Posts

Congratulations to all winning teams at this past weekend’s Startup Weekend Honolulu.  I look forward to meeting you all. Good job by The Box Jelly for hosting a great event!
So last week was trade name versus trademark.  Today is another area that a lot of startups get confused.  They find a programmer, designer, consultant, and other similar professions to help them bring their idea to reality, but want them only as an independent contractor, and if they have enough capital, possibly an employee.  However, no ownership, thus how do they protect their most sacred moneymaking idea that they slaved over a weekend trying to pitch?

Make them sign a nondisclosure agreement (NDA), is usually the first conclusion, then when a Client comes to me to draft them a NDA. I then ask them what they want to protect with the NDA, and they then to proceed to tell me everything including the kitchen sink . . . isn’t everything internal a trade secret?

No, just because you don’t want your competition to know does not make it a trade secret.

So What IS a Trade Secret?

Where we start off with trade secrets is the legislative definition, which is found in Hawaii at HRS §482B-2. This is the definition section under the Uniform Trade Secrets act and it states the following:

“Trade secret” means information, including a formula, pattern, compilation, program device, method, technique, or process that:

(1)  Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and

(2)  Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

So right off the bat, the definition indicates why a lot of business owners feel they have a trade secret.  Their information is precious (to them), they created a “new” “method” or “technique” (which was tried already and the market doesn’t think it is valuable), etc . . . . As you can tell by my commentary in the parentheses a trade secret has to be more.

Let’s use the famous example of a trade secret The Coca-Cola Company’s formula for coca-cola. First, it satisfies the first element. It’s a formula.

Second, the formula must have an independent economic value from not being known. In this case, it is clear that it does. No one has successfully replicated Coke’s formula AND it’s major rival Pepsico does not have the same formula.  Through its distribution deals and keeping the formula unattainable by normal means (such as experimenting) they have built a beverage empire.

Lastly, Coke has kept this secret for so many years, which supports the last element, which is the efforts to maintain secrecy.  At this point it may be beyond reasonable, but the efforts by Coke to maintain the correct amounts to the formula are legendary.  From bank vaults, to shopping around to different suppliers, etc . . . you name it, they have probably created an elaborate strategy to foil would be corporate spies.

What does this Mean for a Startup?

If you want to make a sound NDA, then you need to know what your company is all about.  Before, you think that is easy, remember you have gone around itching the idea to get investors, employees, etc . . . what have you told them?  Remember it’s a balancing act of trying to sell the idea without giving up the process, the secret has to be generally not know.

This brings me to another situation where people rely on public data, government information, etc . . . I will give them they have come up with a clever way to put disparate knowledge together, but if someone can readily replicate that “cleverness” on their own their really isn’t anything to protect.

Finally, the shotgun approach to NDA use should not be your method of maintaining secrecy.  Medium and large companies go overboard and have their janitors sign them when the have no intention of enforcing it against them and they aren’t privy to the company’s core secrets.  So for you, don’t make everyone you come in contact sign it, especially investors. They aren’t going to do it.

The rule of thumb is what your trying to protect your core strength and are you deriving that strength because no one else has figured it out.  This includes things like next year’s marketing plan, your competition not knowing how you will expand your product lines is a) valuable b) it is not known and c) if you are keeping it under lock and key, encrypted files, etc . . .  then you do have a trade secret. Obviously, it will no longer be a secret as to when you role out these new product lines, but before that time you need they are worth protecting. Then on the NDA side you only make people sign one if they can make use of your idea on their own (i.e. an engineer who knows the process to make a new material).

Anyway, the lucky winners from Startup Weekend Honolulu will get this information in a lecture and more regarding contracts, HR, Internet laws, and organizing their company as part of their winning package as provided by my firm.  So I urge you participate in Startup Weekend, as you may be the one asking, can I protect my business idea?

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.


Pardon the Delay and IP Law Talk this Week

Hey everyone, I am sorry that this Draw the Law was delayed by a week.  Like many things in the legal world situations develop that require an attorney’s attention and in my mind clients do come first, as much as I love doodling stick figures. Before I get into the post that I was supposed to do last week, please be reminded that I will be having an IP Law Talk tomorrow night, Wednesday, May 23rd.  I will be discussing intellectual property matters (copyright, trademark, and trade secrets) for small business and startup owners seeking to protect their content and brand in this increasingly connected hypercompetitive world.  So here is the information for that event:

  • When: Tomorrow, May 23rd  (Wednesday)
  • Where: The Greenhouse Innovation Hub (685 Auahi Street)
  • Time: 6:00 – 7:00 p.m.
  • Price: $20.00 will get you in for the 45-min talk, discussion period, and the presentation and materials

Please consider coming to check it out if you are a marketer, small business owner, or someone who uses the web frequently to showcase your brand and identity. Click here for further info and reserve your spot.

Today’s Draw the Law: Nondisclosure Agreements

This subject is tied into tomorrow’s talk due to the fact it deals with NDAs and their usage to protect trade secrets.

What is a Nondisclosure Agreement?

Nondisclosure Agreements (NDAs) is a contract where the parties agree to protect a trade secret or confidential information.  Often the “Discloser” will give valuable information to the “Recipient” in order to achieve some business objective. They are frequently used in startups who have come up with a novel business method or possibly a patentable invention, by businesses that rely on consultants and independent contractors who see sensitive information, and for executives that sign have access to confidential business information.

What is a Trade Secret?

I just want to touch a little bit on what constitutes a trade secret.  It is information that has economic value by the virtue of it not being generally known AND is the subject of reasonable efforts to maintain secrecy.

Without those four things, it is NOT a trade secret.  One of the most famous trade secrets is Coca-Cola’s recipe, which has generated a great amount of fascinating articles and discussion.  Here is a couple for you to read at your leisure:

When is a Mutual NDA Appropriate?

More often than not, there is generally one side disclosing information and the other’s expertise or ability to do something with that information is being sought.  So in that case the flow of information is one-sided.  However, in many joint ventures, one company has a piece of useful technology and the other side also has a useful piece of technology.  If the companies share these technologies (they will form a super-awesome robot! Sorry, little geek humor there) both stand to gain from the partnership.  In this case, a mutual NDA would be appropriate because they are sharing secrets together in their collaboration.

For my friends who are marketers, a mutual is also useful, let’s say you have a marketing method that is golden and your client company wants to give you sensitive information or access to their database that dovetails with your method to launch a great marketing campaign.  In this instance, both sides would use a mutual NDA.

What Can I do if the Recipient Violates my NDA?

Well, it depends. First you will probably want to review the contract. Often times, contract attorneys will put some form of damages.  In addition, typically the Discloser will probably ask a court to make the violator stop disclosing and possibly file a suit against the third-party who the Recipient tipped off to have them stop making use of the trade secret, and also possibly give up monies they made off of violating the trade secret.

Final Word: Drafting a NDA

Due to the sensitivity of trade secrets, you want to have an attorney work with you extensively to identify some aspects you want protected and to go over certain provisions. Consider the following:

  1. Define the confidential information that you are protecting (including what is not confidential information);
  2. Describe the duties and obligations of the Recipient; and
  3. Miscellaneous provisions, such as time, jurisdiction, and dispute resolution.

You businesspeople know that some of the information in your head can make you money, and sometimes copyright, trademark, and patent protection will only go so far.  Those are times that you may ask yourself who knows about your information, what can they do with it, and if the information is widespread do you lose your competitive edge? At that point consider a NDA.

See you next week!


*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

Hey everyone Draw the Law will be delayed slightly today.  It will discuss the use of nondisclosure agreements, as we continue our tour of commonly used agreements by startups or small businesses. In the mean time, check out my event next week (which will also be discussing NDAs).
You can sign-up by clicking the link.

Brand and Content Protection: Insight on Copyright, Trademark, and Trade Secrets Law

All successful businesses nowadays need to produce their own content and manage a unique brand or they will be lost in the noise of the Internet.  With the certain interests pushing bills like SOPA and court cases pending regarding ownership of intellectual property it is best for business owners to understand the law of copyright, trademarks, and trade secrets.  Learn how the law does (or doesn’t) protect your work and ideas.

We will discuss creating your content and brand, what registering copyright and trademark does for you, and some strategies for managing and protecting, such as licensing, those important creative assets that make your business unique.  Lastly, we will end with an open discussion with where the law might be heading.

  • Date: May, 23rd (Wednesday) 
  • Time: 6:00 p.m. – 7:00 p.m.; 45 minute presentation with 15 minutes for Q&A
  • Place: The Greenhouse Innovation Hub, 685 Auahi Street
  • Price: $20.00 – materials and samples included

Check back later today for Draw the Law. Have a good morning!

Hey everyone, this will be the last weekly Boilerplate Blurb for 2011. I will be cutting back the number of Boilerplate Blurbs to once a month and shifting gears to roll out new content. So look for it in 2012. So let’s get to it!

Letter of Intent or Memorandum of Understanding

As a small business and startup attorney, many of my clients are not laden with cash to spend a lot of time and money of negotiating a 100-page agreement. Time management for an owner-operator consists of being at the storefront (so to speak) while spending time with the banker, accountant, attorney, and doing their own books and marketing. Thus when they come upon deals that require time and thought they sometimes feel like they have to rush through it to secure it.

In cases like that, especially where the two parties met at an informal event or through networking, I sometimes advise that it might be best to set a date in the future to enter into a formal agreement, but during the negotiating and review process sign a letter of intent, memorandum of understanding, or term sheet.

Why?

It usually signifies that both of your will make a good-faith attempt to reduce your terms into a workable formal agreement. It basically says you are both interested, but you need time to evaluate and develop the agreement. In that way for the small business owner it gives them the kind of space and pacing at their own time without losing the deal immediately.

Lose? How could they Lose it?

Well, a memorandum of understanding is typically nonbinding, even though both parties sign it. What’s the point of that? Well, both parties generally use it as a guide, a starting point, for reaching the final agreement. However, during that process one party might in good-faith disagree with the final outcome. Recognize too that even if nonbinding, elements of the letter of intent, such as a confidentiality provision may become binding, which is important for startups floating future worker agreements, additional owners, or the like.

What is this Whole Deal with Good Faith?

Good faith is not a pie in the sky idea, it really does have a body of law lineage and is something courts do consider. Good faith requires you and the opposite party to deal with each other reasonably and fairly. So no sneaking around with prices and secret info to sabotage the deal and no blowing the guy off because you did not like way he looked one day. Therefore, if you enter a memorandum of understanding be honest and deal with the white hat on.

Example of the Nonbinding part of a Letter of Intent:

. . .

This document is only a Letter of Intent. It is not intended to be, and shall not constitute in any way, a binding legal agreement.

That’s it for this last Boilerplate Blurb of 2011, lookout for the next one sometime in January 2012.  Happy holidays!

If you enjoyed this post or any of my others please “Subscribe” to this blawg!

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.