Innovation is critical to our economic success as a region. Countless creative and original ideas are created every day, but most of these ideas will never see commercialization for various reasons: it was a great idea but there was a lack of funding to support commercialization, it was an idea ahead of its time, it was a bad idea or it was an idea that would not be profitable.
Unfortunately, those ideas that are pursued are often copied by unscrupulous opportunists. An inventor telling the world about an idea before certain precautions are in place lacks the insight to protect the idea while pursuing development and commercialization. Fortunately, there are some simple legal strategies to assist the innovator in developing, protecting and promoting an idea.
- Confidentiality and nondisclosure agreements. Confidentiality and nondisclosure agreements offer a measure of protection when disclosing ideas. The purpose of this agreement is to have the party who comes into knowledge of confidential information agree not to use or disclose the confidential information to anyone.
- Work for hire agreements. Before hiring anyone to assist in product design or enhancement, clarify who will own the work. It is always surprising to a business owner to find that the consultant he hired to develop software or prototype enhancements without any agreement disclaiming ownership of the intellectual property may have a claim to the intellectual property.
- Patent applications. Seek advice early-on from a patent attorney as to whether the idea is worthy of patent protection. While patents are not inexpensive to file, the process can protect an idea and deter those that would copy an idea.
- Licensing and royalty agreements. Licensing agreements permit one party to use the ideas or innovations of another for a fee or royalty, and may be the preferred business model when access to capital is limited or nonexistent.
The licensor (person with the idea) licenses or gives the licensee (the person with the wherewithal to produce the product) the right to commercialize the product. It can be exclusive or nonexclusive, limited to geographic territories, and based on a percentage of sales.
A royalty agreement is used when an inventor/innovator sells his idea to another and desires to receive a residual from the product sales. Depending on the idea, the inventor may expect to receive a lump sum plus royalties over a period of time. - Business entity structure. For tax and liability reasons, the choice of business entity should be carefully considered. Before deciding whether to form a corporation or limited liability company, enter into a joint venture or some other business combination, obtaining sound accounting and legal advice is essential to achieve short- and long-term business goals.
- Review applicable laws. Before spending time and money on an idea, review applicable existing laws, regulations and rules to determine product development feasibility and the cost of compliance. Reviewing industry trends and proposed laws, regulations and rules can identify whether the product is realistic given trends in regulatory constraints and the particular industry.
- Undertake a market study. A market study can be invaluable in demonstrating the need for development of an idea or product, identifying and quantifying the market(s), and identifying the competitors or any competitive products.
Implementing these simple strategies will serve to protect and promote the idea and its creator. Equally important, investors may consider the implementation of these protections a requisite before funding the idea.
Linda L. Bluso is partner-in-charge of Brouse McDowell’s Cleveland office. Reach Bluso at (216) 830-6830 or [email protected].
