosure document if filed. F. The Patent Application 1. The patent application must contain a complete history and description of the invention as well as claims for its usefulness. 2. The application is divided into sections:

Provisional Patent Application The initial application to the U.S. Patent and Trademark Office providing evidence of first to market

In the Press: How different is different enough when it comes to obtaining trademarks, patents, and copyrights?  For a trademark, the key is “likelihood of confusion.” If someone sees your mark, are they likely to think it’s some other firm’s mark?  With copyrights, there are two considerations. First, have you borrowed so much that the original is not worth reading for more information? Second, is your work based on someone else’s work commonly known as “derivative” (e.g., a sequel)? The copyright holder has the rights to his/her original and all derivative works.  For a patent, are the claims in your work essentially equal to someone else’s patent? (Monosoff, Tamara “Top Legal FAQs for Inventors” Entrepreneur July 10, 2006

6-7 Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 06 – Protecting the Idea and Other Legal Issues for the Entrepreneur

a. The Introduction Section contains the background and advantages of the invention and the nature of problems it overcomes.

http://www.entrepreneur.com/ startingabusiness/inventing/ inventionscolumnisttamaramonosoff /article159562.html)

b. Description of Invention Section i.

This section contains a brief description of the drawings, which must comply with PTO requirements.

ii.

A description of the invention follows, including engineering specifications, materials, and components.

c. Claims Section. i.

Claims are the criteria by which any infringements will be determined.

ii.

Essential parts of the invention should be described in broad terms.

iii. The claims must not be so general that they hide the invention’s uniqueness and advantages. 3. The application should contain a declaration signed by the inventor. 4. When the application is sent, the status of the invention becomes “patent pending,”

Entrepreneur in Action: AutoCart is making shopping more automated. They have set up a drive-through superstore. Customers place their orders online, by phone or onsite using a touch screen. Merchandise travels by high speed conveyor to a consolidating zone. The products are delivered to the car by conveyor belt where the consumer pays and leaves without ever setting foot in the store. (Flight, Georgia “A Speedier Superstore” Business 2.0 December 2005, pg. 38 http://money.cnn.com/magazines /business2/business2_archive/ 2005/12/01/8364582/index.htm) A current (2018) search for AutoCart finds nothing. With most larger stores offering curbside pickup now, this concept is no longer needed.

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Chapter 06 – Protecting the Idea and Other Legal Issues for the Entrepreneur

providing complete confidential protection until the application is approved. 5. A carefully written patent should provide protection and prevent competitors from working around it, but is also an invitation to sue or be sued if there is any infringement. 6. The fees for filing an application will vary, depending on the patent search and on claims made in the application. 7.

Applicants may also file online using the EFS web service provided by the PTO.

Figure 6.1 “Options to Avoid Infringement” Illustrates the steps needed to follow when considering marketing a product that may infringe on an existing patent.

G. Patent Infringement 1. The entrepreneur must be sensitive about whether they are infringing on someone else’s patents. 2. Many inventions are the result of improvements in existing products.

Table 6.1 “Checklist for Minimizing Patent Risks” A simple checklist to follow to minimize any patent risks.

a. Copying and improving a product may be legal and a good business strategy. b. If copying and improving is impossible, it may be possible to license the product from the patent holder. 3. To ascertain the existence of a patent, the entrepreneur can use the Internet. a. If there is possible infringement on an 6-9

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Chapter 06 – Protecting the Idea and Other Legal Issues for the Entrepreneur

existing patent, consider licensing. b. If in doubt, hire a patent attorney.

VI.

BUSINESS METHOD PATENTS A. With the growth of Internet use and software development has emerged the use of business method patents. 1. Amazon.com owns a business method patent for the single click buying feature to order products on its website. 2. Priceline.com claims it holds a patent to a service where a buyer can submit a price bid for a particular service. B. Many firms have used these patents to assault competitors and provide a stream of royalties. C. The PTO has changed the review process for business method patents and reviews are now conducted by the Patent Trial and Appeal Board. D. The growth of the use of tablets and smartphones has necessitated these changes.

VII. STARTUP WITHOUT A PATENT

See Chapters 07 and 08 to understand the competitive environment.

A. Not all startups will have a product or concept that is patentable B.

Using a unique marketing plan and striking

Learning Objective 03 To understand the purpose of a trademark and the procedure for filing. Discussion point: Present a dozen or so trademarks from products. Select

6-10 Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 06 – Protecting the Idea and Other Legal Issues for the Entrepreneur

early may provide a competitive advantage.

VIII. TRADEMARKS A. A trademark may be a word, symbol, design, or some combination which identifies the source or sponsorship of certain goods. 1. A trademark can last indefinitely, as long as it continues to perform its indicated function. a. Trademarks now are given an initial 10year registration with 10-year renewable terms. b. In the fifth to sixth year, the registrant must file an affidavit with the PTO indicating that the patent is in commercial use.

“obvious” ones (Nike Swoosh, McDonald’s golden arches) to less obvious (airline logos, perhaps). See which ones they can identify. The same can be done for protected advertising tag lines (“Just do it”).

Discussion point: Marketing News lists the best known brand names, advertising icons, symbols, etc. and estimates the value of these brands. These lists are published irregularly, data is never more than a year or so old. Other marketing or advertising publications often do the same. Forbes has a list of brands and their values for 2018.

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Trademark A distinguishing word, name, or symbol used to identify a product

Trademark examples are the red tab attached to the left rear pocket of Levi Strauss jeans, the Dutch Boy is recognized in paints, the McDonald’s arch is internationally recognized in the fast food industry, the roar of a lion identifies the motion pictures of MetroGoldwyn-Mayer, and the apple with a bit missing is well recognized with Apple Computer.

c. If no affidavit is filed, the registration is canceled. Between the ninth and tenth year after registration, and every 10 years thereafter, the owner must file an application for renewal of the trademark. Otherwise, the registration is canceled. d. Trademark law allows filing a trademark solely on the intent to use the trademark in interstate or foreign commerce. e. There are benefits to registering a mark that has already been in use. 6-11 Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 06 – Protecting the Idea and Other Legal Issues for the Entrepreneur

B. Registering the Trademark 1. The PTO is responsible for federal registration of trademarks.

Table 6.2 “Benefits of a Registered Trademark” Table 6.2 summarizes the benefits of registering a trademark.

2. To file, the entrepreneur must complete a downloadable form, submitted by mail or filed electronically using the TEAS available on the PTO website. 3. Filing of the trademark registration involves four requirements: a. Completion of the written form. b. A drawing of the mark. c. Five specimens showing actual use of the mark. d. The fee. 4. An examining attorney at the PTO determines whether the mark is suitable for registration.

Entrepreneur in Action: Can you brand a commodity item? Niman Ranch has found a way to brand beef. They follow several other notables that branded “unbrandable” items. Ever heard of Evian water, Tiffany glass, Intel semi-conductors, or Chiquita bananas? (Kaihla, Paul “Marketing designer meat” Business 2.0 April 2006, pg. 72 http://money.cnn.com/magazines /business2/business2_archive/ 2006/04/01/8372802/index.htm)

5. Once accepted, the trademark is published in the Trademark Official Gazette to allow any party 30 days to oppose. 6. If the trademark is refused, the entrepreneur still has the right to appeal to the PTO. 7. If no opposition is filed, the registration is issued. 6-12 Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 06 – Protecting the Idea and Other Legal Issues for the Entrepreneur

8. The entire process usually takes about 13 months from the initial filing.

IX . COPYRIGHTS A. A copyright protects original works of authorship.

Discussion point: The United States Copyright Office can be found at http://www.copyright.gov

1. The protection does not protect the idea itself.

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Copyright Right given to prevent others from printing, copying, or publishing any original works of authorship

2. It allows someone else to use the idea in a different manner. B. Online Issues 1. The copyright law has become especially relevant because of the tremendous growth of the use of the Internet especially to download music, pictures, and videos. 2. The music streaming business has been particularly relevant in any discussion of copyright protection. However, social media has become a copyright issue. a. Every social media can be considered a type of publication.

Learning Objective 04 To learn the purpose of a copyright and how to file for one.

In the Press: Cilija, a chain of pizza parlors in Lithuania and Latvia has applied for a copyright on the scent of fresh-baked pizza. No word yet as to whether they’ll get it, but for publicity power, the ploy was undeniably good. (Anonymous “Lithuanian Restaurant Seeks to Copyright Special Scent.” Marketing News June 15, 2006, pg. 13 http://www.marketingpower.com/ resourceLibrary/MarketingNews/Pages/ 2006/40/11/21147265.aspx)

AS SEEN IN BUSINESS NEWS: Music Streaming and Copyright Protection: Where Are We Headed?

b. With businesses using social media, needed protection may be more relevant. c. It may be difficult to copyright a Tweet but Facebook postings by businesses may 6-13 Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 06 – Protecting the Idea and Other Legal Issues for the Entrepreneur

be considered original works. 3. Copyright protection related to the Internet will continue to be a concern until precedents and regulations are made clear. C. Copyrights are registered with the Library of Congress and usually requires no attorney. 1. All that is needed is the application, two copies of the work, and the $35 fee if filed online or $45 if filed by mail. 2. The term of the copyright is the life of the author plus 70 years. D. In some instances, several forms of protection may be available. For example: the name of the board game may be protected by trademark, the game itself protected by utility patent, the board protected by a copyright, and the playing pieces covered by a design patent.

X.

Learning Objective 05 To identify procedures that can protect a venture’s trade secrets.

TRADE SECRETS AND NONCOMPETITION AGREEMENTS A. In certain instances, an entrepreneur may prefer to maintain an idea or process as confidential and to sell or license it as a trade secret.

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Trade secret Protection against others revealing or disclosing information that could be damaging to business

1. Noncompete agreements are documents prepared by an employer and signed by an 6-14

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Chapter 06 – Protecting the Idea and Other Legal Issues for the Entrepreneur

employee. 2. The agreement is signed in order for the company to protect valuable assets ranging from product information to clients, marketing ideas and unique strategies.

Table 6.3 “A Simple Trade Secret Nondisclosure Agreement”

B. A trade secret is not covered by federal law but is recognized under common laws in each state. 1. Employees may be asked to sign a confidential information agreement. 2. The holder of the trade secret has the right to sue any signee who breaches the agreement. ETHICS Noncompete Agreements: Do Employees Have An Ethical Responsibility To Restrain From Revealing Trade Secrets To A New Employer?

C. How much information to give to employees is determined by the entrepreneur’s judgment. 1. Historically, entrepreneurs tended to restrict access to confidential information. 2. Today there is a tendency to share more information with employees, to make them more effective and creative. D. Non-protected ideas could become a serious problem in the future unless the entrepreneur takes proper precautions. E. To maintain secrecy: 1. Train employees to refer sensitive questions to one person. 6-15

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Chapter 06 – Protecting the Idea and Other Legal Issues for the Entrepreneur

2. Provide escorts for all office visitors. 3. Avoid discussing business in public places. 4. Keep important travel plans secret. 5. Control information that might be presented by employees at conferences or in journals. 6. Use simple security such as locked file cabinets, passwords, and shredders. 7. Have employees and consultants sign nondisclosure agreements. 8. Debrief departing employees on any confidential information. 9. Avoid faxing any sensitive information. 10. Mark documents “confidential” when needed. F. Protection against the leaking of trade secrets is difficult to enforce, and legal action can be taken only after the secret has been revealed. G. A few good points are worth considering when preparing a noncompetition agreement: 1. Determine if the employee can harm the company if he or she left. 2. Hire a competent labor law attorney to make sure the agreement is fair and can be enforced. 6-16 Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 06 – Protecting the Idea and Other Legal Issues for the Entrepreneur

3. Provide incentives for the employee at hiring for signing a noncompete agreement. 4. Specify what is included in the noncompete information. 5. Consider other options besides a noncompete, such as nonpiracy or nondisclosure documents.

XI.

Learning Objective 06 To understand the value of licensing to either expand a business or start a new venture.

LICENSING A. Licensing is an arrangement between two parties, where one party has proprietary rights over some information process or technology protected by a patent, trademark, or copyright. 1. This requires the licensee to pay a royalty to the holder of the proprietary rights in (licensor) return for permission to copy the patent, trademark, or copyright. 2. Licensing has significant value as a marketing strategy to holders of patents. B. Procedure 1. A patent license agreement specifies how the licensee would have access to the patent. 2. The agreement must be carefully worded and should involve a lawyer.

In the Press: Movies have a habit for shutting down fan sites – which usually have a lot of protected contents – pictures, graphics, plots, dialog, etc. They have a good reason for doing so: they can, instead, license this same information and make quite a bit of money. When Lord of the Rings was about to be released, Gordon Paddison, a senior vice president of New Line Cinema, decided to co-operate with these sites. Now many films are selling based on their prerelease Internet hype – or viral marketing as it is often called. (Weingarten, Marc “Get Your Buzz to Breed Like Hobbits” Business 2.0 January 2002, pg. 96)

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Licensing Contractual agreement giving rights to others to use intellectual property in return for a royalty or fee

C. Licensing a trademark generally involves a 6-17 Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 06 – Protecting the Idea and Other Legal Issues for the Entrepreneur

franchising agreement. 1. The entrepreneur operates a business using the trademark and agrees to pay a fixed sum for use of the trademark. 2. The franchisee also pays a royalty based on sales volume, buys supplies from the franchiser, or some combination of these. D. Copyrights are also popular licensed property. 1. They involve the right to use or copy books, software, music, photos, and plays. 2. Celebrities will often license the right to use his or her name or image in a product.

Entrepreneur in Action: In 1998, Mike Becker resurrected the bobblehead and Wacky Wobblers was born. His success is based on being able to license a character such as Big Boy (from the Big Boy Restaurant chain), Bozo the Clown, Lucky Charms, and Pink Panther. His biggest coupe? Getting the licensing rights to Austin Powers. (Anonymous “Got ID” Entrepreneur November 2002 www.entrepreneur.com/article/56270)

3. Licensing is also popular around special sports events such as the Olympics. 4. Licensing represents opportunities for many firms to expand into new markets, expand product line, or simply reach more customers within its existing target markets.

Microsoft and IBM continue to generate significant revenues from its licensing strategies.

5. Disney is by far the world leader in licensing. E. Benefits 1. Licensing can increase revenues, without the risk and costly startup investment. 2. Licensing can also be a way to start a new venture when the idea may infringe on 6-18 Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 06 – Protecting the Idea and Other Legal Issues for the Entrepreneur

someone else’s patent. Learning Objective 08 To illustrate important issues related to contracts, insurance, and product safety and liability.

XII. PRODUCT SAFETY AND LIABILITY A.

The Consumer Product Safety Act, passed in 1972, amended in 1990 and again in 2008, created a five-member commission that has the power to prescribe safety standards for products.

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Product safety and Liability Responsibility of a company to meet any legal specifications regarding a new product covered by the Consumer Product Safety Act

1. Large fines and recalls of any products that are deemed unsafe are the typical outcome of any action enforced by the commission. 2. McDonald’s had to recall 33 million StepIT wristbands due to skin irritation or burns to children and IKEA had to recall 27 million children’s dressers that easily tipped over causing the death of two children. 3. Entrepreneurs must be aware of the threats of these recalls, especially with any high-risk products. Food and toys especially should be evaluated prior to any development.

XIII. INSURANCE A. The entrepreneur should purchase insurance in the event that problems do occur. B. Most firms should consider coverage in specific areas as a means of managing risk in the business.

Discussion point: Consider bringing in an insurance agent who insures small business to talk more about this topic.

Table 6.4 “Types of Insurance and Possible Coverage” Most firms should consider coverage for situations described in Table 6.4.

6-19 Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 06 – Protecting the Idea and Other Legal Issues for the Entrepreneur

1. Some insurance, such as disability and vehicle coverage, is required by law and cannot be avoided. 2. There have been many changes to the Affordable Care Act of 2010 and should be reviewed carefully before deciding on an insurance plan or program. 3. Advice and information on insurance is available at universities or the Small Business Administration. Learning Objective 07 To recognize the implications of new legislation that affects board of directors and internal auditing processes for public companies.

XIV. SARBANES-OXLEY ACT A. After many reports of corporate misconduct, Congress passed the Sarbanes-Oxley Act in 2002 and amended it in 2010. 1. Although it provides greater control over financial activities of public companies, it has created some difficulties for small businesses and startups. 2. Recently, Congress provided some relief for small businesses by making them exempt from section 404 requiring them to attest to the soundness of the firm’s internal controls and financial statements. 3. The law contains many provisions not covered here, but an overview of the law’s

In the Press: Deloitte offers these 10 threats to Sarbanes-Oxley compliance: 1 Lack of a firm-wide, top management driven internal control system. 2 Lack of a formal program. 3 Inadequate controls. 4 Ineffective post-merger integration. 5 Lack of effective controls over IT.

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Chapter 06 – Protecting the Idea and Other Legal Issues for the Entrepreneur

requirements is provided. a. CEOs are required to vouch for financial statements through a series of internal control mechanisms and reports. b. Directors must meet background requirements and responsibilities regarding internal auditing and control. c. Any attempt to influence the auditor or impede the internal auditing process would be considered a criminal act. 3. There is some concern that this law will discourage qualified individuals from being members of important boards.

6 7

Ineffective financial reporting. Lack of forma control over financial closing. 8 Lack of current, consistent, complete accounting policies. 9 Inability to evaluate and test controls over outsourced processes. 10 Inadequate board and audit committee understanding of risk and control. (From a “Sarbanes-Oxley Section 404” booklet provided by Deloitte Touche Tohmatsu (2004) http://www.deloitte.com/us/tenthreats#)

4. Foreign companies that trade on U.S. stock exchanges have been forced to delist because the provisions of the law conflicted with the laws of that foreign country.

5. Private companies were not included in this act, but are subject to control if they consult to public companies.

6. The other option is for the entrepreneur to set up a board of advisors instead of an extended board of directors. Learning Objective 08 To illustrate important issues related to

XV. CONTRACTS 6-21

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Chapter 06 – Protecting the Idea and Other Legal Issues for the Entrepreneur

contracts, insurance, and product safety and liability.

A. A contract is a legally enforceable agreement between two parties as long as certain conditions are met.

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B. Often, business deals are informal, concluded with a handshake.

Contract A legally binding agreement between two parties

1. When things are going smoothly, this procedure is sufficient. 2. If there are disagreements, the entrepreneur may find that there is no deal and that they may be liable for something never intended.

Table 6.5 “Contract Conditions and Results of a Breach of Contract” Table 6.5 identifies conditions and outcomes should one party not live up to the terms of the contract.

3. Never rely on a handshake if the deal cannot be completed within one year. 4. The courts insist that a written contract exist for all transactions over $500. C. The safest way to conduct business deals is with a written contract. 1. Any deal involving real estate must be in writing to be valid. 2. Leases, rentals, and purchases all need written agreements. D. It is helpful for the entrepreneur to understand that before signing a contract he or she should do the following: 1. Understand the terms and conditions in the contract. 6-22

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Chapter 06 – Protecting the Idea and Other Legal Issues for the Entrepreneur

2. Cross out anything that you do not agree to. 3. Do not sign if there are blank spaces (these can be crossed out). 4. Make a copy for your files after signing.

XVI. IN REVIEW: SUMMARY. See “Learning Objectives Revisited” below.

6-23 Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 06 – Protecting the Idea and Other Legal Issues for the Entrepreneur

LEARNING OBJECTIVES REVISITED Learning Objective 01: To identify and distinguish intellectual property assets of a new venture including software and websites. ●

Intellectual property includes patents, software, websites, trademarks, copyrights, and trade secrets.



These represent important assets. Learning Objective 02: To understand the nature of a patent, the rights they provide, and the filing process.



A patent is a contract between the government and an inventor.



The government grants the inventor exclusivity for a specified amount of time.



The patent gives the owners a negative right, preventing anyone from making, using, or selling the invention.



There are three types of patents: utility patents, design patents, and plant patents.



The patent application must contain a complete history and description of the invention as well as claims for its usefulness.



The application includes: the introduction section, description of invention section, and claims section.



When the application is sent, the status of the invention becomes “patent pending,” providing protection until the application is approved.



The entrepreneur must be sensitive about whether he or she is infringing on someone else’s patent.



With the growth of Internet use and software development has emerged the use of business method patents. Learning Objective 03: To understand the purpose of a trademark and the procedure for filing.



A trademark may be a word, symbol, design, or some combination which identifies the source of certain goods. 6-24 Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 06 – Protecting the Idea and Other Legal Issues for the Entrepreneur



A trademark can last indefinitely, as long as it continues to perform its indicated function.



To file, the entrepreneur must complete the application form, including the four basic requirements.



An examining attorney at the PTO determines whether the mark is suitable for registration.



Once accepted, the trademark is published in the Trademark Official Gazette to allow any party 30 days to oppose.



If no opposition is filed, the registration is issued. Learning Objective 04: To learn the purpose of a copyright and how to file for one.



A copyright protects original works of authorship.



Although software was added to copyright law in 1980, there are continuing issues regarding access to materials on the Internet.



Copyrights are registered with the Library of Congress.



The term of the copyright is the life of the author plus 70 years. Learning Objective 05: To identify procedures that can protect a venture’s trade secrets.



Train employees to refer sensitive questions to one person.



Provide escorts for all office visitors.



Avoid discussing business in public places.



Keep important travel plans secret.



Control information presented by employees at conferences or in journals.



Use simple security such as locked file cabinets and shredders.



Have employees and consultants sign non-disclosure agreements.



Debrief departing employees.



Avoid faxing and emailing any sensitive information.



Mark documents “confidential” that need to be. Learning Objective 06: To understand the value of licensing to either expand a business or start a new venture. 6-25 Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 06 – Protecting the Idea and Other Legal Issues for the Entrepreneur



Licensing is an arrangement between two parties, where one party has proprietary rights protected by a patent, trademark, or copyright.



Licensing a trademark generally involves a franchising agreement.



Licensing can increase revenues, without the risk and costly startup investment.



It can be a way to start a new venture when the idea may infringe on someone else’s patent. Learning Objective 07: To recognize the implications of new legislation that affects board of directors and internal auditing processes for public companies.



After many reports of corporate misconduct, Congress passed the Sarbanes-Oxley Act.



CEOs are required to vouch for financial statements.



Directors must meet background requirements and responsibilities regarding internal auditing and control.



Any attempt to influence the auditor or impede the internal auditing process would be considered a criminal act.



There is some concern that this law will discourage qualified individuals from being members of important boards. Learning Objective 08: To illustrate important issues related to contracts, insurance, and product safety and liability.



The entrepreneur should purchase insurance in the event that problems do occur.



Most firms should consider coverage in specific areas as a means of managing risk in the business.



Any new product should be assessed as to whether it falls under the Consumer Product Safety Act.



A contract is a legally enforceable agreement between two parties as long as certain conditions are met. 

The safest way to conduct business deals is with a written contract, although oral contracts are legal and enforceable.



There are four essential items that provide legal protection. 6-26

Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 06 – Protecting the Idea and Other Legal Issues for the Entrepreneur

   

Understand the terms and conditions in the contract. Cross out anything that you do not agree to. Do not sign if there are blank spaces. Make a copy of the files after signing.

KEY TERMS Contract: A legally binding agreement between two parties Copyright: Right given to prevent others from printing, copying, or publishing any original works of authorship Intellectual property: Any patents, trademarks, copyrights, or trade secrets held by the entrepreneur Licensing: Contractual agreement giving rights to others to use intellectual property in return for a royalty or fee Patent: Grants holder protection from others making, using, or selling a similar idea Product safety and liability: Responsibility of the company to meet any legal specifications regarding a new product covered by the Consumer Product Safety Act Provisional patent application: The initial application to the U.S. Patent and Trademark Office providing evidence of first to market Trademark: A distinguishing word, name, or symbol used to identify a product Trade secret: Protection against others revealing or disclosing information that could be damaging to business

RESEARCH TASKS AND CLASS DISCUSSIONS The text includes several topics for student research and class discussions. These are openended questions and the answers will differ for each student. There are no “correct” answers. Research tasks: 1.

Using the Internet, obtain copies of three patents that are at least three years old. What are the elements that are common across these patents? What are the differences? Which do you believe will be the greatest success? Can you find any evidence of products that are now on the market that incorporate any of these patented technologies? 6-27

Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 06 – Protecting the Idea and Other Legal Issues for the Entrepreneur

2.

Search press reports for patent infringement cases. Describe the process and the outcome. Of particular value are examples that list the legal costs of defending patent infringements and the amount awarded for a successful defense.

3.

What are some of the world’s most famous trademarks? Use data to back up your answer.

4.

Provide a real-life example for each of the following different types of product liability: (a) negligence, (b) warranty, (c) strict liability, and (d) misrepresentation. When possible, report both the details and the payouts.

5.

Identify five major sources of support for an entrepreneur in an application for a patent.

Class Discussions 1. Provide three examples of situations where a noncompete agreement would be necessary. In each of these three examples what should be included in the noncompete agreement to protect the venture? Answer: Employees involved in working with an idea or process may be asked to first sign a noncompete agreement. Well-written agreements will hold up in court if they are fair to all parties and have a reasonable duration and geographic coverage. Following are few points to be noted while preparing a noncompetition agreement: a) Determine if the employee can harm the company if he or she left. b)

Hire a competent labor law attorney to make sure the agreement is fair and likely to be enforced.

c)

Specify what is included in the noncompete such as client lists, confidential software code, or product information, and

d)

Consider other options besides a noncompete such as a non-piracy or nondisclosure of confidential information.

2. What are the major issues in the constant battle over music streaming rights? How do you think these issues should be resolved? Answer: The discussion should focus on the fact that the protection in a copyright does not protect the idea itself, and thus it allows someone else to use the 6-28 Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 06 – Protecting the Idea and Other Legal Issues for the Entrepreneur

idea or concept in a different manner. Copyright protection related to the Internet will continue to be a gray area until regulations are made clearer. 3. To what extent should the government be involved in creating and enforcing safety laws and to what extent should companies (and industries) be responsible for creating their own standards and self-policing those standards? Answer: In general most firms should consider coverage for various situations such as casualty, life, and compensation among others. According to the government, the company is responsible for regulating safety or health measures.

6-29 Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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