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foundations and issues for netpreneurs:

intellectual property 101

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marc kaufman: patents

Good morning. It's certainly a pleasure to be here. As Andrew mentioned, I'm going to discuss the patent process in general and how your business methods and E-commerce methods can be protected by the patent process. Today, technology is intertwined with commerce more than ever, and, more than ever, it's important to protect your proprietary methods of doing business and related technology.

When it comes to protecting your company's proprietary business methods, often the patent process is the best tool. Traditionally, business methods were protected through copyright and trade secret theory. Copyrights protect particular expression of an idea, fixed and tangible media such as a computer programs on a magnetic diskette, or a business plan or brochure printed on paper. Copyright ordinarily doesn't prevent the appropriation of the underlying idea.

Trade secret theory can be used to protect a business method in rather a broad way, but requires, among other things, that the business method be maintained in secrecy. That's often very difficult to do while still commercially implementing the business method. Often, trade secret protection falls short with respect to business methods.

Patents, on the other hand, protect an embodiment of an idea as a method or apparatus. If drafted properly, I'd argue that the patent can be broad enough to cover all practical and commercially available embodiments of a particular method, and thus can approach protection of the underlying idea itself. Patents are a generally more expensive form of IP to procure, however, as I've noted, it can be much broader protection than the alternatives when available. This is not to say that patent protection is the one and only answer in all circumstances for protecting business methods and other technology, but it can be a very powerful protection and something that you should consider for all proprietary business methods.

useful, novel and not obvious

To help you better understand when patent production is appropriate, I want to discuss the basic requirements for patent protection very briefly. There are three primary hurdles that must be overcome to obtain a patent. Once you do, you get to make a deal with the federal government to obtain the patent.

The first hurdle is that the invention must be useful; it must achieve some functional result. By way of history, prior to the early 1980s it was widely held by courts and the US Patent & Trademark Office that business methods were merely an expression of a mathematical algorithm, an abstract idea that is not deemed to be useful for the purposes of the patent laws. The Patent Office rejected most patents that were directed toward business methods under what they fashioned as the "business method exception" to patentable subject matter. However, over the last 20 years and culminating with the recent State Street Bank case, courts have eliminated this business method exception by making it clear that the manipulation of figures that represent funds or goods is useful under the patent laws. It's now clear that business methods can be useful and can pass that first hurdle of patentability.

The second hurdle is novelty. The invention must be new. Briefly, it could not have been published, invented by another or otherwise publicly known. The critical date is ordinarily the date of conception of your invention, however, and this is very important, an offer for sale of the invention or public disclosure of the invention subsequent to your date of conception but prior to the date of filing a patent application could affect your patent rights. You should always consult patent counsel before making any offer for sale or public disclosure of a proprietary business method. If you're not sure if what you're doing is a public disclosure or offer for sale, again, consult patent counsel.

The third hurdle is called non-obviousness. In other words, the differences between the invention sought to be patented and known devices or methods must not be obvious. A difference is obvious if it was suggested by the general knowledge in the prior art. This, of course, is a factual determination that varies from case to case and, again, is something that you need to consult patent counsel about. Consulting counsel is a recurring theme here.

Once all these hurdles are overcome—once you've demonstrated that your invention is useful, has novelty, and is non-obvious—that's when you get to make the deal. The deal is that you agree to disclose your invention in enough detail to allow the proverbial "person of ordinary skill in the art" to make and use the invention. In exchange, the federal government grants you the right to exclude others from making, using or selling the invention from the date of issuance of the patent until a date which is 20 years from the filing date of the patent application. Since the typical pending period of a patent application is somewhere between two and three years, typically patent protection runs for roughly 17 years. The Patent Office is trying to reduce the two- to three-year pendency, but I don't know how soon it will change.

The rationale behind the deal is that people will be encouraged to spend time and resources developing new business methods if they can expect some period of exclusive use of the invention. It's important to note that patents are published to ensure that the public does obtain use of the invention and has the ability to improve upon it after expiration of the patent. This is essentially opposite and mutually exclusive to trade secret protection which requires that the business method be maintained in secrecy.

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leveraging your patent

Now we get to the $64,000 question or, in some cases, hopefully, the $64 million question. Once you've obtained a patent, how can it be exploited commercially? This is what's important to all of us.

Patents can be used to protect your market. A patent grants the holder the right to exclude others from making, using, selling or offering for sale the patented subject matter for a limited time and thus can be used offensively to protect your market and even to create a limited monopoly.

Patents can be profit centers. Patent owners can extract a royalty from others in exchange for allowing them to make or use the invention, or you can create a profit center by keeping competitors at a cost disadvantage in the marketplace.

Patents can be used defensively. Often patents are asserted as a bargaining tool when a patent holder is accused of infringing the patent rights of another. This results in a stronger negotiating position in many cases and gives you the alternative of a cross-license agreement as opposed to directly paying royalties.

Patents can be used to help obtain funding. This is very significant because venture capitalists (VC) love patents. Having a patent or even a patent pending application for significant subject matter can raise the confidence level of potential investors and thus facilitate obtaining capital. In any event, all business plans should include a coherent strategy for protecting IP, including patent protection.

Patents can be used as a marketing tool. Having a patent for a certain method or device, particularly if it's significant in your marketplace, can distinguish the quality of your goods or services in the eyes of potential customers and thus serve as a marketing tool.

Lest you think the exercise of obtaining patents is merely academic, I want to briefly mention a few examples of patents directed to business methods that have been in force recently.

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Amazon.com, a company I'm sure you're all familiar with, has a patent covering their "One Click" ordering system. Just before the holiday season, they sued BarnesAndNoble.com (B&N) in federal court and obtained preliminary injunction with respect to B&N's version of one click ordering. This forced Barnes & Noble to revamp their order processing right before their biggest rush. The fact that Amazon.com obtained a preliminary injunction doesn't mean that they will ultimately prevail, but they have demonstrated a likelihood of success and have been able, for the time being, to prevent B&N from using the one click method. The case is still pending and only time will tell how it comes out.

Another company that I'm sure you're familiar with, Priceline.com, has obtained a patent directed to reverse auctions over the Internet. In a very high profile case, they've sued Microsoft and Expedia.com for patent infringement by Expedia's use of reverse auctions for hotel rooms and airline tickets. That case is also still pending.

This brings to mind the issue of infringement and how you should best avoid infringing the patent rights of others. There's no easy answer. The best answer is that you should work with patent counsel throughout your business plan and implementation process, and, when appropriate, conduct a thorough patentability search and study.

To summarize, companies developing proprietary business methods should always investigate the use of patent protection for their business methods and should weigh the additional expense associated with obtaining patents against the broad protection that patents can afford in certain instances as compared to more traditional theories such as copyright and trade secret. Thanks for your time.

Mr. Sherman: Our next speaker, Christopher Capuano from Internet solutions developer Proxicom, made a very smart decision back in 1993 to leave the private practice of law. He went first to Price Waterhouse, and, since 1996, has been with Proxicom in various capacities including Senior VP, General Counsel and the board of directors. He's going to give you the perspective of in-house counsel, looking at some of the IP challenges Proxicom faced for itself and its clients, and give you some practical strategies from the in-house lawyer’s perspective.

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chris capuano: the inside scoop

Thanks. Mary asked me to come today because we've been working with netpreneur.org and the Morino Institute since about 1995 when Proxicom was about 20-25 employees. I joined them when they were at 30-something employees. For those of you who don't know, Proxicom is an Internet application development company for the Fortune 1000.

When I joined the company, as I said, we were at about 30 employees. It was a time when I had to be very careful about how I approached all the issues—translation: money. I was very cognizant of the fact that we were a growing company. We were growing 100% a year, but I still had to be very, very careful about where we allocated our resources. One of the areas that was most affordable, and, as it turns out, one of the smartest moves we made, was to invest in making sure we had our IP house in order. Today, Proxicom is a company of about 800 people. We've had tremendous growth, which we expect to continue, and one reason is because we've been able to manage our IP effectively. I will talk about how I approached our various basic issues—what I wanted to do for protecting Proxicom in-house and what I wanted to do as far as our services. We're a consulting company devoted to Internet application development, so I've got two sides to deal with. I've got to take care of the company, and I've got to take care of our services and our clients.

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the name game

We weren't originally called Proxicom, and that was one of our first IP issues. When I joined the company, we were known as Proxima, and we had been known as Proxima since about 1990. In the middle of 1996, we received a letter from a company called Proxima which happened to be a public company. They weren't happy that we were starting to grow, getting our name out and using the name Proxima. They were not in our business—they make LCD projectors—but they are a public company and we were not. To Eric's point, know which battles you want to fight, and that was not one of them for us. Frankly, in my opinion, litigation would have been a waste of valuable resources.

We held an in-house competition to choose a new name. Our services are put together using a strategic consulting team, a technical consulting team and a creative consulting team. They came up with some of the best names. They didn't come up with the Proxicom, but they had the best names. They came up with names like "King Daddy." That was a popular one. Treehouse was another, and so was Proximundo. Before we chose the name, we did an IP search on Proxicom and the first thing we did was to make sure that we could retain the url. If we couldn't get for free, we weren't going to take the name. We did our trademark search which, to Eric's point, is a very efficient thing to do. You can do an initial trademark search online at the US Patent & Trademark site. A full-bore search will cost you maybe $1,000. Proxicom was available, so we registered the name. When I look back on how much I have spent in corporate fees, M&A fees and four rounds of corporate financing fees, the amount of money we spent on our trademark and copyrighting fees is negligible compared to everything else. For a couple thousand dollars, you can get a lot of protection.

We've also set up two joint ventures in Europe, one known as Kristina Internet Business Solutions in Spain. Spain and Europe, as a whole, are catching up with the US pretty quickly, but I think it's well recognized that they're maybe a year to 18 months behind on the Internet. We took a minority position in this joint venture, so we had nothing to do with naming the company. Our joint venture partner retained a creative firm which came up with the name Kristina. Lo and behold, the first thing they didn't do was to see whether the url was taken. Kristina.com was taken by a somewhat unsavory site, depending upon your perspective, and the joint venture had to buy the site. Two years ago, the most profitable sites on the Internet were those type of sites, although not anymore. The value of the url had gone down significantly, so it was somewhat affordable.

You have to be very, very careful, so my takeaway is that it will not cost you a lot of money to make sure that you have your trademark protection.

Another thing we did back in 1996 was to ask ourselves where we wanted to go. We wanted to become a national company, but we were also thinking internationally. Today, we have four offices in Europe. In early 1997, we did a search in Europe and filed in the countries we wanted to move into pretty quickly. Again, it was a relatively inexpensive proposition, maybe a couple thousand dollars to protect everything we had over there. As it turned out later, a company popped up named Proxicom in Germany, but we had filed the registration two years before. If we want to, we can stop them from using the name since our businesses are relatively similar. Now that we're an international company, a few dollars is going to go a long way.

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keep it simple, keep it fair

Proxicom makes pretty extensive use of our IP. We're very careful about copyright and confidentiality protection, and it has allowed us to make a good bit of money from licensing our IP and from certain joint ventures. We're very careful about how we deal with our clients and how we deal with meeting new clients.

For every client we meet, we have very simple documents—the key is simple. Take our nondisclosure agreements (NDA), for example. New clients have absolutely no problem signing them. Ask Eric or Mark, or even Andrew here—well, not Andrew, he's probably too expensive, maybe one of his associates—to put together one of these one-pagers. They are documents you keep in your file and pull out when you need them. If there are ever problems, they'll go a long way to protecting you. We have these mutual nondisclosure agreements that our prospective clients execute every time.

Our services contracts are a little bit more complex, involving IP issues as well. A lot of you are .com companies and are very sensitive about retaining ownership of what you create. Mostly, Proxicom is a developer for the Fortune 1000 and for .com extensions of traditional brick and mortar establishments, so we are very sensitive to it as well. What we put into our sites, and our client sites, is our IP, so there's an inherent tension that we have to deal with in every situation relative to who gets to keep the rights to the deliverables. For those of you who are building a services enterprises, that's an issue you will deal with in every engagement you have.

Back when Proxicom was just 30 employees and we were trying to do business with companies like General Electric (GE), you can imagine that we didn't put up too much of a fight in giving GE what it wanted. At the same time, however, we always kept a little for ourselves. While GE, for example, could own all the results of what we did, we asked for our license back to reuse it as long as we didn't take GE's proprietary information. Nine times out of ten, if you take a balanced approach to these contracts, it works out just fine.

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As I said, the value to us has been that we have kept some IP associated with the company. That has allowed us to grow quickly because we've been able to leverage it over the years. We've been able to take something we built for GE and reuse it for Merrill Lynch; something from Merrill Lynch, and use it for Chase or any of our other financial services clients. We can take components of what we build from Mobil and use it for PG&E. A little caution in how you draft the contracts will go a long way, so long as you make sure they're balanced from both parties' perspectives. Back in 1996, I drafted most of them, but we had outside trademark and copyright lawyers review them and make them as simple and as fair as possible. It's gone a long, long way in getting us where we are.

On the trademark side, it's a very affordable proposition to protect your name. I can't overstate that. My trademark lawyers aren't here, so I can say that their fees have been reasonable. I wouldn't say that if they were here, of course.

When you're dealing with your clients on the professional services side, go in with a balanced approach, but don't be afraid to keep a little for yourselves. When we were going public in 1999, one of the things that the investment bankers focused on was our IP leverage. I was a little surprised at how much they hammered us on it, and then how they turned around and valued it.

Basically, what happens when you're going public is that you have these big organizational meetings with ten times as many lawyers as we have here and then the bankers. There are a great many bankers out there, as well, who are great people and also have reasonable fees, yes. They take you through your company from when it started. They asked us about what we did in 1991, what we did in 1996 and what we were doing at the time. One thing they were very aggressive about was how we leveraged and protected our IP. When they understood that we were able to protect and retain rights to a lot of what we did and use it as leverage going forward in other projects, it added to the bottom line value of the company for them. When you're trying to grow into a large company, leverage is key, so think about today and think about tomorrow. It doesn't take a lot to do something today that will benefit you tomorrow.

The bottom line is, we've been able to fight the fight with few dollars and that was very important to me back then—protecting ourselves with as few dollars as possible. In this arena it is possible. Thanks.

[continued]

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Statements made at Netpreneur events and recorded here reflect solely the views of the speakers and have not been reviewed or researched for accuracy or truthfulness. These statements in no way reflect the opinions or beliefs of the Morino Institute, Netpreneur.org or any of their affiliates, agents, officers or directors. The transcript is provided "as is" and your use is at your own risk.

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