The Viewpoint - A Stitch in Time saves Nine: Steps to Protect Intellectual Property of Start-Ups

Bar & Bench July 14 2019
Steps to Protect Intellectual Property of Start-Ups

Meghna Mishra and Arjit Benjamin

Start-ups are nowadays being looked at as a catalyst to an economy’s development, as they not only help in augmenting the overall GDP of the country but also address ancillary issues like creating job opportunities and fostering trade. Since 2016, Indian start-ups have witnessed a big boom owing to several initiatives taken by the government such as Start-up India, Make in India, Mudra Yojna, Setu Fund, and E-Biz Portal to name a few. India’s jump to the 77th position in UN’s Ease of Doing Business Ranking is a testament to the fact that we are progressing towards an investor-friendly environment.

While the country has been able to attract globally-acclaimed investors and multi-nationals who are ready to fuel Indian Start-ups and supplement their technology, there is still a long way for Indian start-ups to have a disciplined Intellectual Property (IP) regime from day one. In a country which is home to more than 39,000 Start-ups, can this lapse be serious? This article examines key IP issues concerning start-ups in India and what are the probable hygiene steps that can be taken by them.

Trend analysis shows that most Start-up businesses are based on some innovative idea. Therefore, basic awareness to protect innovations (i.e. patents) and brand reputation (i.e. trademarks) is extremely critical. Young entrepreneurs need to understand that problems related to Intellectual Property (IP) may not surface during the initial stages of inception, but it is better to be proactive rather than reactive.

While our country’s IP laws are quite robust, the real issue for Start-ups is the awareness. To ensure that these upcoming businesses do not fall prey to common IP issues, it is worth the time, money and effort to seek awareness about IP Laws.

Having expert legal guidance since the very inception of the Start-up is worthwhile as it will take into account the goals, strategies, and limitations of the business of a Start-up and create a customised IP Strategy accordingly. Different types of IP protection may have to be chosen, based on the IP strategy tailored for specific needs as there is ‘no one size that fits all’ approach that works for Start-ups.

A very important aspect, which is often overlooked by most Start-ups, is the need to look at IP not only as a matter of compliance but also as a matter of creation of an asset. As funding is the backbone for any Start-up, entrepreneurs need to realize that Intellectual Property (IP) is amongst the largest asset class held by any business. Studies have shown that roughly between 70% to 80% of the value of a typical business is its Intellectual Property. Therefore, a well-funded Start-up will be able to avail potential funding in the event their IP is duly protected and more importantly, is capable of being valued or monetized by way of commercial exploitation.

Studies published by WIPO have also indicated that a potential Start-up investor would want to know as to whether an invention, innovation or idea is worth investing in. Accordingly, they would carefully want to evaluate the strengths of these ideas/innovations and the ability of the entrepreneur to commercialize the idea by way of sales and potential revenues.

The biggest advantage of creating IP assets is in cases where an entrepreneur founder intends to move on after establishing a business. In such cases, IP rights like patents, trademarks, and copyrights can be licensed, which generate a future revenue stream for the founders. Even in a situation not ideal as the one mentioned above, in case a Start-up fails because of any unforeseen reason, IP retains its own value and has the potential to be monetized on a standalone basis. 

Further, a business name gives any commercial venture its very recognition. To ensure that Start-ups do not need to get into the hassle of changing names at a later stage, as would mean loss of recognition and recall value of the brand, they must conduct a thorough trademark search to determine whether the trade name, trademark or tag-line is currently being used or would be confusingly similar to another business.

Not just the hassle surrounding the brand recall and reputation, this exercise is equally important in order to avoid trademark infringement. It would be wise to conduct a trademark search prior to settling on a business name, trademark, logo or tag-line. It is also critical to understand, especially if a Start-up will have an international footprint, that the trademark protection is geography-based and registration of the trademark gives a Start-up business exclusive rights in the countries or regions in which they have obtained registrations. Therefore, Start-up businesses may consider filing trademark applications in each country or region in which they intend to do business.

Another vital aspect to be considered is to understand the practical and commercial viability of the IP regime you’ve chosen. Depending upon the benefits, you may have to design your IP portfolio tactfully.

For instance, while getting a patent may bring tax benefits to a Start-up, it may take several years to register a patent in India, and any royalty profits accruing before the grant of a patent are not eligible for tax benefits. It is also worthwhile to know that in India, there are no patents on “mathematical methods, business methods, computer programs per se and algorithms from the realm of the patentable subject matter”.

Therefore, as an alternative in such cases, should the Start-ups seek copyright protection instead of patent protection in order to protect the software source codes and algorithms. Further, copyright protection has also proven to be a more economical mode of seeking IP protection owing to cost-friendliness and ease of registration process (as compared to Patents). These well-thought-of strategies are something that a seasoned IP lawyer would be able to guide the Start-up towards.

Confidentiality is another widely underrated aspect in IP protection for Start-ups. Several Start-ups lack the ability to manufacture and sell their goods or services on their own and are largely dependent on funding.

If Start-ups intend to pursue potential investors for funding, they may have to explain their innovations and inventions to them. Therefore, ensuring any disclosures are made after signing a Non-disclosure Agreement (NDA) with those they intend to disclose their invention to, is an absolute must. This will prevent innovative ideas to fall into public dissemination and any misuse by the recipient. Explaining one’s inventions/innovations to potential investors in the absence of NDAs may lead to loss of ability to patent further modifications by the Start-up.

Similarly, if a Start-up plans to outsource any work that could contain confidential elements, say outsourcing work to researchers, technology and design labs, photographers or copy-writers, it is important to have contractual provisions that provide for the transfer of ownership in the work created so as to ensure that all IP work created by full-time employees with use of their time and resources working for the Start-up should be the IP of the Start-up. 

While precautionary measures are the most important step to preventing IP abuse, Start-ups should be aware that in case of misuse of their IP, there are remedies (civil as well as criminal) that can be taken to prevent abuse. Civil action involves filing a suit, seeking an injunction (restraint order) and damages. Criminal action is used sparingly, in egregious cases such as counterfeiting of products. Start-ups should nonetheless bear in mind that litigation can be very expensive. 

In a country like ours, where start-ups play the role of much-required catalysts to aid economic growth, the above-mentioned steps will equip a start-up to exercise its creative and innovative prowess without inhibitions. With the regulatory authorities determined to foster an environment of research and development, these small steps to put their house in order will help the start-ups in propelling their own growth in an IP secured environment. 

About the authors: The authors are lawyers working with Karanjawala & Co. Meghna Mishra is a partner, whereas Arjit Benjamin is an Associate at the firm.