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Module 2B: SOFT IP

This PPT has been created with the participation of:

L. BIRKETTG. COLAKA. KAVAK

K. TAUBERA. DINTRICH

G. FRIEDRICH

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Industrial Prop., Intellectual Prop. & Intellectual Assets

Inventions

Brands, logos

Designs

Musical, dramatic,

literary & artistic works

Databases

Reputation / Goodwill

Designs

Know-how

Trade secrets

Confidential

information

Patents, UMs

Reg. TMs

Reg. Designs

Copyright

Database right

Unreg. TMs

Unreg. Designs

Restrictive

covenants

Confidentiality

agreements

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What is Soft IP ?

• A category of rights which:

– Are not protected by registration and legislation,– But fall under the category of intangible rights, which

are usually associated with other intellectual property rights

– Are free of chargeAre free of charge– Do not involve long or complex Do not involve long or complex

proceduresprocedures

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What can it be worth?

• Why are we bothering with this topic? Is not confidential information just at the margins of IP?

• 13 September 2007 - the McLaren Formula 1 Racing Team was fined $100 million by the FIA for illegal possession of technical data from rival team Ferrari

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SOFT IP

I. Know-how, trade secrets, confidential information

II. Restrictive covenants, confidentiality agreements and non-disclosure agreements

III. “First Mover Advantage”

IV. Business methods

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I. Know-how, Trade secrecy, confidentiality

• Know-how and trade secrets are protected by means of keeping the information confidential

• Misappropriation procedures of trade secrets and know-how are actionable under:– contract law, by restrictive covenants– commercial law as a tort and as unfair competition

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I. a) What is Know-how ?

• Information which is secret,secret, substantialsubstantial, identifiedidentified and valuablevaluable

• Non-patented practical information, resulting from experience and testing by the supplier

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I. a) What is Know-how ? (2)

• “Secret” means a component which is not known or easily accessible

• “Substantial” refers to a functional information, such as:– a method of production;– a product or a service;– the development of a method of production and/or a product and/or

a service

• “Identified” means that the information is characterized or can be found on a material support, in such a way as to make possible to ensure that it satisfies the requirements of secrecy and substantiality

• “Valuable” means that the information has a monetary value for use or exchange

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I. a) What is Know-how ? (3)

• A know-how:

– constitutes an economic asset, which belongs to whoever has developed it or properly acquired it

– is transmissible by contract or other means in accordance with national laws

– can be protected against misappropriation and wrongful disclosure

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I. a) What is Know-how ? (4)

• There can be wrongful disclosure, if all or part of the know-how which should have been kept secret or confidential has been published or revealed against the will of the possessor of the know-how, by a person having an obligation to keep the know-how confidential

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I. b) What is Trade Secret ?

• Any information that:

– is sufficiently secret to derive economic value, actual or potential, from the fact that it is not generally known to other persons

– is kept secret thanks to its holder's reasonable efforts

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I. b) What is Trade Secret ? (2)

• Protection requirements:

– the trade secret must not be known – owner of the trade secret must obtain an

economic advantage from the trade secret– owner of the trade secret must take necessary

steps to preserve the confidential nature of the trade secret

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I. b) What is Trade Secret ? (3)

• Main advantage:– contrary to patents there is no limit to the length of time– with a trade secret, as long as it is kept confidential, it will

benefit only the owner of the trade secret – no registration fee

• Examples of well known trade secrets:Examples of well known trade secrets:

– the formula for Coca-colathe formula for Coca-cola

– the Colonel Sanders recipe for fried chickenthe Colonel Sanders recipe for fried chicken 

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• Venture Partners• Consultants• Sub-contractors• Departing staff• Suppliers• Marketing Team• Customers

I. b) When can Trade Secrets leak ? (4)

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I. c) What is Confidentiality ?

• Confidentiality should only be claimed if:– the information is confidential– and the information is given in confidential circumstances

• Confidential information has a limited range of disclosure that includes:– know-how– trade secrets– business methods

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I. c) What is Confidentiality ? (2)

• Advantages: – the protection offered by keeping an idea

confidential is potentially infinite and will only be lost once the idea enters the public domain

– it is a relatively cheap form of protection

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I. c) What is not Confidentiality ? (3)

• Information is not considered as confidential if:- it is in the public domain - it has entered the public domain other than through the fault

of the receiving party- at the time of disclosure, the receiving party already had it in

its possession or has acquired it from a third party- the disclosing party has been able to disclose it to another

party without restriction- it is or was independently developed by the receiving party - it is disclosed as required by law or governmental rules or

regulations

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II. Restrictive covenants

• Definition of a restrictive covenant:

– contractual agreement between an employee and an employer that requires the employee to refrain from certain behavior that is contrary to the employer's interests

– restrictive covenants may be the object of a specific contract or may be included within a more general agreement

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II. Restrictive covenants (2)

• Object: contractual protection of trade secrets or other business assets during or after employment

– to create awareness within the company’s employees to protect know-how from inadvertent (e. g. pretext telephone calls, rubbish inspection, elicitation) and conscious disclosure*

– to create an inhibition threshold in addition to existing laws– to prevent behavior that is not prohibited by law

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II. a) Relevance of restrictive covenants

• Trade secrets

• Examples for trade secrets include:

– know how, good will, customer and supplier relationships

(e. g. customer identities and preferences, vendors), product pricing, marketing strategies, company finances, manufacturing processes and other competitively valuable information

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II. a) Relevance of restrictive covenants (2)

• Case study for Germany shows (Focus online, 24 June 2007, “Wirtschaftsspionage vernichtet 50.000 Jobs”):– 50.000 lost jobs, approx: 10 - 50 billion Euros p. a.

– 1 company on 4 is affected; the number of affected SMEs is raising

– in most cases the offenders are insiders!

• NOTA BENE: PRECAUTION IS THE BEST PROTECTION• Stolen business assets can cause serious economic damages:

– litigation takes a long time and is expensive

– lost trade-secrets may be embarrassing to the company (negative publicity)

– lost trade secrets may cause loss of faith of stockholders and other investors

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II. b) Types of restrictive covenants

• Non-competition agreements

• Non-solicitation agreements

• Non-raiding agreements (also known as “no-hire” or “anti-piracy covenants”)

• Non-disclosure agreements

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II. c) To be spoilt for choice?

• The various types of restrictive covenants are subject to different legal restrictions

• It is important to identify the restrictive covenant that protects the company sufficiently and - at the same time - affects the employee least– the appropriate restrictive covenant has to be determined by

a case to case basis– the scope of a non-competition covenant is very broad and

is subject to stricter legal requirements than other restrictive covenants*

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II. d) Best time to conclude a restrictive

covenant?• Possible point in times:

– outset of the employment agreement– during employment (e.g. change of position, substantial promotion

or pay increase)– after termination of employment

outset

Employment

change of position, substantial promotion, pay increase

terminationt

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II. e) Who should sign restrictive covenants?

• Unnecessary and overly broad use of restrictive covenants may negatively impact an employer’s ability to enforce these agreements

• In this context the answers to the following questions are relevant and need to be checked from time to time:1. Legal relationship between the company and the staff

person?*2. Identify key personnel** 3. Is or will the staff person be in a position to harm the

employer’s business if he uses this information on behalf of a competitor?

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II. f) Legal restrictions

• European law does not provide harmonized standards for restrictive covenants; therefore criteria may differ from country to country

• Possible criteria for an enforceable restrictive covenants may be:– formal requirements (written form!)

– necessary with respect to the protection of the employer’s legitimate business interests

– reasonable with respect to geographic and time scope

– compensation (e. g. German law requires at least a compensation amounting to 50 % of the former paid remuneration)

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II. h) Legal consequences

• Is the restrictive covenant enforceable?– the lack of a specific requirement can make a restrictive

covenant void– courts do not regularly revise the restrictive covenant to

make it valid

• Legal consequences of an obligation breach:– termination of the employment if the breach happens

during employment– preliminary injunction to prevent further obligation breach– damages (penalty clause)

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II. i) Examples of Restrictive Covenants

• A software developer working in a bank told not to work in any other bank for 2 years after leaving the bank.

• A solicitor told not to work in the same town for 3 months after leaving their current employer.

• A locksmith told not to work in the same town as a locksmith for 6 months after leaving his current employer.

• A plumber told not to use – ever – the trade secrets of his current employer if he leaves.

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II. j) Non-disclosure Agreements – NDAs (1)

• Why to use NDAs?– Used between people who are NOT working in the same

company– In such situation Restrictive Covenants (RCs) cannot be

used

• When to use NDAs?

Before patenting, because:– Disclosure of the invention prior to patent filing will destroy

the application– It is vital that any discussion with investors, business

partners, etc. be done CONFIDENTIALLY

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II. j) NDAs – General rules (2)

• Once an agreement is signed then proceed with caution

• An NDA is only valid if you can prove that you tried your best to keep the information confidential

• Even if an inventor has filed a patent application, he must be careful to cover any features of the invention which are not in the patent application with an NDA

NO POACHING / STEALING

• Keep in mind that inventor and manufacturer may have opposite interests

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II. j) NDAs – Example of a NDA(3)

Open Communications Architecture ForumMulti-Party Nondisclosure Agreement

• The Parties agree as follows:1. Confidential Information

2. Obligations of receiving party

3. Period of confidentiality

4. Termination of obligation of confidentiality

5. Title

6. No obligation of disclosure; Termination

7. No warranty

8. General

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What kind of protection is appropriate? EXERCISE 1

"Happy Baby" - an innovative nutrition company specialized in organic baby food

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Workshop exercise 1

• What kind of soft IP does Happy Baby own?

• What is the best protection for this soft IP?

• Which employees should be bound by restrictive covenants? What other issues have to be observed content wise?

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What kind of soft IP does Happy Baby own?

• Know how

• Trade secrets

• Trademarks

• Advertisement slogan

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What is the best protection for this soft IP?

• Registration of trademarks• Keep certain sensitive information such as food

recipes, customer names etc. restricted to key employees

• Conclusion of restrictive covenants such as non-disclosure agreements, non-solicitation agreements, non-compete agreements and anti-raiding agreements

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Which employees should be bound by restrictive covenants?

• Sales employees

• Production employees

• Director of production

• The three key assistants

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III. First Mover advantage

• First mover advantage is the advantage of the first entrant in a market

First mover advantage does not always refer to First mover advantage does not always refer to advantage of the first entrant in a new market, advantage of the first entrant in a new market,

but to the advantage of the but to the advantage of the significant significant first first occupant to that marketoccupant to that market

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III. First Mover advantage : examples

• Be first and brand it:

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III. a) What is First Mover advantage?

• The advantages of the first occupant in a market segment:

– ability to register patents, trademarks, designs… in order to protect the first occupant from future competition

– access to resources– reputation of being the first in that market– ability to affect the economic conditions of the market

especially with regard to following entrants– ability to invest the early profits to new resources

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III. a) What is First Mover advantage? (2)

• A firm can be the first-mover in the market:– by creating a new product, – by using a new process, or – by entering a new market

• Benefits of first mover advantage with regard to technological developments: – effectiveness of legal protection instruments such as

patents and copyrights– acquirement of the control of the technology which is the

basis of the innovation

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III. a) First Mover advantage and IP

• Patent protection may provide first movers a monopoly position during the life of a patent

• However, there is always the risk of imitation since the data shows that around 60% of successful innovations are subject to imitation approximately in four years

• In addition, it can be difficult to protect the rights against “2nd generation of patents” strategy of following entrants

• Patenting offers a broader scope of protection for product innovations than for process innovations

• If the innovation is included in the process, trade secrets may provide protection as well as patents.

• Technology within a product is under the risk of reverse engineering whereas process technology is discovered more slowly

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IV. Business Methods

• What is a Business Method ?

A method of operating any aspect of an economic enterprise, which supports and facilitates business operations and practices such as billing processes, investment decisions, fund allocations etc.

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IV. a) Are Business Methods patentable ? • The situation in Europe:

– business methods and software per se are excluded from patentability under the European Patent Convention

– however, the European Patent Office grants patents for new inventions which are implemented through computers

– such new inventions need to have technical features and/or solve a technical problem to be patentable. A business problem is not considered to be technical. So a patent application for a new business method implemented in a novel way on new equipment could be granted in relation to the technical features of the equipment, without regard to the business method.

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IV. a) Are Business Methods patentable ? (2)• The situation in the U.S.: • Business method patents are granted in the U.S. under certain

conditions for new business methods (ex: new types of e-commerce, insurance, banking…). Business methods patents are examined according to the same criteria than any other invention. Furthermore, accordingly to the USPTO Guidelines, a business method is patentable if it produces a result which is:– ““Useful”Useful”: : Specific, Substantial, Credible utility– ““Concrete”Concrete”: : The result should be assured or reproducible / Does not

always require 100% accuracy / May require a certain level of skills– ““Tangible”Tangible”: : “Real world” result is required / Does not have to be necessarily

tied to a machine / Thoughts are not considered as “real world” results– BM patents are not required to use traditional technological arts.

• U.S. examples of business methods patents- reverse auction procedures (Priceline.com)- one-click online payment system (Amazon.com)

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IV. b) Debates on Business Methods

• Debates on the patentability of business methods continue with respect to:

– patents for electronic commerce methods– standards for business method patents– the traditional business settings

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V. Useful links

• http://www.shewchukip.com/index.htm: Dedicated Expertise in Intellectual Property, easy to understand information

• http://www.wipo.int/sme/en/: World Intellectual Property Organization, SMEs pages

• http://www.ipo.gov.uk: responsible for IP in the UK

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Which risks for soft IP rights? EXERCISE 2

Protection of soft IP

The case of a new banking product

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Workshop exercise 2

• Which soft IP rights are involved?

• Which formal rights are involved?

• Which soft IP right could be patentable?

• Establish a contract with the marketing company

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Which soft IP rights are involved?

• Know-how

• Trade-secret

• Business-method

• Confidential and sensitive information

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Which formal rights are involved?

• Copyright• Trademark

Which soft IP right could be patentable?

• Business-method

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Establish a contract with the marketing company

• Disclosure and misuse of information about:– calculation method– commercialization method– business method– sensitive personal information

• Confidentiality clause:– making the printing factory liable for any disclosure

• IP-clause:– the bank remains the only owner of IP

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Thank you for your attention

Questions / Comments / Suggestions?