23.1 Introduction

LEARNING OBJECTIVES

1. Understand what intellectual property is.
2. Define the four types of intellectual property.
3. Explore the Constitutional roots for providing legal protection to intellectual property.

Regardless of size and industry, a business’s Intellectual Property (IP) is often more valuable than its physical assets. In fact, Fortune 500 companies have 45-75% of their assets tied to IP. Companies invest tremendous resources in developing innovative new products and services. Intellectual property law prevents competitors from immediately profiting from another’s invention and provides incentives for continued innovation.

23.2 Intellectual Property

Intellectual Property is a form of intangible property representing the commercially valuable product of the human mind. IP can be in either an abstract or concrete form. For example, a composer may have IP interests to both the abstract sound of the music he or she composed, as well as the concrete sheet music that instructs musicians how to play the musical composition.

Protection of IP rights generally fall into one of four categories: patents, trade secrets, copyrights, and trademarks.

Different types of IP may attach to aspects of the same product or service. For example, Coca-Cola has trademarks for its name and logo, a patent for the shape of its original glass bottle, a copyright for its commercial jingle, and a trade secret for its cola recipe.

Figure 23.1 Examples of Coca-Cola trademarks

23.3 Constitutional Roots

The US Patent and Trademark Office (USPTO) was established to protect patents as enumerated in Article I, Section 8 of the Constitution. That clause, known as the Copyright Clause, says that Congress may “promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.” The USPTO website has a searchable database for trademarks and patents.

The Copyright Clause directs the federal government to protect certain products of the mind, just as much as it protects personal land or money. The Copyright Clause essentially allows the government to create a special kind of monopoly around IP. For example, a pharmaceutical company invents a drug and applies for a patent. If the patent is granted, then the company can charge as much as it needs to recover its research and development costs because competitors are shut out of that drug market by virtue of the patent. Violations of patent law carry severe penalties.

How can Congress outlaw most monopolies when the Constitution grants monopolies for IP? The answer lies in the genius of the Copyright Clause itself. As in all monopolies, there are two sides: the producer and the consumer. The producer wants the monopoly to last as long as possible, while the consumer wants the monopoly to end as quickly as possible. The Copyright Clause strikes a compromise between the producer and the consumer in two ways.

First, the Clause states that Congress can grant the monopoly only to “promote the progress of Science and Useful Arts,” which is a very specific purpose. Note that making an inventor rich is not the purpose. Rather, the purpose is progress. Granting temporary monopolies encourages progress by providing a financial incentive to producers. Singers, songwriters, inventors, drug companies, and manufacturers invent and create in the hope of making money. If they were not protected, they would either not invent at all or would simply do it for themselves, without sharing the fruits of their labor with the rest of society.

Second, the Clause states whatever monopoly Congress grants has to be for a “limited time.” Congress makes the decision on how long a monopoly can last based on how best to promote progress. When the monopoly ends, science is advanced again because others can freely copy and improve upon the producer’s products. Society benefits greatly from the expiration of IP monopolies. Important drugs such as aspirin and penicillin, for example, can now be purchased for pennies and are accessible to the entire human population. Similarly, literary works, such as Shakespeare’s Hamlet or Beethoven’s Fifth Symphony, can be performed and enjoyed by anyone at any time without seeking permission or paying royalties because copyrights last for only seventy years after the death of the author or creator. These inventions and works are now in the public domain to be enjoyed by all.

23.4 Patents

A patent is the exclusive right to make, use or sell an invention for a specified period of time (usually seventeen years), granted by the federal government to the inventor. A patent holder owns a patent. Patents may be legally sold to others. Therefore, an inventor may sell a patent to others, which ends his or her property interest in the invention.

Many inventors and designers work for employers in creative and inventive capacities. If an employee invents something as part of his or her employment, then the employer is the patent holder. This arrangement allows innovative ideas to be adequately funded and to prevent employees working against the best interests of their employers. However, if an employee invents something outside of work on his or her own time, and the invention is not related to his or her employment, then the employee is the patent holder.

To apply for a patent, an inventor must meet two requirements: the invention must be (1) novel and (2) non-obvious. To be novel, the invention must not have been previously invented and must not come from a trivial improvement to an existing invention. In other words, it must not have been previously known or used. To be non-obvious, the invention must not be obvious to a reasonable person in an appropriate field with ordinary skill. In other words, patents reward creativity that results in something new and is not considered common knowledge by someone in the industry.

Not all things can be patented. An idea alone (without a definite description) cannot be patented. Similarly, the laws of nature (such as gravity) and things that occur naturally (such as DNA) cannot be patented. This is because some items found in nature are not the result of the human mind or creativity. If not the product of human invention, then a patent cannot apply. This distinction can be narrow in some industries. For example, DNA cannot be patented but the scientific process of synthetically reproducing DNA can be patented. Likewise, oil cannot be patented but the process for extracting it from the ground can be.

Types of Patents

Three types of patents exist. The most common type of patent is the utility patent. Utility patents are granted for a useful innovative machine, process, manufacture, composition of matter (such as a new chemical) or an improvement to an existing item or process. These patents usually are granted for twenty years.

A design patent may be granted for new, original, and ornamental designs for an article of manufacture. This type of patent protects a product’s appearance or nonfunctional aspects. These patents last for only fourteen years.

A plant patent covers inventions or discoveries of asexually reproduced plants (e.g., plants produced through methods such as grafting, root cuttings, and budding). In other words, the plant is able to multiply without using seeds. For example, one company patented a unique rose whose color combination did not exist in nature.

Patent Enforcement

The USPTO grants property rights to patent holders within the United States. Patent law is complicated, and attorneys who wish to practice patent law must have an engineering or science background and pass a separate patent bar exam. When an application is filed, the USPTO assigns a patent examiner to decide whether the patent application should be approved. While the application is pending, the applicant is permitted to use the term “patent pending” in marketing the product to warn others that a patent claim has been filed. Even after a patent has been issued by the USPTO, however, the patent is only presumed to be valid. If someone challenges a patent in a lawsuit, final validity rests with the US federal courts.

In the last decade there has been more than a 400 percent increase in the number of patents filed, resulting in a multiyear delay in processing applications. An increase in the number of business method patents contributed to this dramatic increase in patent applications. A business method patent seeks to monopolize a new way of conducting a business process. For example, “Patent Filing for One-Click Web Ordering” describes a method of e-commerce by which a customer can order an item and pay for it immediately with just one click of a button. This one-click patent was granted to Amazon.com. Amazon licensed the patent to Apple so that it could feature one-click on its website. This in turn allowed Amazon to recover some of its development costs from Apple, which also wanted to use the technology.

IP protection sometimes involves controversial issues. For example, pharmaceutical companies rely on patent law to protect their massive investment in research and development of new drugs. For the few drugs that eventually get governmental approval and commercial success, manufacturers seek to extract the highest possible price during the period of patent monopoly. For example, antiretroviral drugs has greatly extended the lives of HIV/AIDS patients, but the drugs cost between $10,000 and $12,000 per year in the United States. In many developing nations, individuals cannot afford US prices. Therefore, some governments have declared national health emergencies, a procedure under international treaties called compulsory licensing, that forces drug companies to license the formula to generic drugmakers. As a result, Cipla, a generic drug manufacturer in India, manufactures the same antiretrovirals for about $350 a year.

Outside the United States, a patent granted by the USPTO does not automatically protect the inventor’s interest in that property. Instead, IP is protected by a series of international conventions. Because international law is only binding on nations who agree to be bound by it, IP is not protected internationally in nations that have not signed the conventions.

Patent Infringement

If someone uses a patented invention without permission from the patent holder, then the user violates the patent holder’s rights. Patent infringement is the act of making, using, selling, or offering to sell a patented invention without the permission of the patent holder. Patent infringement can be either direct or indirect. Direct infringement occurs when someone copies and uses an invention, or uses an invention with a slight variation or addition. Indirect infringement occurs when someone “designs around” a patent by creating a product that is substantially the same and performs a similar function.

If patent holders successfully sue for patent infringement, they may be entitled to an injunction forcing their competitors to stop using the invention, treble damages, costs, and attorney’s fees. The most common defense to patent infringement claims is to challenge the validity of the patent. Given the scientific and technical nature of patent cases, litigating these cases is expensive.

As a result of the cost of litigation, patent trolls exist in certain industries such as technology and pharmaceuticals. Patent trolls are individuals or companies who obtain the rights to one or more patents to profit by means of licensing or litigation, rather than by producing their own goods or services. The main source of revenue for patent trolls comes from suing companies for infringement and hoping the companies settle. For a relatively minor cost of applying for a patent and attorneys’ fees, patent trolls look for a big payout. For example, NTP, a patent troll, sued the maker of BlackBerry, claiming patent infringement for the technology used to deliver the BlackBerry’s push email feature. Faced with a potential shutdown of service, BlackBerry settled the case for more than six hundred million dollars.

Over the past decade, there have been some legal developments to help protect companies from patent trolls. For example, the US Supreme Court unanimously ruled that patent infringement cases must be filed in the federal court where the defending company is based rather than a court of the plaintiff’s choice. This reduces the exposure and cost to the company of defending against cases filed across the nation, and for the patent trolls to “forum shop” for districts they believe will be more beneficial to their claims.

More companies are choosing to fight patent trolls in court rather than payout. For example, Apple has been defending itself in court against patent troll VirnetX over patents that VirnetX obtained in FaceTime and iMessage delivery systems. Although Apple has a large enough budget to engage in protracted litigation, not every company does. Therefore, patent trolls often target start-up companies hoping that the economic threat of a lawsuit encourages quick settlements.

23.5 Trade Secrets

A Trade secret is a formula, process, device, or other business information that is kept confidential to maintain an advantage over competitors. The scope of trade secret protection goes well beyond patent law. Unlike patent law, protection under trade secret law is not tied to the information’s novelty. Instead, the essence of a trade secret is its relative secrecy.

A trade secret is, in short, secret information. This information may include a process, formula, pattern, program, device, method, technique, or compilation. For many companies, lists of suppliers, costs, margins, and customers are all trade secrets. Soft drink recipes, the Big Mac’s special sauce, and even the combination of wood that is used in the burning process to make Budweiser beer are all trade secrets. Additionally, Google’s algorithm for conducting web searches is a trade secret.

Trade secrets are unlike patents in that with a patent, the inventor must specifically disclose in the application the details of the invention. Thus, the inventor has not protected the secret of the invention. However, in exchange for this disclosure, a patent owner has a legal monopoly over the property for a specified period of time. Even if others discover how the invention works (which often is not difficult because patent applications are public record), they are prohibited from making, using, or selling it without the patent holder’s permission. After the patent expires, the patent holder no longer has a property right to exclude others.

Trade secrets can last forever if the owner of the secret keeps it a secret. If someone uses lawful means to uncover the secret, then the secret is no longer protected. Therefore, some companies would rather not make their confidential information public knowledge through a patent application in return for a temporary monopoly. Instead, they choose to protect the confidentiality of the information or product internally with the hope of a longer period of protection. For example, Google protects its search algorithm as a trade secret to maintain a competitive advantage in the market for as long as possible.

A claim for misappropriation may be brought when a trade secret has been wrongfully obtained, such as through corporate espionage or bribery. Generally, misappropriation occurs if the secret was acquired by improper means, or if the secret was disclosed or used without permission from the secret’s owner. Damages may include actual loss and unjust enrichment not captured by actual loss. Additionally, in cases of willful or malicious misappropriation, double damages may be awarded, as well as attorney’s fees.

23.6 Trademarks

A trademark is any word, name, logo, motto, device, sound, color, or graphic symbol used by a manufacturer or seller to distinguish its products. The main purpose of a trademark is to guarantee a product’s genuineness. In effect, the trademark is the commercial substitute for one’s signature. To receive federal protection, a trademark must be (1) distinctive rather than merely descriptive, (2) affixed to a product that is actually sold in the marketplace, and (3) registered with the USPTO.

The Lanham Act protects trademarks. Unlike copyrights and patents, trademarks can last forever and are not subject to the Constitution’s limited time restriction. Since the objective of trademark law is to prevent consumer confusion, the public good is best served by allowing companies to maintain their trademarks as long as consumers associate a trademark with a specific origin. The moment they no longer make that association, however, the trademark ceases to exist.

When it comes to trademarks, distinctiveness is good. Therefore, an invented word is the easiest type of trademark. In 1997, Larry Page and Sergey Brin were brainstorming names for their new Internet search engine, and invented the word “Google,” which is a play on “googol” that means 1 followed by 100 zeroes. They felt the name reflected their goal to organize the staggering amount of information available on the Internet. Common words can also become trademarks as long as consumers identify them with a particular source. For example, Amazon is the name of the world’s longest river, but it is also the name of an online retailer. Since consumers now identify Amazon.com as an online retailer, the name can be trademarked.

People’s names may also be trademarked as long as they have a business presence. Over time, if consumers begin to identify a person’s name with their business, then the name has acquired secondary meaning and can be trademarked. Thus, Sam Adams is a trademark for a beer, Ben & Jerry’s is a trademark for ice cream, and Ford is a trademark for motor vehicles.

Figure 23.1 Photo of Samuel Adams Beer Bottle
Figure 23.2 Photo of Ben & Jerry’s Justice ReMix’d Ice Cream

In addition to names and logos, slogans may also be trademarked. For example, “Built Ford Tough” and the “Quicker Picker Upper” are both trademarked slogans. Trademarks can also apply to a combination of distinctive words, logos, and slogans. McDonald’s has a trademark for its name, a trademark for its “golden arches,” and a trademark for its slogan “i’m lovin’ it.” McDonald’s could also trademark the combination of how those three items are displayed together in its advertising materials.

Trademarks are usually granted for a specific category of goods. The same name can sometimes be used for multiple categories of goods. The name Delta is a trademark for both an airline and a brand of faucets. Since there is little chance that consumers will confuse an airline with a faucet brand, trademark law allows these dual registrations.

On the other hand, some brands are so strong that they may stop registration even for a completely different category of goods. McDonald’s is a good example of this. The McDonald’s trademark is one of the strongest in the world and is instantly recognizable. In 1988, hotel chain Quality Inns launched a new line of budget motels called “McSleep.” McDonald’s sued, claiming trademark infringement. McDonald’s claimed that consumers might be confused and believe that McDonald’s owned the hotel chain. A federal judge agreed and ordered Quality Inns to change the name of the chain, which it did, to Sleep Inns.

Trademarks go beyond a company’s name or its logo. A color can be trademarked if it is strong enough to create consumer identification. Pink, for example, is trademarked when used for building insulation by Owens Corning. All other insulation manufacturers must use different colors. Sounds can be trademarked too, such as MGM Studios’ lion’s roar. Distinctive colors, materials, textures, and signage of a Starbucks or T.G.I. Friday’s are considered trade dress and cannot be copied. A unique bottle shape also can be trade dress. Trade dress is the overall appearance and image in the marketplace of a product or commercial enterprise, including any packaging, labeling, design and decor. Interestingly, courts have been reluctant to grant certain smells trademark protection, even though it can be argued that certain fragrances such as Old Spice or CK One are distinctive.

Companies providing services may receive trademark protection called a service mark. Instagram, for example, is a service mark.

A trademark can also be used to demonstrate certification meeting certain standards, such as the Good Housekeeping Seal of Approval. The International Organization for Standardization (ISO) and its various standards for quality management (ISO 9000) or environmental quality (ISO 14000). The Forest Stewardship Council (FSC) allows its logo to be used on paper products that come from sustainable forests, while certain foods can be labeled “Organic” or “Fair Trade” if they meet certain standards as established by governmental or nongovernmental organizations. Each of these marks is an example of a certification mark.

Finally, a mark can represent membership in an organization, such as the National Football League, Girl Scouts of America, Chartered Financial Analyst, or Realtor. Each of these is known as a collective mark. The rules that apply to trademarks apply equally to service marks, collective marks, and certification marks.

The Lanham Act excludes a few categories from trademark registration, mainly for public policy purposes. Obviously, trademarks will not be granted if they are similar or identical to a trademark already granted. When starting a new company, businesses need to make sure that their business name is not already trademarked by someone else. Trademarks also cannot contain the US flag, any government symbol (such as the White House or Capitol buildings), or anything immoral. Trademarks cannot be merely descriptive. Therefore, every restaurant is allowed to offer a “Kid’s Meal,” but only McDonald’s can offer a “Happy Meal.”

A trademark is valid as long as consumers believe that the mark is associated with a specific producer or origin. If the mark refers to a class of goods instead, then the trademark no longer exists. This process is called genericide. Many words today once started as trademarks: furnace, aspirin, escalator, thermos, asphalt, zipper, lite beer, Q-tip, and yo-yo are all examples of trademarks that are now generic and have therefore lost legal protection. To prevent genericide from occurring, trademark owners must actively police their use. If trademarks become generic, the owners will lose control of the marks and the public (and competitors) will be free to use those words just as they use “aspirin” and “yo-yo” today.

Trademark infringement occurs when someone uses someone else’s mark, either completely or to a substantial degree, when marketing goods or services without the permission of the mark’s owner. When Apple first released the iPhone, it found out that “iPhone” was already a registered trademark belonging to Cisco for a phone used for calling over the Internet. To avoid trademark infringement liability, Apple purchased the trademark from Cisco.

The elements of trademark infringement are:

• Distinctiveness (strength) of plaintiff’s mark;
• Similarity of the two marks;
• Similarity of goods or services associated with marks;
• Similarity of the parties’ facilities/operations;
• Similarity of the parties’ advertising;
• Defendant’s intent; and
• Proof of actual confusion.

Even if a trademark owner does not believe a similar use of its mark would lead to any consumer confusion, it can protect its trademark through a concept called dilution. Trademark dilution occurs when a trademark’s strength or effectiveness is impaired by the use of the mark by an unrelated product, often blurring the trademark’s distinctive character or tarnishing it with an unsavory association. For example, when an adult novelty store in Kentucky opened as “Victor’s Secret,” Victoria’s Secret filed a dilution suit in response. Under dilution concepts, the trademark owner only needs to show a likelihood that its mark will be diluted or tarnished in some way.

Companies or persons accused of trademark infringement can rely on several defenses:

• Marks are sufficiently different;
• Fair use;
• Parody;
• Comedy and satire; and
• Consumer advocacy.

The most obvious is arguing that no infringement has occurred because the two marks are sufficiently different enough that consumers will not be misled. For example, in 2002 Jeep sued General Motors for infringing on what Jeep called its trademark grill. GM’s Hummer division released the H2 that year, with a similar seven-bar grill. A district court held that there was no trademark infringement because the grills were too dissimilar to cause consumer confusion.

Figure 23.3 Photos of Hummer H2 and Jeep Grills

Another defense is fair use. The Lanham Act prohibits the use of someone else’s trademark when selling goods. However, when a company mentions a competitor’s product to draw a comparison, this is called comparative advertising and is fair use of the competitor’s trademark. Honda, therefore, is free to claim that the “Honda Accord is better than the Toyota Camry” in its advertising even though Toyota and Camry are both trademarks.

The First Amendment also recognizes the use of parody, comedy, or satire as fair use. Comedy skits on television that make fun of, or use, company logos are an example of this fair use. The First Amendment is also a defense for websites run by consumer activists who seek to criticize or parody companies, such as “www.fordreallysucks.com” or “www.peopleofwalmart.com.”

23.7 Copyright

The final form of intellectual property protection is copyright. A copyright is a property interest in an original work of authorship (such as literary, musical, artistic, photographic, or film work) fixed in any durable medium of expression. The owner of a copyright has the exclusive right to reproduce, adapt, distribute, perform, and display the work. The durable medium requirement exists because otherwise it would be impossible to prove who is the original author of a work. Ideas, by themselves, cannot be copyrighted.

Like patents and trademarks, federal law protects copyrights. Copyright is designed to protect creativity. It is one of the two types of IP specifically mentioned in the Copyright Clause of the US Constitution. Copyright extends to any form of creative expression, including digital forms.

Because computer software is a compilation of binary code expressed in 1 and 0, software can be copyrighted. Similarly, if a group of students were given a camera and asked to photograph the same subject, each student would frame the subject differently, which is an expression of their creativity.

A copyrighted work is automatically protected upon its creation. Unlike patents and trademarks, which must go through an expensive and rigorous application process, authors do not need to send their work to the government for approval. In 1989, the United States signed the Berne Convention, which is an international copyright treaty. This treaty eliminated the need to write “Copyright” or place a © symbol on the work itself to receive legal protection. Copyrights may be registered with the US Copyright Office, if the author chooses.

Copyright protection lasts for seventy years after the death of the author. If there is more than one author, the copyright expires seventy years after the death of the last surviving author. If a company, such as a publisher, owns a copyrighted work, the copyright expires ninety-five years from the date of publication, or one hundred twenty years from the date of creation, whichever comes first. After the copyright expires, the work falls into the public domain. The works of Shakespeare and Beethoven are in the public domain, and may be freely recorded or modified without permission.

The copyright owner may allow the public to view or use a copyrighted work for free or for a fee. This use is contained in a copyright license. A license is essentially permission from the copyright holder to use the copyrighted material, within the terms of the license. When purchasing a book, MP3 or DVD, for example, the copyright license allows the purchaser to read the book, listen to the music, and view the movie in private. The license does not allow the purchaser to show the movie to a broad audience, to modify the music, or to photocopy the book to give away or sell. These rights of reproduction, exhibition, and sale are not part of a license. The purchaser does have the right of first sale. This means that the owner of the physical work can do with it as he or she pleases, including resell the original work.

There are common licenses that authors can easily refer to if they wish to distribute their work easily. The General Public License (GPL) for software and Creative Commons (CC) license for text and media are well-known examples.

Licenses in the digital arena can be very restrictive. Copyright holders may use schemes such as Digital Rights Management (DRM) to limit ownership rights in digital media. DRM limits the number of copies and devices a digital file can be transferred to, and in some cases even permits the copyright holder to delete the purchased work.

Copyright infringement occurs when someone uses a copyrighted work without permission or violates the terms of a license. Copyright infringement is common when someone takes someone else’s work and simply repackages it as their own. For example, J. K. Rowling’s Harry Potter series created an international following, and many fans gather online to discuss her books. One website, called the Harry Potter Lexicon, served as an encyclopedia to the Harry Potter world, with reference notes on characters, places, spells, and other details. When the site announced plans to publish the contents of the Lexicon in a book format, J. K. Rowling successfully sued, claiming copyright infringement.

Copyright infringement also may be indirect, such as helping others violate a copyright. Websites such as Napster and Grokster, which existed solely for the purpose of facilitating illegal downloading of music, were copyright infringers even though the websites themselves did not directly violate any copyrights. The music recording industry pursues these cases aggressively.

Copyright law makes a distinction between “fair” and “infringing” use. Fair use includes copying a work for purposes of commentary, criticism, news reporting, teaching, or research. Just because a work is used in a news article or in a classroom, however, does not make its use fair.

In an attempt to tackle the problem of copyright infringement on the Internet, Congress passed the Digital Millennium Copyright Act (DCMA) in 1998. One portion of the law helps Internet service providers by expressly stating that those providers cannot be sued for copyright infringement if others use their networks for infringing uses. Another portion of the law helps websites by stating that if a user uploads infringing material and the website complies with a copyright holder’s request to remove the material, the website is not liable for infringement. For example, if an individual uploads a portion of a copyrighted song, movie, or television show to YouTube, YouTube may remove the clip at the request of the copyright holder. Finally, the DMCA makes it illegal to attempt to disable a copy protection device, such as DVD and Blu-ray Discs. Anyone who writes software that disables a copy protection device violates the DMCA.

23.8 Concluding Thoughts

The framers of the Constitution recognized the value of intellectual property by including the Copyright Clause into Article I, Section 8. As IP law evolved, laws that govern trade secrets, patents, trademarks, and copyright have emerged. These legal protections provide a foundation for businesses, entrepreneurs, and artists to create useful and innovative works. Without the financial incentives provided by IP law, innovation would grind to a halt.

The Constitution states the primary purpose of providing temporary IP monopolies is to advance science and the useful arts. This advance can take place when IP owners create IP, but it can also take place when the IP falls into the public domain at the end of its limited time.