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Avoiding litigation: IP risk assessment

For the purpose of this article, intellectual property (IP) is defined as original creative work manifested in a tangible form that can be legally protected. IP includes patents, trademarks, copyright and confidential information.

All companies create IP, whether they are aware of it or not. This is not to say that all companies retain or even protect their IP. When starting a new business, make certain to examine what types of IP your company will use, rely on and even create. This will enable you to assess your risk of intentional and unintentional infringement and gauge the likelihood of detection and resulting litigation.

Due to stretched finances, intentional infringement commonly occurs at the start-up stage. New ventures are typically starved for cash and cannot afford proper research, opinions, licenses and IP applications (patent and trademark). Additionally, many start-ups intentionally model themselves after the dominant product or service in the marketplace. Willful blindness (i.e., not investigating when you should) is also widespread and can be considered intentional.

Unintentional infringement often transpires because of the complexities of certain industries and the speed at which applications for new patents and trademarks take place.

Demand letter vs. litigation

A demand letter is not a legal proceeding—it is simply a commercial letter that usually asks you to cease and desist from whatever it is you are doing that is allegedly infringing. The letter sometimes demands money as a penalty or to obtain a license. A demand letter is inexpensive for the sending party to prepare and usually succeeds in stopping the infringing behaviour. It is analogous to a warning shot.

Litigation is commenced by filing a Statement of Claim in court and then personally serving a copy on the defendant. If you are being sued, it is likely because your activity has significantly harmed the plaintiff (or has the potential to do so). It is important to remember that harm is not always financial; it can include reputation, increased competition (patents = monopoly) and confusion in the marketplace. Litigation is expensive and time consuming for both the plaintiff and defendant. As a result, litigation favours the well-established company and not the start-up. Consequently, it makes sense for start-ups to avoid getting sued.

High-risk activities

The following activities could be considered high-risk and could increase your chances of litigation:

  • Patent infringement of a mechanical invention. This form of infringement is easy to detect and the plaintiff is entitled to, among other things, an accounting of any profits you make or damages you cause.
  • Patent infringement of a pharmaceutical. This form of infringement is not easy to detect but the dominant players in this market are large and constantly litigating.
  • Trademark infringement of a registered mark owned by a large corporation. Avoid giving your product or service a name similar to that of a registered mark if they co-inhabit the same category of ware or service (e.g., making a cola beverage and calling it Koka-Kola or 7-Down). Trademark infringement lawsuits made up 34% (the highest percentage of all categories) of federal court cases in 2010.
  • Copyright infringement of a well-known work where the rights are managed by a large corporation or collective rights society. Do your best to avoid using unlicensed graphics or proprietary fonts in apps you develop for resale. Copyright infringement lawsuits made up 16.8% (the second-highest percentage of all categories) of federal court cases in 2010.
  • Use of confidential information obtained from a competitor by way of hiring, or simply being, an ex-employee of that company. Leaving one business to start a directly competing company is risky.
  • Defamatory statements about your competitor or their wares or services. The Trade-marks Act states in section 7(a) that no person shall “make a false or misleading statement tending to discredit the business, wares or services of a competitor.”

Conclusion

The most effective method of reducing your chances of being sued is proper research.  Search the Internet, patent, trademark and copyright databases for similar products or services.

Note: The content in this article is for purposes of general information only. It is not legal advice.

References

Federal Court. (2006, October 30.) Retrieved May 3, 2011, from http://cas-ncr-nter03.cas-satj.gc.ca/portal/page/portal/fc_cf_en/Index.

IPPractice.ca. (n.d.). Retrieved May 3, 2011, from http://www.ippractice.ca/.

Canadian Legal Information Institute. (2008, January 31.) Trade-marks Act, R.S.C. 1985, c. T-13. Retrieved May 3, 2011, from http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-t-13/latest/rsc-1985-c-t-13.html.

Canadian Legal Information Institute. (2005, May 14.) Patent Act, R.S.C. 1985, c. P-4. Retrieved May 3, 2011, from http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-p-4/latest/rsc-1985-c-p-4.html.


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