Protecting Your Precious (Intellectual) Property

It's almost impossible to be too cautious about safeguarding your company's creative assets -- and it's never too early to start taking defensive steps.

(Number 12 in our series on management best practices.)

Gerald Branim and iNet Strategy's experiences with intellectual property (IP) strategies could be likened to a long, frustrating game of Battleship.

When the Nashville, Tenn.-based Gold Certified Partner, which CTO Branim describes as "an IT department for hire," signed on to develop software for an ultrasound device to track plaque in arteries, the agreement specified that iNet Strategy would be paid for its time and the client would own the software.

"We were in a mindset of just being a service company," Branim says. "You want us to build a widget for you, you pay us $135 an hour to develop it."

Branim now acknowledges that this view was a bit shortsighted. The software became central to the client's growth into a $50-million-a-year company; iNet Strategy made about $50,000. In Battleship terms: A miss.

"It might have been wiser to get into that revenue stream by signing a deal that would get us 'X' percentage of earnings," Branim says. "It made us ask: 'What can we do to get a bigger piece of the pie?'"

iNet Strategy tried to go the other way, absorbing the up-front costs of developing software for another firm in return for ownership of the product and a percentage of the profits. The problem: There were no profits. The client's business plan wasn't as solid as thought. Its execution was poor. Another miss, this time on the other side of the intended target.

But there is a happy ending. When another client came looking for software to expand a government contract, iNet Strategy did a thorough look at that company's plan to better understand the dimensions of the deal. The development costs were sizable, but the per-package revenue stream looked solid. Through long negotiations, aided by an attorney skilled in intellectual properties law, the client agreed to license iNet Strategy's work for a percentage of each transaction. Branim's company would own the software, but agreed not to peddle it to the client's competitors. The deal turned into a monthly, six-figure revenue stream for iNet Strategy, which can still offer elements of the software it developed to other customers.

In Battleship parlance: A direct hit.

For Branim, the lesson -- which is also being learned and reinforced across the IT world -- is to consider the long-term importance of what you produce.

"We have become fairly successful, through the school of hard knocks, by understanding how valuable our work can be to us into the future," Branim says. "Now when we're in negotiations, we push to retain ownership."

Such lessons are catching on everywhere. According to the World Intellectual Property Organization, a Geneva-based United Nations agency that promotes IP development and protection, global patent and copyright activity has surged since the mid-1980s and continues to rise steeply. U.S. patent filings rose by 9.5 percent in 2005, the last year for which data is available. Technological rivals, such as Japan, China and the Republic of Korea have seen similar increases.

"The volume of business has increased exponentially since I started doing this 20 years ago," says Jerrold Spiegel, a New York City-based attorney specializing in intellectual property law. "My developer clients all desire to retain ownership as much as they can and to hold the rights so they can exploit their own work."

But protecting your intellectual property doesn't begin and end at the lawyer's office. As experts explain here, you need to guard your company's creative treasures at the start of each new project, through its development and beyond the tricky contract, patent and copyright process.

"Intellectual property has to be something you think about from the very start," says Ashif Mawji, CEO of Upside Software Inc., a Gold Certified Partner and developer of contract lifecycle-management software based in Edmonton, Alberta, Canada. "If you don't, it can be very challenging to fix later."

7 Tips for Guarding Your IP Treasures

Your best bet for solid IP information: a legal firm that specializes in this aspect of the law. But here are some general recommendations for safeguarding your assets:

  1. Protect IP from the start. Guard ideas from inception through development. Know who's accessing what information and where it's traveling. Make sure employees and contractors sign confidentiality agreements.
  2. Seek IP specialists. Your company's regular lawyers may be fine for most of your company's legal work, but for IP issues, it's wise to seek attorneys experienced in patent filings, copyright protection and potential contract loopholes. And bring them in early so they're up to speed throughout the development process.
  3. Share information selectively. Don't let the natural desire to brag about work in progress overcome the need to protect your ideas. During development, be especially careful when dealing with prospective customers who might also be talking to your competitors. Consider doing early demos primarily in-house or in small, secure settings.
  4. Take a surgical approach. Patenting a product or idea is expensive. Experts say it can cost as much as $30,000 to get a patent -- and much more to defend it later. But experts say that not every great idea needs a patent. Look into simpler, less expensive routes, such as copyrighting certain source code.
  5. Take the big-picture view. The desire to drive new business can sometimes prompt bad long-term decisions. For instance, potential clients may threaten to walk if you don't give them all rights to software you're creating for them. But if you're only getting a paltry sum for developing a product that's potentially worth millions, it might be best to let them go.
  6. Consider your options. There's a vast middle ground between simply getting paid for developing software and strictly licensing a product. Consider creative deals. For example, clients may be willing to pay development costs for the part of the product specific to their business and licensing fees for the other parts that you could use for other solutions.
  7. Learn and network. Chambers of Commerce and other business and trade organizations often offer free or low-cost seminars on IP protection. And don't overlook the partner community as a source of information for IP issues: Chances are that your colleagues have faced similar IP questions and might even have some answers.

-- F. B.

First Steps
For Mawji and other leaders, doing it right begins with educating your employees on their rights and responsibilities. That means having them sign the standard confidentiality and non-disclosure agreements.

"One of the first things I do with a new software developer client is to make sure that they have proper agreements with their staff, that they have determined who is an employee and who isn't and to make sure that all the rights flow to the company," says Spiegel. "There shouldn't be much debate about that. The employees sign work-for-hire agreements. The work doesn't belong to them."

The same diligence applies to your clients. When hammering out ownership and licensing issues, you also must make sure your client understands and respects the confidentiality of your work.

"You have to be careful what you write down about what is confidential and what isn't," says Joe Fantuzzi, CEO of Workshare Inc., a San Francisco-based independent software vendor and Gold Certified Partner with 6,000 client companies.

Such confidentiality is crucial even in the early stages, when you're simply talking about the concept.

"One check I always look for is to make sure that what I say to you and what you say to me is confidential," Fantuzzi says. "When you're thinking about great ideas, you need to think about ways to protect them."

Guarding Development
Securing your idea is especially important during the development stage. Many companies do this with the diligence you might expect from the National Security Agency. Workshare encrypts its work-in-progress and keeps it in a secure vault off premises; a second backup is stored at a location in London. Special codes, keys and passwords are used to make sure that no one else can access the product if it's stolen or lost.

"You need to keep your engineers mobile and allow them to take home their computers and work on a project," says Fantuzzi, who acknowledges the risks involved with such mobility. "Research shows that 2 to 3 percent of laptops are lost annually, so you have to believe that it can happen," he says.

Steps should also be taken to track your developing product. Workshare and other diligent firms monitor who downloads data onto portable storage devices -- such as USB sticks -- and who's moving data off-premises through the Web.

"If an engineer takes part of it home, we audit the fact they've done that," Fantuzzi says. "If we see an unauthorized engineer sending data through an FTP, we can block that. We don't want engineers moving source code for reasons we don't know."

Securing While Selling
Such oversight should extend from your employees to your potential customers when you're ready to peddle that hot new product. Before Mawji's Upside Software shows off its wares, the company takes steps to ensure that whoever is getting the sneak peek is trustworthy. Demonstrations are usually done in-house or on secure channels to make sure the customers checking out the new product are the ones meant to see it.

"Some organizations want to have what you have, so we validate a prospect," Mawji says. "We take a look at them to make sure we want to demo to them. Often we'll have them sign a tight non-disclosure agreement before we show."

As you take the technical steps to secure your ideas, you should be talking with practiced intellectual attorneys to develop the solid protections your company will need once your product is in the marketplace.

Choosing the right counsel is critically important. Handing off the complicated issues of intellectual property laws to your company's regular business attorney is not recommended.

"When it comes to IP, I'd suggest working with attorneys who have dealt with this before," says iNet Strategy's Branim. Like many companies interviewed for this article, iNet Strategy now relies on special counsel for IP issues. Before, " it seemed like things would come up that didn't fit our terms and conditions and we'd get burned through loopholes," he says.

With 15 U.S. patents and 21 foreign patents, along with another 200 pending here and abroad, CommVault Systems Inc., an Oceanport, N.J., Gold Certified Partner and developer specializing in data management, has gone beyond hiring outside IP attorneys. It now has a dedicated intellectual property attorney on staff.

Randy DeMeno, who bears the official title of CommVault's "chief evangelist," says that having an attorney versed in both IP law and the company's technological goals has helped speed both the legal and developmental sides of product development.

"It streamlined the IP and filing process as opposed to completing the project and explaining how things work," DeMeno says. "Our IP team is very technical and the folks they work with are very technical. It's a cost, but for us it worked very well."

CommVault's IP attorney, Marcus Muller, doesn't advise that every firm bring on a full-time IP expert. A deciding factor, of course, is cost. He estimates that the legal bill for a single patent can run between $20,000 and $30,000. "Outside counsel makes sense for one to two patents a year," he says.

But Muller stresses the importance of having solid continuity before and during the 20-year term that most patents carry.

"It becomes an asset for the company," he says. "That requires advice of counsel in protecting your business and seeking out licensees. You want a lawyer to analyze the patent claims. If you let that go for many years, it can create problems."

Obviously, the legalities of intellectual property protection go well beyond patents. There are copyright laws, trademarks and trade secrets to deal with. Changing federal rules require attention to the details of record keeping and compliance to legal and business-practice standards. If your company is ever involved in litigation, having those ducks in line will speed up -- and cut the costs of -- the discovery process. So even a smaller business needs good IP advice.

"It's pretty much touching all companies," Muller says. "Even the two-person mom-and-pop shop might have IP issues."

Determining Ownership
Chief among those issues is the central question: Who owns the software you develop?

Spiegel, the New York IP attorney, says the answer can require long, arduous negotiations between developer and client. Again, it's generally more desirable for developers to retain all rights. Their clients understandably want to make sure the software they've paid for doesn't wind up in their competitors' toolboxes. Sometimes, Spiegel says, those clients will walk away from projects because ownership isn't on the table.

"Developers today are much savvier and tend to be less anxious to bring in every last piece of business," he says.

To slow that exodus, Spiegel spends time "slicing and dicing things" at the bargaining table. "I explain that when you hire a carpenter to build a bookcase you don't expect him to give you his tools," he says. "Developers have certain tools they want to keep. But they also have to agree that the customer has rights to non-competition clauses."

Spiegel often recommends a combination of licensing some of the general applications of the software and a "pay-for-play" billing system for developing other sections of the software more specific to the client.

"It doesn't make sense for them to own the whole thing," he says of the clients. "They don't understand what the value is and what it does."

The SaaS Model
The rise of the Software as a Service (SaaS) model both simplifies and complicates intellectual property issues.

Marc Simony, director of business development at Logicworks Corp., a Gold Certified Partner and managed-hosting provider in New York City, notes that SaaS arrangements offer advantages to both developers and clients in the tug-of-war over who pays for and who owns a particular piece of software.

"You get a recurring-revenue business model rather than a product-based one," he says. But with the model comes the responsibilities of protecting not only your IP, but also that of your clients. That may include certification that necessary controls are in place to separate your clients from each other when they come to your site. You may need to do background checks on your employees to show due diligence.

"We've taken the pains to undergo the necessary audit [showing] that we are secure and they are secure," says Simony.

Microsoft -- which prefers the term "Software plus Services" -- offers how-tos on licensing and coding, and partnering with existing service providers.

Simony, who has helped put together SaaS seminars for clients and fellow partners, says the new model raises some new questions while revisiting many of the old IP conundrums faced by every firm.

"Your intellectual properties and the good will you've built up over the years are still at stake," he says. "You have to think about how to go about protecting that."


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