Entrepreneurship: Successfully Launching
New Ventures
Sixth Edition, Global Edition
Chapter 12
The Importance
of Intellectual
Property
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Learning Objectives (1 of 2)
12.1 Define the term intellectual property and describe its
importance.
12.2 Explain what a patent is and describe different types
of patents.
12.3 Describe a trademark and explain the process
entrepreneurs use to obtain one.
12.4 Describe a copyright and identify what a copyright
can protect.
12.5 Describe a trade secret and understand the common
causes of trade secret disputes.
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Learning Objectives (2 of 2)
12.6 Explain what an intellectual property audit is and identify
the two primary reasons entrepreneurial firms should
complete this type of audit.
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The Importance of Intellectual Property
• Intellectual Property
– Is any product of human intellect that is intangible but has
value in the marketplace.
– It is called “intellectual” property because it is the product
of human imagination, creativity, and inventiveness.
• Importance
– Traditionally, businesses have thought of their physical
assets, such as land, buildings, and equipment as the
most important.
– Increasingly, however, a company’s intellectual assets are
the most important.
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Common Mistakes Firms Make in Regard to
Protecting Their Intellectual Property
• Not properly identifying all of their intellectual property.
• Not fully recognizing the value of their intellectual property.
• Not using their intellectual property as part of their overall
plan for success.
• Not taking sufficient steps to protect it.
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Determining What Intellectual Property
to Legally Protect
Criteria 1
• Determine whether the intellectual property in question
is directly related to the firm’s competitive advantage.
Criteria 2
• Decide whether the intellectual property in question
has value in the marketplace.
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The Four Key Forms of Intellectual
Property
• Patents
• Trademarks
• Copyrights
• Trade Secrets
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Patents (1 of 4)
• A patent is a grant from the federal government conferring
the rights to exclude others from making, selling, or using an
invention for the term of the patent. (See the next slide for a
full explanation.)
• Increasing Interest in Patents
– There is increasing interest in patents.
Since Patent #1 was granted in 1790, the U.S. Patent
& Trademark Office has granted 9.6 million patents.
The patent office is strained. It takes an average of
25.3 months from the date of first filing to receive a
U.S. patent.
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Patents (2 of 4)
Proper Understanding of What a Patent Means
• A patent does not give its owner the right to make, use, or sell an
invention; rather, the right granted is only to exclude others from doing so.
• As a result, if an inventor obtains a patent for a new kind of computer chip,
and the chip would infringe on a prior patent owned by Intel, the inventor
has no right to make, use, or sell the chip.
• To do so, the inventor would need to obtain permission from Intel. Intel
may refuse permission, or ask that a licensing fee be paid for the rights to
infringe on its patent.
• While this system may seem odd, it is really the only way the system could
work. Many inventions are improvements on existing inventions, and the
system allows the improvements to be (patented) and sold, but only with
the permission of the original inventors, who usually benefit by obtaining
licensing income in exchange for their consent.
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Patents (3 of 4)
Table 12.2 growth in patent applications in the united states
Blank 2014 2015 2016
Applications received 618,457 618,062 650,411
Patents issued 329,612 322,449 334,107
Patent applications pending 1,127,701 1,099,468 1,070,163
Average time for approval 27.4 months 26.6 months 25.3 months
Source: United States Patent and Trademark Office, Performance and Accountability
Report for Fiscal Year 2016, available at www.uspto.gov.
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Patents (4 of 4)
Figure 12.2 three basic requirements for a patent
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Types of Patents
Table 12.3 Summary of the Three Forms of Patent Protection, the
Types of Inventions the Patents Cover, and the Duration of the Patents
Type Type of Invention Covered Duration
Utility New or useful process, machine, 20 years from the date of the
manufacture, or composition of original application.
material or any new and useful
improvement thereof.
Design Invention of new, original, and 14 years from the date of the
ornamental design for original application.
manufactured products.
Plant Any new varieties of plants that can 20 years from the date of the
be reproduced asexually. original application.
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Business Method Patents (Special Utility
Patent)
• A business method patent is a patent that protects an
invention that is or facilitates a method of doing business.
• The most notable business method patents that have
been awarded:
– Amazon.com’s one-click ordering system.
– Priceline.com’s “name-your-price” business model.
– Netflix’s method for allowing customers to set up a
rental list of movies to be mailed to them.
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The Process of Obtaining a Patent
Figure 12.3
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Patent Infringement
• Takes place when one party engages in the unauthorized
use of another party’s patent.
• The tough part (particularly from a small entrepreneurial
firm’s point of view) is that patent infringement cases are
costly to litigate.
– A typical patent infringement case costs each side at
least $500,000 to litigate.
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Trademarks
• A trademark is any word, name, symbol, or device used
to identify the source or origin of products or services
and to distinguish those product or services from others.
• Trademarks also provide consumers with useful
information.
– For example, consumers know what to expect when
they see a Macy’s store.
– Think how confusing it would be if any retail store
could use the name Macy’s.
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The Four Types of Trademarks (1 of 2)
Table 12.5 Summary of the Four Forms of Trademark Protection, the Type
of Marks the Trademarks Cover, and the Duration of the Trademarks
Type Types of Marks Covered Duration
Trademark Any word, name, symbol, or device used Renewable every 10 years,
to identify and distinguish one company’s as long as the mark remains
goods from another’s. in use.
Examples: Apple, d.light, GoPro, Athletic
Propulsion Labs, 3Derm
Service mark Similar to trademarks; are used to Renewable every 10 years,
identify the services or intangible as long as the mark remains
activities of a business, rather than a in use.
business’s physical products.
Examples: 1-800-FLOWERS,
Amazon.com, IndieU, Real Time Cases,
CoachUp, Dropbox
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The Four Types of Trademarks (2 of 2)
Table 12.5 (continued)
Type Types of Marks Covered Duration
Collective Trademarks or service marks used by Renewable every 10 years,
mark the members of a cooperative, as long as the mark remains
association, or other collective group. in use.
Examples: Information Technology
Industry Council, International Franchise
Association, Rotary International
Certification Marks, words, names, symbols, or Renewable every 10 years,
mark devices used by a person other than the as long as the mark remains
owner to certify a particular quality about in use.
a good or service.
Examples: 100% Napa Valley, Florida
Oranges, National Organic Program,
Underwriters Laboratories
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What is Protected Under Trademark
Law? (1 of 2)
Item Example(s)
Words Birchbox, Rent the Runway, National Football
League
Numbers and letters 3M, Boeing 787, AT&T
Designs and logos Nike swoosh logo
Sounds MGM’s lion’s roar
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What is Protected Under Trademark
Law? (2 of 2)
Item Example
Fragrances Stationery treated with a special fragrance
Shapes Unique shape of the Apple iPod
Colors Nexium—the “purple pill”
Trade dress The layout and décor of a restaurant
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Exclusions From Trademark Protection
Item Example
Immoral or scandalous matter Profane words
Deceptive matter Labeling oranges “Fresh Florida
Oranges” that aren’t grown in Florida
Descriptive marks Phrases like “golf ball” and “fried
chicken” are descriptive and can’t be
trademarked
Surnames Common surnames like “Anderson”
or “Smith” can’t be trademarked
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The Process of Obtaining a Trademark
Figure 12.4
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Copyrights
• A copyright is a form of intellectual property protection
that grants to the owner of a work of authorship the legal
right to determine how the work is used and to obtain the
economic benefits from the work.
• The work must be in a tangle form, such as a book,
operating manual, musical score, or computer software
program.
• A work does not have to have artistic merit to be eligible
for copyright protection.
– As a result, things such as operating manuals and
sales brochures are eligible for copyright protection.
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What is Protected by a Copyright? (1 of 2)
Item Example(s)
Literary works Books, poetry, reference works, speeches
Musical compositions Musical score, CD, MP3 file
Computer software All forms of computer programs
Dramatic works Play, comedy routine, newscast, movie,
television show
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What is Protected by a Copyright? (2 of 2)
Item Example(s)
Pantomimes and Arrangements of dance movements, including
choreographic works ballets and mime works
Pictorial, graphic, and Photographs, prints, art reproductions,
sculptural works cartoons, maps, globes, jewelry, fabrics,
games, technical drawings, diagrams, posters,
toys, sculptures, charts
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Exclusions from Copyright Protection
• The Idea-Expression Dichotomy
– The main exclusion is that copyright laws cannot protect
ideas.
For example, an entrepreneur may have the idea to open
a soccer-themed restaurant. The idea itself is not eligible
for copyright protection. However, if the entrepreneur
writes down specifically what his or her soccer-themed
restaurant will look like and how it will operate, that
description is copyrightable.
The legal principle describing this concept is called the
idea-expression dichotomy.
An idea is not copyrightable, but the specific expression
of an idea is.
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Obtaining a Copyright
• How to Obtain a Copyright
– Copyright law protects any work of authorship the moment
it assumes a tangible form.
– Technically, it is not necessary to provide a copyright notice
or register work with the U.S. Copyright Office.
– The following steps can be taken, however, to enhance
copyright protection.
Copyright protection can be enhanced by attaching the
copyright notice, or “copyright bug” © to something.
Further protection can be obtained by registering the
work with the U.S. Copyright Office.
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Copyright Infringement (1 of 2)
• Copyright Infringement
– Copyright infringement occurs when one work derives
from another, is an exact copy, or shows substantial
similarity to the original work.
– To prove infringement, a copyright owner is required to
show that the alleged infringer had prior access to the
copyrighted work and that the work is substantially
similar to the owner’s.
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Copyright Infringement (2 of 2)
• The illegal downloading of music is an example of
copyright infringement.
• Copyright infringement costs the owners of copyrighted
material an estimated $25 billion per year.
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Fair Use
• Copyright law permits limited infringement of copyrighted
material under certain circumstances.
• The certain circumstances are called fair use. Fair use
allows one to use copyrighted material for purposes such
as criticism, comment, news reporting, teaching or
scholarship.
• This provision is what allows movie critics to show clips
from movies.
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Trade Secrets
• Trade Secrets
– A trade secret is any formula, pattern, physical device,
idea, process, or other information that provides the
owner of the information with a competitive advantage
in the marketplace.
– Trade secrets include marketing plans, product
formulas, financial forecasts, employee rosters, logs of
sales calls, and similar types of proprietary information.
– The federal Economic Espionage Act, passed in 1996,
criminalizes the theft of trade secrets.
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What Qualifies for Trade Secret
Protection? (1 of 2)
• Trade Secret Protection
– Not all information qualifies for trade secret protection.
– In general, information that is know to the public or that
competitors can discover through legal means doesn’t
qualify for trade secret protection.
– Companies protect trade secrets through physical
measures and written documents.
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What Qualifies for Trade Secret
Protection? (2 of 2)
The strongest case for trade secret protection is information that is
characterized by the following.
• Is not known outside the company.
• Is known only inside the company on a “need-to-know” basis.
• Is safeguarded by stringent efforts to keep the information
confidential.
• Is valuable and provides the company a competitive advantage.
• Was developed at great cost, time, and effort.
• Cannot be easily duplicated, reverse engineered, or discovered.
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Physical Measures for Protecting
Trade Secrets
• Restricting access • Labeling documents
• Password protecting • Maintaining logbooks for
confidential computer files visitors
• Maintaining logbooks for • Maintaining adequate
access to sensitive material overall security measures
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Conducting an Intellectual Property
Audit (1 of 2)
• Intellectual Property Audit
– The first step a firm should take to protect its intellectual
property is to complete an intellectual property audit.
– An intellectual property audit is conducted to determine the
intellectual property a firm owns.
– There are two reasons for conducting an intellectual
property audit:
First, it is prudent for a company to periodically
determine whether its intellectual property is being
properly protected.
Second, it is important for a firm to remain prepared to
justify its valuation in the event of a merger or
acquisition.
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Conducting an Intellectual Property
Audit (2 of 2)
• The Process of Conducting an Intellectual Property Audit
– The first step is to develop an inventory of a firm’s existing
intellectual property. The inventory should include the firm’s
present registrations of patents, trademarks, and copyrights.
– The second step is to identify works in progress to ensure
that they are being documented and protected in a
systematic, orderly manner.
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