Chapter 12: The Importance of Intellectual Property
Copyright © 2019 Pearson Education, Inc.
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CHAPTER 12
THE IMPORTANCE OF INTELLECTUAL PROPERTY
LEARNING OBJECTIVES
1.
Define the term intellectual property and describe its importance.
2.
Explain what a patent is and describe different types of patents.
3.
Describe a trademark and explain the process entrepreneurs use to obtain one.
4.
Define a copyright and identify what a copyright can protect.
5.
Describe a trade secret and understand the common causes of trade secret disputes.
6.
Explain what an intellectual property audit is and identify the two primary reasons
entrepreneurial firms should complete this type of audit.
CHAPTER OVERVIEW
This chapter focuses on the important topic of intellectual property. The chapter begins
by talking about the importance of intellectual property, and discusses how to determine
which intellectual property to legally protect. The four key forms of intellectual property
are then introduced, including patents, trademarks, copyright, and trade secrets.
The middle portion of the chapter focuses on patents, trademarks, copyrights, and trade
secrets. A complete description of each of these forms of intellectual property is
described, including how to obtain legal protection in each of these areas.
The chapter ends with a discussion of how to complete an intellectual property audit. It is
important that a firm have a full awareness of the intellectual property that it owns, to
make sure it is properly protected and to be able to justify its valuation in the event of an
acquisition or merger.
CHAPTER OUTLINE
I. The Importance of Intellectual Property
A. Determining What Intellectual Property to Legally Protect
B. The Four Key Forms of Intellectual Property
II. Patents
A. Types of Patents
B. Who Can Apply for a Patent?
C. The Process of Obtaining a Patent
D. Patent Infringement
III. Trademarks
A. The Four Types of Trademarks
B. What Is Protected Under Trademark Law?
C. Exclusions from Trademark Protection
Chapter 12: The Importance of Intellectual Property
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D. The Process of Obtaining a Trademark
E. Trademark Infringement
IV. Copyrights
A. What Is Protected by a Copyright?
B. Exclusions from Copyright Protection
C. How to Obtain a Copyright
D. Copyright Infringement
E. Copyright and the Internet
V. Trade Secrets
A. What Qualifies for Trade Secret Protection?
B. Trade Secret Disputes
C. Trade Secret Protection Methods
1. Physical Measures
2. Written Agreements
VI. Conducting an Intellectual Property Audit
A. Why Conduct an Intellectual Property Audit?
B. The Process of Conducting an Intellectual Property Audit
CHAPTER NOTES
I. The Importance of Intellectual Property
• Intellectual property is any product of human intellect that is intangible but valued
A. Determining What Intellectual Property to Legally Protect
1. There are two primary rules of thumb for determining whether intellectual
property protection should be pursued for a particular intellectual asset.
B. The Four Key Forms of Intellectual Property
1. Patents, trademarks, copyrights, and trade secrets are the four key forms of
intellectual property.
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2. Intellectual property laws exist to encourage creativity and innovation by
granting to individuals who risk their time and money in creative endeavors
exclusive rights to the fruits of their labor for a period of time.
II. Patents
• 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.
• Patent protection has deep roots in U.S. history and is the only form of intellectual
A. Types of Patents
1. Utility Patents. Utility patents are the most common type of patent and cover
what we generally think of as new inventions. Patents in this category may be
granted to anyone who “invents or discovers any new and useful improvement
2. Design Patents. Design patents are the second most common type of patent
and cover the invention of new, original, and ornamental designs for
3. Plant Patents. Plant patents protect new varieties of plants that can be
reproduced asexually. Such plants are reproduced by grafting or crossbreeding
rather than by planting seeds.
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B. Who Can Apply for a Patent?
1. Only the inventor of a product can apply for a patent. If two or more people
make an invention jointly, they must apply for the patent together.
2. There are notable exceptions to this rule. First, if an invention is made during
the course of the inventor’s employment, the employer typically is assigned
1. Obtaining a patent is a six-step process, as illustrated in Figure 12.3 in the
textbook.
D. Patent Infringement
III. Trademarks
• A trademark is any word, name, symbol, or device used to identify the source or
on their articles of pottery to distinguish their work from others.
A. The Four Types of Trademarks
1. Trademarks include any word, name, symbol, or device used to identify and
2. Service marks are similar to ordinary trademarks, but they are used to identify
3. Collective marks are trademarks or service marks used by the members of a
cooperative, association, or other collective group. The American Bar
Association and The International Franchise Association are examples of
collective marks.
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4. Certification marks are marks, words, names, symbols, or devices used by a
person other than its owner to certify a particular quality about a product or
service. An example is the Good Housekeeping Seal of Approval.
B. What Is Protected Under Trademark Law?
1. Trademark law protects the following items:
a. Words
b. Numbers and letters
c. Designs or logos
C. Exclusions from Trademark Protection
1. There are notable exclusions from trademark protection that are set forth in
the U.S. Trademark Act:
a. Immoral or scandalous material
D. The Process of Obtaining a Trademark
2. Once a trademark has been used in interstate commerce, it can be registered
3. There are three steps in selecting and registering a trademark:
a. Select an appropriate mark.
b. Perform a trademark search.
c. Create rights in the trademark.
Chapter 12: The Importance of Intellectual Property
E. Trademark Infringement
A trademark is infringed when an unauthorized use is done in a manner to
cause confusion. The key here is to prove that confusion is caused. As the text
says, the name Acebook is confusingly similar to Facebook and so Facebook
may legitimately object.
IV. Copyrights
• A copyright is a form of intellectual property protection that grants to the owner
A. What Is Protected by a Copyright?
1. Copyright laws protect “original works of authorship” that are fixed in a
tangible form of expression. The primary categories of material that can be
copyrighted follow:
a. Literary works
b. Musical compositions
B. Exclusions from Copyright Protection
1. First, copyright protection can be enhanced for anything written by attaching
the copyright notice, or “copyright bug” as it is sometimes called (i.e., ©).
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2. Second, further protection can be obtained by registering a work with the U.S.
Copyright Office. Filing a simple form and depositing one or two samples of
the work with the U.S. Copyright Office completes the registration process.
D. Copyright Infringement
3. One of the most famous copyright infringement cases involved Napster, the
company that was launched by then 18-year-old Shawn Fanning and his
partner, Sean Parker.
E. Copyright and the Internet
1. Every day, vast quantities of material are posted on the Internet and can be
downloaded or copied by anyone with a computer. Because this information is
stored somewhere on a computer or Internet server, it is in tangible form and
probably qualifies for copyright protection.
2. Copyright laws, particularly as they apply to the Internet, are sometimes
difficult to follow, and it is easy for people to dismiss them as contrary to
common sense. Still, entrepreneurs should guard themselves against taking
too lax of an attitude regarding copyright laws and the Internet.
V. 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.
A. What Qualifies for Trade Secret Protection?
1. Not all information qualifies for trade secret protection. In general,
information that is known to the public or that competitors can discover
through legal means doesn’t qualify for trade secret protection.
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2. The general philosophy of trade secret legislation is that the law will not
protect a trade secret unless its owner protects it first.
3. Companies can maintain protection for their trade secrets if they take
reasonable steps to keep the information confidential.
B. Trade Secret Disputes
1. Trade secret disputes arise most frequently when an employee leaves a firm to
2. A company damaged by trade secret theft can initiate a civil action for
C. Trade Secret Protection Methods
1. Aggressive protection of trade secrets is necessary to prevent intentional or
unintentional disclosure.
agreements.
VI. Conducting an 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 completed to
determine the intellectual property a company owns.
A. Why Conduct an Intellectual Property Audit?
1. There are two primary reasons for conducting an intellectual property audit.
a. First, it is prudent for a company to periodically determine whether its
intellectual property is being properly protected.
b. The second reason for a company to conduct an intellectual property audit
is to remain prepared to justify its value in the event of a merger or
Chapter 12: The Importance of Intellectual Property
B. The Process of Conducting an Intellectual Property Audit
BOXED FEATURES: QUESTIONS FOR CRITICAL THINKING
What Went Wrong?
1.
What is your reaction to each case? Were you surprised at how they turned out?
Do you think each case turned out the way the trademark law intended it to?
Answer: Students will vary in their answers to this question. Most students will
come down on the side of the Davids, the underdogs. A t-shirt maker goes up
against a large chain, Chick-fil-A, and wins. So does a small pet food maker
against a large department store chain, Saks. The trademark law comes into play to
prevent confusion. “Eat More Kale” is in no way going to cause confusion about
eating more chicken. Students shouldn’t be surprised at how these verdicts turned
out.
2.
Which of the three smaller companies profiled – Eat More Kale, Xoom, or Snacks
5th Avenchew – do you think had the strongest case in defending the name it was
using? Which company do you think had the weakest case?
Answer: While students’ opinions may differ, one could argue that Saks Fifth
Avenue is an upscale department store, while Snacks 5th Avenchew is a brand of
dog treats. The two are entirely different and so is quite unlikely to cause
confusion. In all likelihood, Motorola had the weakest case because their name
matches exactly with the money service Xoom.
3.
Why do you think Bo Muller-Moore was able to elicit such passion and support in
his trademark dispute with Chick-fil-A?
Answer: The Bo Muller-Moore case is a classic story of an individual going up
against a large system. In addition, all he was doing is to simply sell t-shirts with a
catchy slogan. Students should able to identify with both Muller-Moore and the
product.
4.
To what degree do you think these cases should embolden small firms so they
won’t always have to give in to larger firms in intellectual property disputes if they
think the law is on their side?
Chapter 12: The Importance of Intellectual Property
Answer: There are two factors at play here. First, businesses take their intellectual
property seriously, so be careful to not infringe on the intellectual property of
others. Second, be careful to not engage in activities that will take you away from
what should be your primary focus—building a successful company. That said,
small companies should not just give in when they confront large firms in such
cases. As the examples in the boxed feature point out, sometimes they can prevail.
Savvy Entrepreneurial Firm
Knowing the Ins and Outs of Filing a Provisional Patent Application
1.
Briefly describe the difference between a provisional patent application and a
utility patent application. If successful, which of the two applications awards an
inventor a patent?
Answer: A provisional patent application includes specifications (i.e., a description
and drawings of an invention), but does not reqire formal claims, inventors’ oaths
or declarations, or any information disclosure statement. Its purpose is to establish
a “priority” filing date for an invention. A utility patent application, which is what
awards an inventor a patent, includes formal claims and a host of other required
information. It is assigned to a patent examiner, and a judgment is subsequently
made regarding prior art and the patentability of the invention.
2.
Can a provisional patent application be filed for a design patent? Document your
research to arrive at the correct answer to this question.
Answer: No. According to the U.S. Patent and Trademark Office Web site,
“Provisional applications may not be filed for design patents.”
3.
Under what circumstances would you (1) suggest to an inventor that he or she
could file a provisional patent application without a patent attorney or (2) suggest
to an inventor that he or she needs to hire a patent attorney to file the provisional
patent application?
Answer: In most cases, it is advisable to hire an attorney to file a provisional
patent application. As substantiated by the example of Amy and her new type of
tennis racket, the stakes are just too high for an inventor to not hire an attorney
who is acquainted with what the USPTO is looking for when filing a provisional
application for a patent.
4.
Spend some time studying the USPTO official Web site, or do some Internet
research on patents. Inventor’s Digest (www.inventorsdigest.com) is another good
resource for learning about patents. Discuss one fact about patents or the
application process you find interesting and isn’t included in the material in this
chapter.
Answer: This is a good question for an invidiual or a group assignment.
Partnering for Success
How the Maker Movement is Bringing Individual Inventors and Large Firms Together
1.
Identify the makerspace, FabLab, or TechShop that is located nearest you.
Describe the equipment that is available and the program the facility offers.
Answer: This is a good assignment for a group or an individual research project.
Students can go to https://www.fablab.com/ and in the “Search for makerspaces”
box, put in their zip code, city, or state to find a location.
2.
Why do you think companies are increasingly open to ideas from independent
inventors?
Answer: Many companies want to tap into the creative potential of independent
inventors. This way, the company gains competitively from an innovation. The
company can buy the invention for a one-time fee or license the product for an
upfront fee and recurring royalty payments. Either way, the company gets the
benefit of an innovation.
3.
Find an idea submission site for a company not mentioned in the feature. Describe
how to submit an invention to the company. What appear to be the keys to getting
an idea accepted by the company?
Answer: This is a good question for an individual or group assignment.
4.
In most cases, do you think inventors and entrepreneurs get a fair shake when they
sell or license a product to a large company? What steps should entrepreneurs take
to make sure they are getting a fair deal?
Answer: Most students will probably guess that the larger company usually has the
upper hand, and they may be right. But it’s our sense that if an entrepreneur’s idea
is compelling enough most companies will operate in good faith, particularly if the
entrepreneur has an experienced attorney representing his or her interests. There
are two steps that an entrepreneur should take to make sure he or she is getting a
good deal. First, hire an attorney as mentioned above. Second, check around with
other investors or licensees to see what they’re getting on a similar product.