Cyprus: The Firm Has A New IT Client! A Partner Has Asked You To Review All Of The Intellectual Property Due Diligence That May Be At Issue

You have just joined a boutique IP Law firm. They have a new client, NC, who is an information technology company. A partner has asked you to review all of the intellectual property due diligence that may be at issue. Assume that you start with reviewing the company's website to see the sort of company it is and the sort of product and services which it will provide.

1.Introduction

For the purpose of this work, it is assumed that, NC is a start-up company in Information Technology business and deals mainly with computer software, computer programs and solutions such as secure messaging and digital encryption solutions and services. These products and services are the subject matter of NC's business. They are NC's intellectual property assets and must be effectively protected as this is crucial to NC's success. It is further assumed that NC is a UK company and therefore is subject to UK and EU Law.

Intellectual property is about legal rights. The Intellectual property rights which are of most relevance in Information Technology Industry are:

• copyright and moral rights of the author
• patents
• trade marks
• design rights
• database rights
• confidential information / Trade secrets

1.1 Copyright and the moral rights of the author

Copyright arises automatically whenever a work is created, without the need of any formalities such as a deposit or registration. It is a property right that subsists in certain specified works as provided for by the Copyright, Designs and Patents Act 1988. The owner of the copyright has the exclusive right to do certain acts in relation to the work and control the exploitation of the work If a third party performs an act which is restricted by the copyright without the permission of the owner, the latter can sue for infringement of his copyright and obtain remedies such as damages and an injunction.

Copyright Law is not about monopolies. It is therefore permissible for any person to produce a work which is similar to a pre-existing work as long as the later work is not taken from the first. All that copyright protects is the expression of the work and not the idea.

The person who makes the work is normally the first owner of the work. However, if a person created the work in the course of his employment, then, his employer is the first owner of the work. The copyright owner can grant licenses in respect of the work which will allow the licensee to do all or some of the restricted acts, in accordance with the terms of the license.

Copyright is also of limited duration. For example, copyright in a literary work endures until the end of the period of 70 years from the end of the calendar year in which the author dies.

Furthermore, all persons including the owner of the copyright, licensees, sub-licensees and other third parties must respect the author's moral rights. The author may be able to enforce his moral rights irrespective of the identity of the present owner of the copyright.

1.2 Patents

Patents are about protecting inventions. Inventions are new ideas with a useful practical application. The essence of a patent is that the inventor is granted a monopoly, for a limited period of time, in return for full disclosure of his invention, in the specification filed at and published by the patent office. For a patent to be granted, the Patents Act 1977 requires that, the invention is new, it involves an inventive step and it is capable of industrial application. A UK patent is valid for a maximum term of twenty (20) years from the date of application.

Patents are considered to be territorial in nature; if protection is desired in more than one country, a separate patent must be applied for in respect of each country. Under international conventions the patent owner may file the same patent specification in countries of his choice within 12 months of first filing. This allows an applicant for a patent to develop his invention in the meantime and make a better decision as to the likelihood of commercial success and hence the worth of patenting in countries abroad. It is up to the patent owner to enforce the patent. The demands of litigation in relation to patents should not be underestimated. Patent litigation by its nature is expensive. It is also necessary to sue in each country in which an infringement takes place.

1.3 Trade Marks

The Law relating to trade marks can be found in Trade Marks Act 1994 which defines a trade mark as being any sign capable of being represented graphically which is capable of distinguishing the products or services of a business from those of a competitor. This can be a device, brand, heading, label, ticket, name, signature, word, letter, numeral or any combination thereof.

In a highly competitive market a distinctive trade mark is of considerable value to the business and its success. The assets of business goodwill and reputation that is attached to the company's name are valuable. It protects business reputation and goodwill and also protects consumers from deception. A trade mark, if used properly, can add value to a balance sheet. The great benefit of trade mark protection is that a registered trade mark may last indefinitely. It may also be transferred, assigned or licensed.

1.4 Design rights

The law recognizes two forms of design rights; the registered designed provided for by the Registered Designs Act 1949, as amended and the design right provided for, by the Copyright, Designs and Patents Act 1988, Part III.

Registered design prevents others applying it in industrial processes while the unregistered design right of the CDPA Act 1988, is very important for protecting semiconductor chip designs and topographies.

Registered design right is not of so much importance in the computers field although recent changes to the UK registered designs regime extend protection to some functional aspects of designs and this may protect innovative aspects of websites.

1.5 Database rights

Databases are of increasing economic importance in information society. A Database itself may attract copyright protection. Section 3 (1) of the CDPA Act 1988 defines "literary" work as including a database. A database will fall within the scope of the Act if it consists of a collection of independent works, data or other materials arranged in a systematic or methodical way and individually accessible by electronic or other means. Apart from copyright which by law can subsist in databases, the EU Directive on Databases introduced a new form of sui generis right, which is a right of a special kind and is designed to protect databases. It is known as the database right and it can either be considered as complementary to copyright or can considered to exist independently of it. The sui generis database right protects against unauthorized extraction or reutilization of the whole or substantial part evaluated qualitatively and/or quantitatively of the contents of any such database. Furthermore, it requires substantial investment in the obtaining, verification or presentation of the contents of a protected database but does not require creativity.

1.6 Confidential information / trade secrets

Common law imposes a duty upon persons who receive information in confidence, such as employees, former employees and business partners, not to divulge that information to competitors or to other third parties.

Lord Greene MR in Saltman Engineering V. Campbell (1948) 65 RPC 203 described confidential information as something which is not public property and public knowledge. Therefore, firstly the information must qualify as confidential and then the duty to keep it secret arises upon the persons who receive it. It seems that relative secrecy is all that is needed, the test being an objective one. In Thomas Marshall v. Guinle [1979] Ch. 227, Sir Robert Megary V-C, suggested that there were four elements which might be of assistance in identifying confidential information in a trade or industrial setting:

1. The information must be information the release of which the owner believes would be injurious to him or of advantage to his rivals or others.
2. The owner must believe the information is confidential or secret, that is not already in the public domain.
3. The owner's belief under the previous two heads must be reasonable.
4. The information must be judged in the light of the usage and practices of the particular industry concerned.

In the Information Technology Industry, what are usually classified as confidential are trade secrets. Trade secrets are valuable assets of a business and are protected as other intangible property such as patents and copyrights usually by non disclosure agreements or in other words confidentiality agreements.

2. Intellectual property Due Diligence

2.1 What is IP Due Diligence?

Due diligence seeks to determine existence, ownership and control of Intellectual property assets, the economic and the strategic value of the Intellectual property and the potential of liability for infringing the intellectual property rights of others.

A successful intellectual property due diligence review into a company's intellectual property requires identifying and understanding the company's products and services, identifying corresponding intellectual property, determining the scope of the protection provided by each right and confirming the exploitability of those rights

Assuming that I have reviewed the company's website to see the sort of company it is and the sort of product and services which it will provide, there's below how I listed them:

2.2 List of NC's major products and services:

2.3. General thoughts

It seems that NC's primary assets will be its copyright works. NC may protect all of the above products by copyright if the necessary conditions are met. Copyright protection is legally vulnerable to reverse-engineering efforts by competitors, during which no copyright infringement may arise unless the original code is copied. In such case perhaps NC should try to get a patent. Furthermore, if there is any technology such as methods or computing apparatus which NC considers involving an inventive step that should be carefully assessed and be decided whether NC should apply for a patent and whether this will prove to be to NC's interest. It is obvious that trade marks will be of great value to NC. As more competing business enter the European Community, trade mark protection is vital. It is always open for NC to register some aspects of its computer software as a design or some of such designs may fall within the unregistered design right and those must also be given attention. Protection of Databases by the sui generis database right doesn't seem to arise in the business. Since patent protection may not arise for some years until after filing patent, or in the case of software, may never arise, copyright protection may not be applicable to protect functional aspects of various technologies, trade secret protection may be used against any misappropriation of NC's confidential information.

A key element of any intellectual due diligence of an information technology start-up, such as NC, will involve an exhaustive examination of the extent to which the start-up company has the exclusive claim to the unique technology that manufactures, promotes and sells. It is quite clear that technology that is not properly protected from use by third parties or is not clearly an asset of the start-up company, will fail to sustain investor interest. Questions like, whether the start-up company own the intellectual property rights to its products, whether the start-up company have licenses from others that adequately cover the use of the products, whether any third parties, those being employees or consultants or independent contractors etc retained any rights or have been granted any rights on the products, whether the manufacture, use, promotion or sale of any product or technology or any aspect of it infringe the intellectual property rights of others must be examined in detail and answered.

2.4 Identifying the appropriate intellectual property rights for each of the products and/or services and determining the scope of protection

NC's Digital Vault

As regards NC's Digital Vault, protection can be provided in different ways by different intellectual property rights out of those listed above.

Digital Vault is a software and in Europe, copyright is seen as the proper vehicle for the protection of computer programs and software. Section 3(1) of the CDPA 1988 defines "literary work" as including a computer program. Identification of the inventor/creator/author of the computer software/ program is important. According to the Software Directive, a computer program is only to be protected by copyright if it is original in the sense that is the author's own intellectual creation and that no other criteria are to be applied to determine its eligibility for that protection. Then it must be specified whether NC is the only creator of the software. A software package is in fact a complex collection of separate copyright works. It is important to know who created each work contained therein in order to avoid any future intellectual property claims by employees or independent contractors who worked on the software. If it is to belong only to NC then, any such Intellectual property rights by third parties must be properly transferred or assigned to NC. Attention must also be paid to the moral rights of the different inventors/creators/authors as they may later try to enforce those rights. It is generally accepted, however, that as regards employees, they have no right of paternity nor of integrity in relation to such works unless the author/employee had at some time been identified with the work.

Then, it is important to investigate whether ownership of the program today rests on NC, as copyright can be transferred, assigned and/or licensed. Therefore, identification of any transfers, assignments or licenses is a must.

Copyright will grant NC effective protection to exploit Digital Vault by granting them the right of action against any competitor copying that software or a substantial part of it without NC's authorization.

I have my doubts on whether such software could be or should be patented by NC.

It is generally accepted that when a computer program is run in a computer to produce some technical result which is a contribution to the state of the art, then it may be patentable, providing the application is directed towards that result rather that the program only. It is generally accepted that computer programs are not patentable as such. If however, NC wish to patent the Digital Vault then its claim must be directed to the practical or technical manner by which the software is applied. In such case the manner in which the patent specification and the claims are drafted are of crucial importance. NC must be also advised that, in US, patent for software inventions seem far easier to obtain that in Europe.

It must be noted, however, that disclosure of the source code of the software will probably be required, infringement would be difficult to test and the length of time to obtain the patent which is between two and three years makes the system unattractive to software houses.

NC's Digital Vault is the name by which NC promotes this software. If NC does not infringe someone else's right to this name then it must seek to protect it by registering it as a Trade mark. In that way, NC's Digital Vault will become associated with quality and consumer expectation. Ownership of a mark will give NC what can be described as a restricted monopoly in that mark and a property right in the mark. In case of infringement NC will be able to sue the infringer for infringing its trade mark and also may be able to get a remedy under the law of passing off.

I personally believe, however, that trade secrets may be the most important issue for particular emerging technologies such as NC's. Therefore, ownership rights to trade secrets are of crucial importance. For example the internal design and documentation for Digital Vault may well constitute trade secret. The general principle is that the employee holds the confidential information for the benefit of his employer. An employee, however after the termination of his employment is free to use his "knowledge and skill". Indeed, it is a problem distinguishing between trade secrets and knowledge and skills that employees can take with them.

Inadvertent, accidental or willful disclosure of confidential information and trade secrets may considerably injure NC. Once a trade secret associated with the software is made public, it enters the public domain. Invariably it will be lost permanently and in most instances so will the competitive advantage linked to it.

NC must sign and be able to rely on non-disclosure agreements also known as confidentiality agreements or other in-house policies and systems to secure confidential information and proprietary information rises to a more significant level of management priority.

NC's Digital Content Exchange (DXC)

NC's Digital Content Exchange is the company's major product. It seems to be NC's most important technology. As a software it can be protected by copyright and all that it is said above (under NC's Digital Vault ) with regard to copyright, may be also applied to this product. It seems that in the case of this software, a patent could be an issue worth discussing. Although it is accepted that computer programs and software are not patentable as such, there are many possibilities that a patent will be granted if it can be demonstrated that an inventive step is involved and that it is capable of industrial application.

Protecting NC's Digital Content Exchange by trade mark law is vital to the success of the product. Therefore, the name of the software must be registered as a trade mark and also the logo DXC can also be registered as a trade mark.

All persons, employees, independent contractors or consultants who participated in the development or otherwise made a contribution to the creation of NC's Digital Content Exchange must assign all their rights to NC.

Keeping safe trade secrets that exist and relate to NC's Digital Content exchange is of crucial importance. Arrangements must be made for non-disclosure agreements to be signed.

NC's Digital Handshake

NC's Digital Handshake is also a software. It is a standard based electronic signature solution. It can be protected by copyright if it is original in the sense that is NC's own intellectual creation.

NC's Digital Handshake is the name by which it is promoted and can of course be registered as trade mark.

It doesn't seem to involve a new idea with new practical application so it seems to me that patent is not an issue here.

NC's Digital Profile

NC's Digital Profile is computer software and it can also be protected by copyright if it is original. All that is said above with regard to software copyright (under NC's Digital Vault) can also be applied to this product.

Any work that may have been done by employees of NC or by independent contractors or consultants doing work for the company must be carefully specified and must be determined whether any of these people or companies retain any intellectual property rights to the work they did. In case they do, NC must signed documents saying that the intellectual property rights remain with NC for all the work done in order for NC to avoid any future disputes arising.

If there is a particular technology involved in NC's Digital Profile that is material to the business of the company as it is currently conducted then NC should claim a patent. Of course in such case NC would have to make a full disclosure of the invention in return. It must be balanced whether such a disclosure would benefit NC.

NC's Digital Profile is the software's name and must be accordingly protected by trade mark law. If NC plans to further promote the Digital Profile product in new countries then, it is important to consider registration of the name as a trade mark in those countries.

NC's Digital Witness

NC's Digital Witness, being software, can also be protected by copyright. All that is said above with regard to copyright under NC's Digital Vault, NC's Digital Content and NC's Digital Profile will also be applied to this product. Trade mark protection is also important for this product as it will distinguish it from other competitors with similar products in the information technology market.

Any trade secrets must also be safeguarded and therefore agreements must be sighed to that effect.

NC's iPlan

NC's iPlan is a secure web-based system that can be accessed from any internet-enabled computer. It uses a targeted questionnaire to collect feedback from the user, her family friends and others and as a result it produces a detailed report which can then be used to help create a support package that is uniquely tailored to the user. It can definitely be protected by copyright. There may be aspects of the software that may be registered separately as designs.

Trade mark law must be used to protect the product's name.

Any computer images associated with this product may be separately registered as trade marks.

Any trade secrets must be safeguarded and therefore confidentiality agreements with the persons who may receive such confidential information are of crucial importance.

NC's Digital Exchange S/MIME

NC's Digital Exchange is a computer program with unique features. It can be definitely subject to copyright. It can be protected as a computer program since it is actually a computer code which causes the computer to process information.

The possibility for applying for patent must be assessed with great care. There may be aspects of the computer program that would worth to patent.

Trade mark registration will also be necessary if not vital to this product also. Trade secrets undoubtedly exist in relation to this software and must be properly and effectively protected. Non- disclosure agreements must be signed to that effect.

NC's Domain name

www....ncs...com is NC's internet address (domain name). It obviously incorporates NC trade mark. A registration by a competitor of a similar address by using the name ...ncs..., may give NC the right to sue for damages for infringement of trade mark and possibly the right to sue that competitor for passing off.

Community trade mark

It is obvious that trade marks are very important for NC. The possibility for applying for community trade mark must be seriously discussed with NC and steps should be taken to register such marks, at least for NC's major products.

3. Evaluation of any Intellectual Property claims

It is important to analyze and evaluate situations where NC's technology/products may infringe a third party's rights or where NC has a valid claim of infringement against a third party.

4. Examination and analysis of licenses or any transfers or assignments of intellectual property rights made by NC

The examination of licenses, or any transfers or assignments and any other transactions which involve transfer of rights in the Intellectual property is also very important and must be carefully reviewed.

Conclusion

Due diligence often reveals that start-up companies have failed to take the necessary steps to register or use legal procedures to protect their core intellectual property Therefore, protection of the value of intellectual property must be a consideration from the start of the business.

This intellectual due diligence will prove to be extremely valuable for NC.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.