Chapter 06 – Protecting the Idea and Other Legal Issues for the Entrepreneur

Chapter 06
PROTECTING THE IDEA AND OTHER LEGAL
ISSUES FOR THE ENTREPRENEUR

LEARNING OBJECTIVES

01: To identify and distinguish intellectual property assets of a new venture including software and
websites.

02: To understand the nature of patents, the rights they provide, and the filing process.

03: To understand the purpose of a trademark and the procedure for filing.

04: To learn the purpose of a copyright and how to file for one.

05: To identify procedures that can protect a venture’s trade secrets.

06: To understand the value of licensing to either expand a business or start a new venture.

07: To recognize the implications of new legislation that affects board of directors and internal
auditing processes for public companies.

08: To illustrate important issues related to contracts, insurance, and product safety and liability.

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Education.
Chapter 06 – Protecting the Idea and Other Legal Issues for the Entrepreneur

CHAPTER OUTLINE AND TEACHING NOTES

OPENING PROFILE – Martin Floreani

Learning Objective 01
I. WHAT IS INTELLECTUAL To identify and distinguish intellectual
PROPERTY? property assets of a new venture
including software and websites.
A. Intellectual property, which includes patents,
trademarks, copyrights, and trade secrets, K EY
T ER M

represents important assets to the entrepreneur.

Intellectual property
B. Because entrepreneurs often do not understand Any patents, trademarks, copyrights, or
intellectual property, they ignore steps that trade secrets held by the entrepreneur
should be taken to protect these assets.

II. NEED FOR A LAWYER

A. All business is regulated by law. Discussion point: The American Bar
Association (http://www.abanet.org)
1. The entrepreneur needs to be aware of offers links that may be helpful to a
regulations that affect the new venture. small business.

2. At different stages of company growth, the

entrepreneur will need legal advice.
3. The legal expertise required will vary based
on such factors as whether the new venture is
a franchise, an independent startup, or a
buyout etc.
B. The entrepreneur should carefully evaluate his or
her needs before hiring a lawyer.

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Chapter 06 – Protecting the Idea and Other Legal Issues for the Entrepreneur

III. HOW TO SELECT A LAWYER

A. Why Hire a Lawyer In the Press: Some general rules about
dealing with lawyers:
1. The entrepreneur does not usually have the 1. If you are being sued, it’s too late to
expertise to handle possible risks associated start looking for an attorney.
2. Larger law firms tend to charge
with difficult laws and regulations.
more, BUT they are likely to offer
2. A competent attorney is in a better position services in nearly all areas you might
need as you grow your business.
to understand all outcomes related to any
Some questions to ask your attorney or
legal action. yourself before selecting an attorney:
1. Are you experienced in small
B. Fees
businesses?
1. The lawyer may work on a retainer basis 2. Are you well-connected to be able
to refer me to another expert if
(stated amount per month) which provides
needed?
office and consulting time. 3. Do you have other clients in my
industry?
2. This does not include court time or other
4. Are you a good teacher?
legal fees. 5. Will you be flexible in your billing?
6. Does this person communicate A patent attorney may be hired as a
3. The lawyer may be hired for a one-time fee,
well? specialist to help obtain a patent.
i.e. filing for a patent. 7. Are the offices conveniently
located?
C. Choosing a lawyer is like hiring an employee—
8. Do I like this person?
the lawyer you work with should be someone to (Ennico, Cliff “How to Hire an Attorney”
whom you can relate personally. Entrepreneur January 20, 2006,
http://www.entrepreneur.com AS SEEN IN BUSINESS NEWS:
D. When resources are limited, the entrepreneur /howto/attorney/index.html) Can a Halloween Costume Actually
may offer the lawyer stock in exchange for his or Infringe on Someone’s Intellectual
her services. Property?

IV. LEGAL ISSUES IN SETTING UP THE

ORGANIZATION

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Chapter 06 – Protecting the Idea and Other Legal Issues for the Entrepreneur

A. Since there are many options an entrepreneur can The form of organization as well as
choose in setting up an organization, it will be franchise agreements are discussed
in Chapters 09 and 14.
necessary to understand all the advantages and
disadvantages of each option.
B. Legal advice is necessary to ensure that the most
appropriate decisions have been made.

V. PATENTS Learning Objective 02

To understand the nature of patents, the
A. A patent is a contract between the government Discussion point: The United States rights they provide, and the filing
government offers information through process.
and an inventor.
their Patent and Trademark Office
1. The government grants the inventor website http://www.uspto.gov. K EY
T ER M
exclusivity for a specified amount of time.
Patent
2. At the end, the government publishes the Grants holder protection from others
invention, and it becomes part of the public making, using, or selling a similar idea
domain.
3. The patent gives the owners a negative right,
preventing anyone from making, using, or
selling the invention.
B. Types of Patents
1. Utility Patents
a. A utility patent has a term of 20 years,
beginning on the date of filing with the
Patent and Trademark Office (PTO).
b. Patents on any invention requiring FDA
approval are extended by the amount of

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Chapter 06 – Protecting the Idea and Other Legal Issues for the Entrepreneur

time it takes the FDA to review the Entrepreneur in Action: Chip Wilson
started yoga in 1997 and decided that
invention. Lycra wasn’t made for “average people.”
c. Initial filing fees for a utility patent for a From this observation sprung
Lululemon, a clothing design company
small entity can vary $70 electronically specializing in yoga clothing. Seams are
and $140 by mail. Additional fees exist less chafing; hoodies have “pony-tail
depending on the number of claims made holes.” There’s even an iPod pouch on
some versions. Many of their ideas are
in the patent application. trade-mark protected. (Anderson, Diane
d. The patent grants the owner protection “Stretching for Success” Business 2.0
October 2006 pg. 58
from anyone making, using, and/or http://money.cnn.com/magazines
selling the invention. /business2/business2_archive/
2006/05/01/8375911/index.htm)
2. Design Patents
a. Covering new, original, ornamental, and
unobvious designs for articles of
manufacture, a design patent reflects an
object’s appearance.
b. These are for a 14-year term and provide
a negative right, excluding others from
making, using, or selling an article
having the same ornamental appearance.
c. Initial filing fees are lower than for utility
patents - $90 for a small entity. Examples are shoe companies such as
Reebok and Nike who are interested in
d. Although design patents have obtaining design patents as a means of
traditionally been viewed as useless, protecting their ornamental designs.
there has been renewed interest recently.

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Chapter 06 – Protecting the Idea and Other Legal Issues for the Entrepreneur

3. Plant patents are issued under the same

provisions as utility patents and are for new
varieties of plants.
C. Patents are issued by the Patent and Trademark
Office (PTO).
1. This office also administers other programs
and many online services for the In the Press: The USPTO offers
entrepreneur, such as software for filing extensive advice on how to apply for a
patent.
patents and forms for trademarks and 1.Make sure your product isn’t infringing
copyrights. on someone else’s patent.
2.Be prepared to establish the novelty of
2. In 2011, the America Invents Act, designed your product.
to streamline the USPTO system, passed. 3.Hire a patent attorney or agent.
4.Consider patenting your method of
3. The new legislation changed the system to a doing business.
first-to-file system that rewards firms that https://www.uspto.gov/patent
can file quickly.
D. International Patents
1. The concerns over imitations and knock-offs
resulted in International Patenting become a
significant IP strategy for many startups.
2. The USPTO has established the Office of
International Patent Cooperation in order to
establish a more harmonized patent system.
3. Joint efforts between the USPTO and the
European Patent Office has established a
common classification process.

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Chapter 06 – Protecting the Idea and Other Legal Issues for the Entrepreneur

4. The Global Dossier allows applicants to have

one stop access for applications in five of the
largest patent offices in the world. K EY
T ER M
4. The major efforts by the USPO have been
Provisional Patent Application
with the European Patent Office, the Japan The initial application to the U.S. Patent
Patent Office, and the Korean Patent Office. and Trademark Office providing
evidence of first to market
E. The Provisional Application
1. The entrepreneur should first file a
provisional patent application to establish a In the Press: How different is different
date of conception of the invention. enough when it comes to obtaining
trademarks, patents, and copyrights?
2. The provisional application is consistent with • For a trademark, the key is
European procedures and can be critical “likelihood of confusion.” If someone
sees your mark, are they likely to
when there is a foreign company involved in think it’s some other firm’s mark?
the patent application. • With copyrights, there are two
considerations. First, have you
4. In addition to the written material, drawings
borrowed so much that the original is
may be included, if deemed necessary to not worth reading for more
understand the invention. information? Second, is your work
based on someone else’s work
5. The actual filing of the patent in its final commonly known as “derivative”
form must occur no later than 12 months (e.g., a sequel)? The copyright
holder has the rights to his/her
after the provisional disclosure document if
original and all derivative works.
filed. • For a patent, are the claims in your
work essentially equal to someone
F. The Patent Application
else’s patent?
1. The patent application must contain a (Monosoff, Tamara “Top Legal FAQs for
Inventors” Entrepreneur July 10, 2006
complete history and description of the
http://www.entrepreneur.com/
invention as well as claims for its usefulness. startingabusiness/inventing/
inventionscolumnisttamaramonosoff
2. The application is divided into sections:
/article159562.html)

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Chapter 06 – Protecting the Idea and Other Legal Issues for the Entrepreneur

a. The Introduction Section contains the

background and advantages of the
invention and the nature of problems it
overcomes.
b. Description of Invention Section
i. This section contains a brief
description of the drawings, which
must comply with PTO Entrepreneur in Action: AutoCart is
making shopping more automated.
requirements. They have set up a drive-through
ii. A description of the invention superstore. Customers place their
orders online, by phone or onsite using
follows, including engineering a touch screen. Merchandise travels by
specifications, materials, and high speed conveyor to a consolidating
components. zone. The products are delivered to the
car by conveyor belt where the
c. Claims Section. consumer pays and leaves without ever
setting foot in the store. (Flight, Georgia
i. Claims are the criteria by which any “A Speedier Superstore” Business 2.0
infringements will be determined. December 2005, pg. 38
http://money.cnn.com/magazines
ii. Essential parts of the invention /business2/business2_archive/
should be described in broad terms. 2005/12/01/8364582/index.htm)

iii. The claims must not be so general A current (2018) search for AutoCart
that they hide the invention’s finds nothing. With most larger stores
uniqueness and advantages. offering curbside pickup now, this
concept is no longer needed.
3. The application should contain a declaration
signed by the inventor.
4. When the application is sent, the status of the
invention becomes “patent pending,”

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Chapter 06 – Protecting the Idea and Other Legal Issues for the Entrepreneur

providing complete confidential protection

until the application is approved.
5. A carefully written patent should provide
protection and prevent competitors from
working around it, but is also an invitation to
sue or be sued if there is any infringement.
6. The fees for filing an application will vary, Figure 6.1
depending on the patent search and on claims “Options to Avoid Infringement”
Illustrates the steps needed to follow
made in the application. when considering marketing a product
7. Applicants may also file online using the that may infringe on an existing patent.

EFS web service provided by the PTO.

G. Patent Infringement
Table 6.1
1. The entrepreneur must be sensitive about “Checklist for Minimizing Patent Risks”
whether they are infringing on someone A simple checklist to follow to minimize
any patent risks.
else’s patents.
2. Many inventions are the result of
improvements in existing products.
a. Copying and improving a product may be
legal and a good business strategy.
b. If copying and improving is impossible,
it may be possible to license the product
from the patent holder.
3. To ascertain the existence of a patent, the
entrepreneur can use the Internet.

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Chapter 06 – Protecting the Idea and Other Legal Issues for the Entrepreneur

a. If there is possible infringement on an

existing patent, consider licensing.
b. If in doubt, hire a patent attorney.

VI. BUSINESS METHOD PATENTS

A. With the growth of Internet use and software
development has emerged the use of business
method patents.
1. Amazon.com owns a business method patent
for the single click buying feature to order
products on its website.
2. Priceline.com claims it holds a patent to a
service where a buyer can submit a price bid
for a particular service.
B. Many firms have used these patents to assault
competitors and provide a stream of royalties.
C. The PTO has changed the review process for
business method patents and reviews are now
conducted by the Patent Trial and Appeal Board.
D. The growth of the use of tablets and smartphones
has necessitated these changes.

VII. STARTUP WITHOUT A PATENT See Chapters 07 and 08 to understand

the competitive environment.

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Chapter 06 – Protecting the Idea and Other Legal Issues for the Entrepreneur

A. Not all startups will have a product or concept Learning Objective 03

To understand the purpose of a
that is patentable trademark and the procedure for filing.
B. Using a unique marketing plan and striking Discussion point: Present a dozen or
so trademarks from products. Select
early may provide a competitive advantage. “obvious” ones (Nike Swoosh, K EY
T ER M
McDonald’s golden arches) to less
VIII. TRADEMARKS
obvious (airline logos, perhaps). See
Trademark
A. A trademark may be a word, symbol, design, or which ones they can identify. The same
A distinguishing word, name, or symbol
can be done for protected advertising
some combination which identifies the source or used to identify a product
tag lines (“Just do it”).
sponsorship of certain goods.
1. A trademark can last indefinitely, as long as
it continues to perform its indicated function. Discussion point: Marketing News lists
the best known brand names,
a. Trademarks now are given an initial 10- Trademark examples are the red tab
advertising icons, symbols, etc. and
year registration with 10-year renewable attached to the left rear pocket of Levi
estimates the value of these brands.
Strauss jeans, the Dutch Boy is
terms. These lists are published irregularly,
recognized in paints, the McDonald’s
data is never more than a year or so old.
b. In the fifth to sixth year, the registrant arch is internationally recognized in the
Other marketing or advertising
fast food industry, the roar of a lion
must file an affidavit with the PTO publications often do the same. Forbes
identifies the motion pictures of Metro-
has a list of brands and their values for
indicating that the patent is in Goldwyn-Mayer, and the apple with a bit
2018.
commercial use. missing is well recognized with Apple
Computer.
c. If no affidavit is filed, the registration is
canceled. Between the ninth and tenth
year after registration, and every 10 years
thereafter, the owner must file an
application for renewal of the trademark.
Otherwise, the registration is canceled.
d. Trademark law allows filing a trademark
solely on the intent to use the trademark
in interstate or foreign commerce.

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Chapter 06 – Protecting the Idea and Other Legal Issues for the Entrepreneur

e. There are benefits to registering a mark

that has already been in use.
B. Registering the Trademark
1. The PTO is responsible for federal
registration of trademarks.
2. To file, the entrepreneur must complete a Table 6.2
downloadable form, submitted by mail or “Benefits of a Registered Trademark”
Table 6.2 summarizes the benefits of
filed electronically using the TEAS available registering a trademark.
on the PTO website.
3. Filing of the trademark registration involves Entrepreneur in Action: Can you
four requirements: brand a commodity item? Niman Ranch
has found a way to brand beef. They
a. Completion of the written form. follow several other notables that
b. A drawing of the mark. branded “unbrandable” items. Ever
heard of Evian water, Tiffany glass, Intel
c. Five specimens showing actual use of the semi-conductors, or Chiquita bananas?
mark. (Kaihla, Paul “Marketing designer meat”
Business 2.0 April 2006, pg. 72
d. The fee. http://money.cnn.com/magazines
/business2/business2_archive/
4. An examining attorney at the PTO 2006/04/01/8372802/index.htm)
determines whether the mark is suitable for
registration.
5. Once accepted, the trademark is published in
the Trademark Official Gazette to allow any
party 30 days to oppose.
6. If the trademark is refused, the entrepreneur
still has the right to appeal to the PTO.

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Chapter 06 – Protecting the Idea and Other Legal Issues for the Entrepreneur

7. If no opposition is filed, the registration is

issued.
8. The entire process usually takes about 13
months from the initial filing.

IX . COPYRIGHTS Discussion point: The United States Learning Objective 04

Copyright Office can be found at To learn the purpose of a copyright and
A. A copyright protects original works of http://www.copyright.gov how to file for one.
authorship.
1. The protection does not protect the idea K EY
T ER M
itself.
Copyright
2. It allows someone else to use the idea in a Right given to prevent others from
different manner. printing, copying, or publishing any
original works of authorship
B. Online Issues
1. The copyright law has become especially
relevant because of the tremendous growth In the Press: Cilija, a chain of pizza
parlors in Lithuania and Latvia has
of the use of the Internet especially to AS SEEN IN BUSINESS NEWS:
applied for a copyright on the scent of
download music, pictures, and videos. Music Streaming and Copyright
fresh-baked pizza. No word yet as to
Protection: Where Are We Headed?
whether they’ll get it, but for publicity
2. The music streaming business has been
power, the ploy was undeniably good.
particularly relevant in any discussion of (Anonymous “Lithuanian Restaurant
copyright protection. However, social media Seeks to Copyright Special Scent.”
Marketing News June 15, 2006, pg. 13
has become a copyright issue.
http://www.marketingpower.com/
a. Every social media can be considered a resourceLibrary/MarketingNews/Pages/
2006/40/11/21147265.aspx)
type of publication.
b. With businesses using social media,
needed protection may be more relevant.

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Chapter 06 – Protecting the Idea and Other Legal Issues for the Entrepreneur

c. It may be difficult to copyright a Tweet

but Facebook postings by businesses may
be considered original works.
3. Copyright protection related to the Internet
will continue to be a concern until precedents
and regulations are made clear.
C. Copyrights are registered with the Library of
Congress and usually requires no attorney.
1. All that is needed is the application, two
copies of the work, and the $35 fee if filed
online or $45 if filed by mail.
2. The term of the copyright is the life of the
author plus 70 years.
D. In some instances, several forms of protection
may be available. For example: the name of the
board game may be protected by trademark, the
game itself protected by utility patent, the board
protected by a copyright, and the playing pieces
covered by a design patent.

X. TRADE SECRETS AND Learning Objective 05

To identify procedures that can protect a
NONCOMPETITION AGREEMENTS venture’s trade secrets.

A. In certain instances, an entrepreneur may prefer K EY

T ER M
to maintain an idea or process as confidential
and to sell or license it as a trade secret. Trade secret

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Chapter 06 – Protecting the Idea and Other Legal Issues for the Entrepreneur

1. Noncompete agreements are documents Protection against others revealing or

disclosing information that could be
prepared by an employer and signed by an damaging to business
employee.
2. The agreement is signed in order for the
company to protect valuable assets ranging
from product information to clients,
Table 6.3
marketing ideas and unique strategies. “A Simple Trade Secret Nondisclosure
B. A trade secret is not covered by federal law but Agreement”

is recognized under common laws in each state.

1. Employees may be asked to sign a
confidential information agreement.
2. The holder of the trade secret has the right to
sue any signee who breaches the agreement.
C. How much information to give to employees is
ETHICS
determined by the entrepreneur’s judgment. Noncompete Agreements:
1. Historically, entrepreneurs tended to restrict Do Employees Have An
Ethical Responsibility To
access to confidential information. Restrain From Revealing
2. Today there is a tendency to share more Trade Secrets To A New
Employer?
information with employees, to make them
more effective and creative.
D. Non-protected ideas could become a serious
problem in the future unless the entrepreneur
takes proper precautions.
E. To maintain secrecy:

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Chapter 06 – Protecting the Idea and Other Legal Issues for the Entrepreneur

1. Train employees to refer sensitive questions

to one person.
2. Provide escorts for all office visitors.
3. Avoid discussing business in public places.
4. Keep important travel plans secret.
5. Control information that might be presented
by employees at conferences or in journals.
6. Use simple security such as locked file
cabinets, passwords, and shredders.
7. Have employees and consultants sign non-
disclosure agreements.
8. Debrief departing employees on any
confidential information.
9. Avoid faxing any sensitive information.
10. Mark documents “confidential” when
needed.
F. Protection against the leaking of trade secrets is
difficult to enforce, and legal action can be taken
only after the secret has been revealed.
G. A few good points are worth considering when
preparing a noncompetition agreement:
1. Determine if the employee can harm the
company if he or she left.

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Chapter 06 – Protecting the Idea and Other Legal Issues for the Entrepreneur

2. Hire a competent labor law attorney to make

sure the agreement is fair and can be
enforced.
3. Provide incentives for the employee at hiring
for signing a noncompete agreement.
4. Specify what is included in the noncompete
information.
5. Consider other options besides a
noncompete, such as nonpiracy or non-
disclosure documents.

XI. LICENSING Learning Objective 06

To understand the value of licensing to
A. Licensing is an arrangement between two either expand a business or start a new
venture.
parties, where one party has proprietary rights
over some information process or technology In the Press: Movies have a habit for K EY
T ER M
protected by a patent, trademark, or copyright. shutting down fan sites – which usually
have a lot of protected contents –
1. This requires the licensee to pay a royalty to pictures, graphics, plots, dialog, etc.
Licensing
Contractual agreement giving rights to
the holder of the proprietary rights in They have a good reason for doing so:
others to use intellectual property in
(licensor) return for permission to copy the they can, instead, license this same
return for a royalty or fee
information and make quite a bit of
patent, trademark, or copyright. money. When Lord of the Rings was
2. Licensing has significant value as a about to be released, Gordon Paddison,
a senior vice president of New Line
marketing strategy to holders of patents. Cinema, decided to co-operate with
B. Procedure these sites. Now many films are selling
based on their prerelease Internet hype
1. A patent license agreement specifies how the – or viral marketing as it is often called.
licensee would have access to the patent. (Weingarten, Marc “Get Your Buzz to
Breed Like Hobbits” Business 2.0
January 2002, pg. 96)

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Chapter 06 – Protecting the Idea and Other Legal Issues for the Entrepreneur

2. The agreement must be carefully worded and

should involve a lawyer.
C. Licensing a trademark generally involves a
franchising agreement.
1. The entrepreneur operates a business using
the trademark and agrees to pay a fixed sum
Entrepreneur in Action: In 1998, Mike
for use of the trademark. Becker resurrected the bobblehead and
Wacky Wobblers was born. His success
2. The franchisee also pays a royalty based on
is based on being able to license a
sales volume, buys supplies from the character such as Big Boy (from the Big
franchiser, or some combination of these. Boy Restaurant chain), Bozo the Clown,
Lucky Charms, and Pink Panther. His
D. Copyrights are also popular licensed property. biggest coupe? Getting the licensing
1. They involve the right to use or copy books, rights to Austin Powers. (Anonymous
“Got ID” Entrepreneur November 2002
software, music, photos, and plays. www.entrepreneur.com/article/56270)
2. Celebrities will often license the right to use
his or her name or image in a product.
3. Licensing is also popular around special
sports events such as the Olympics.
4. Licensing represents opportunities for many Microsoft and IBM continue to generate
significant revenues from its licensing
firms to expand into new markets, expand strategies.
product line, or simply reach more customers
within its existing target markets.
5. Disney is by far the world leader in
licensing.
E. Benefits
1. Licensing can increase revenues, without the
risk and costly startup investment.
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Chapter 06 – Protecting the Idea and Other Legal Issues for the Entrepreneur

2. Licensing can also be a way to start a new

venture when the idea may infringe on
someone else’s patent.

XII. PRODUCT SAFETY AND LIABILITY Learning Objective 08

To illustrate important issues related to
A. The Consumer Product Safety Act, passed in contracts, insurance, and product safety
and liability.
1972, amended in 1990 and again in 2008,
created a five-member commission that has the K EY
T ER M
power to prescribe safety standards for products.
Product safety and Liability
1. Large fines and recalls of any products that Responsibility of a company to meet any
are deemed unsafe are the typical outcome of legal specifications regarding a new
any action enforced by the commission. product covered by the Consumer
Product Safety Act
2. McDonald’s had to recall 33 million StepIT
wristbands due to skin irritation or burns to
children and IKEA had to recall 27 million
children’s dressers that easily tipped over
causing the death of two children.
3. Entrepreneurs must be aware of the threats of
these recalls, especially with any high-risk
products. Food and toys especially should be
evaluated prior to any development.

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Chapter 06 – Protecting the Idea and Other Legal Issues for the Entrepreneur

XIII. INSURANCE
A. The entrepreneur should purchase insurance in
the event that problems do occur.
Discussion point: Consider bringing in
Table 6.4
B. Most firms should consider coverage in specific an insurance agent who insures small
“Types of Insurance and Possible
business to talk more about this topic.
areas as a means of managing risk in the Coverage”
business. Most firms should consider coverage for
situations described in Table 6.4.
1. Some insurance, such as disability and
vehicle coverage, is required by law and
cannot be avoided.
2. There have been many changes to the
Affordable Care Act of 2010 and should be
reviewed carefully before deciding on an
insurance plan or program.
3. Advice and information on insurance is
available at universities or the Small
Business Administration.

XIV. SARBANES-OXLEY ACT Learning Objective 07

To recognize the implications of new
A. After many reports of corporate misconduct, legislation that affects board of directors
Congress passed the Sarbanes-Oxley Act in 2002 and internal auditing processes for
public companies.
and amended it in 2010.
1. Although it provides greater control over
financial activities of public companies, it
has created some difficulties for small
businesses and startups.

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Chapter 06 – Protecting the Idea and Other Legal Issues for the Entrepreneur

2. Recently, Congress provided some relief for In the Press: Deloitte offers these 10
threats to Sarbanes-Oxley compliance:
small businesses by making them exempt 1 Lack of a firm-wide, top
from section 404 requiring them to attest to management driven internal
the soundness of the firm’s internal controls control system.
2 Lack of a formal program.
and financial statements. 3 Inadequate controls.
3. The law contains many provisions not 4 Ineffective post-merger integration.
5 Lack of effective controls over IT.
covered here, but an overview of the law’s 6 Ineffective financial reporting.
requirements is provided. 7 Lack of forma control over financial
closing.
a. CEOs are required to vouch for financial 8 Lack of current, consistent,
statements through a series of internal complete accounting policies.
control mechanisms and reports. 9 Inability to evaluate and test
controls over outsourced
b. Directors must meet background processes.
requirements and responsibilities 10 Inadequate board and audit
committee understanding of risk
regarding internal auditing and control. and control.
c. Any attempt to influence the auditor or (From a “Sarbanes-Oxley Section 404”
booklet provided by Deloitte Touche
impede the internal auditing process Tohmatsu (2004)
would be considered a criminal act. http://www.deloitte.com/us/tenthreats#)

3. There is some concern that this law will

discourage qualified individuals from being
members of important boards.
4. Foreign companies that trade on U.S. stock
exchanges have been forced to delist because
the provisions of the law conflicted with the
laws of that foreign country.

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Chapter 06 – Protecting the Idea and Other Legal Issues for the Entrepreneur

5. Private companies were not included in this

act, but are subject to control if they consult
to public companies.
6. The other option is for the entrepreneur to set
up a board of advisors instead of an extended
board of directors.

XV. CONTRACTS Learning Objective 08

To illustrate important issues related to
A. A contract is a legally enforceable agreement contracts, insurance, and product safety
and liability.
between two parties as long as certain conditions
are met. K EY
T ER M
B. Often, business deals are informal, concluded
with a handshake. Contract
A legally binding agreement between
1. When things are going smoothly, this two parties
procedure is sufficient.
2. If there are disagreements, the entrepreneur
may find that there is no deal and that they
Table 6.5
may be liable for something never intended. “Contract Conditions and Results of a
3. Never rely on a handshake if the deal cannot Breach of Contract”
Table 6.5 identifies conditions and
be completed within one year. outcomes should one party not live up to
the terms of the contract.
4. The courts insist that a written contract exist
for all transactions over $500.
C. The safest way to conduct business deals is with
a written contract.

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Chapter 06 – Protecting the Idea and Other Legal Issues for the Entrepreneur

1. Any deal involving real estate must be in

writing to be valid.
2. Leases, rentals, and purchases all need
written agreements.
D. It is helpful for the entrepreneur to understand
that before signing a contract he or she should do
the following:
1. Understand the terms and conditions in the
contract.
2. Cross out anything that you do not agree to.
3. Do not sign if there are blank spaces (these
can be crossed out).
4. Make a copy for your files after signing.

XVI. IN REVIEW: SUMMARY.

See “Learning Objectives Revisited” below.

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Chapter 06 – Protecting the Idea and Other Legal Issues for the Entrepreneur

LEARNING OB JECTIVES REVISITED

Learning Objective 01: To identify and distinguish intellectual property assets of a new
venture including software and websites.
● Intellectual property includes patents, software, websites, trademarks,
copyrights, and trade secrets.
● These represent important assets.

Learning Objective 02: To understand the nature of a patent, the rights they provide,
and the filing process.
● A patent is a contract between the government and an inventor.
● The government grants the inventor exclusivity for a specified amount of
time.
● The patent gives the owners a negative right, preventing anyone from
making, using, or selling the invention.
● There are three types of patents: utility patents, design patents, and plant
patents.
● The patent application must contain a complete history and description of
the invention as well as claims for its usefulness.
● The application includes: the introduction section, description of invention
section, and claims section.
● When the application is sent, the status of the invention becomes “patent
pending,” providing protection until the application is approved.
● The entrepreneur must be sensitive about whether he or she is infringing
on someone else’s patent.
● With the growth of Internet use and software development has emerged
the use of business method patents.

Learning Objective 03: To understand the purpose of a trademark and the procedure
for filing.
● A trademark may be a word, symbol, design, or some combination which
identifies the source of certain goods.
● A trademark can last indefinitely, as long as it continues to perform its
indicated function.
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McGraw-Hill Education.
Chapter 06 – Protecting the Idea and Other Legal Issues for the Entrepreneur

● To file, the entrepreneur must complete the application form, including the
four basic requirements.
● An examining attorney at the PTO determines whether the mark is suitable
for registration.
● Once accepted, the trademark is published in the Trademark Official
Gazette to allow any party 30 days to oppose.
● If no opposition is filed, the registration is issued.

Learning Objective 04: To learn the purpose of a copyright and how to file for one.
● A copyright protects original works of authorship.
● Although software was added to copyright law in 1980, there are
continuing issues regarding access to materials on the Internet.
● Copyrights are registered with the Library of Congress.
● The term of the copyright is the life of the author plus 70 years.

Learning Objective 05: To identify procedures that can protect a venture’s trade
secrets.
● Train employees to refer sensitive questions to one person.
● Provide escorts for all office visitors.
● Avoid discussing business in public places.
● Keep important travel plans secret.
● Control information presented by employees at conferences or in journals.
● Use simple security such as locked file cabinets and shredders.
● Have employees and consultants sign non-disclosure agreements.
● Debrief departing employees.
● Avoid faxing and emailing any sensitive information.
● Mark documents “confidential” that need to be.

Learning Objective 06: To understand the value of licensing to either expand a

business or start a new venture.
● Licensing is an arrangement between two parties, where one party has
proprietary rights protected by a patent, trademark, or copyright.
● Licensing a trademark generally involves a franchising agreement.
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McGraw-Hill Education.
Chapter 06 – Protecting the Idea and Other Legal Issues for the Entrepreneur

● Licensing can increase revenues, without the risk and costly startup
investment.
● It can be a way to start a new venture when the idea may infringe on
someone else’s patent.

Learning Objective 07: To recognize the implications of new legislation that affects
board of directors and internal auditing processes for public
companies.
● After many reports of corporate misconduct, Congress passed the
Sarbanes-Oxley Act.
● CEOs are required to vouch for financial statements.
● Directors must meet background requirements and responsibilities
regarding internal auditing and control.
● Any attempt to influence the auditor or impede the internal auditing
process would be considered a criminal act.
● There is some concern that this law will discourage qualified individuals
from being members of important boards.

Learning Objective 08: To illustrate important issues related to contracts, insurance,

and product safety and liability.
● The entrepreneur should purchase insurance in the event that problems do
occur.
● Most firms should consider coverage in specific areas as a means of
managing risk in the business.
● Any new product should be assessed as to whether it falls under the
Consumer Product Safety Act.
● A contract is a legally enforceable agreement between two parties as long
as certain conditions are met.
§ The safest way to conduct business deals is with a written contract,
although oral contracts are legal and enforceable.
§ There are four essential items that provide legal protection.
• Understand the terms and conditions in the contract.
• Cross out anything that you do not agree to.
• Do not sign if there are blank spaces.
• Make a copy of the files after signing.
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McGraw-Hill Education.
Chapter 06 – Protecting the Idea and Other Legal Issues for the Entrepreneur

KEY TERM S

Contract: A legally binding agreement between two parties

Copyright: Right given to prevent others from printing, copying, or publishing any
original works of authorship
Intellectual property: Any patents, trademarks, copyrights, or trade secrets held by the
entrepreneur
Licensing: Contractual agreement giving rights to others to use intellectual property in
return for a royalty or fee
Patent: Grants holder protection from others making, using, or selling a similar idea
Product safety and liability: Responsibility of the company to meet any legal
specifications regarding a new product covered by the Consumer Product Safety Act
Provisional patent application: The initial application to the U.S. Patent and Trademark
Office providing evidence of first to market
Trademark: A distinguishing word, name, or symbol used to identify a product
Trade secret: Protection against others revealing or disclosing information that could be
damaging to business

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