Federal Trade Commission Non-compete Ban

What is the FTC Non-Compete Ban?

Partial Summary of the FTC Ban

The Federal Trade Commission adopted a comprehensive ban on new non-competes with all workers, including senior executives. The final rule provides that it is an unfair method of competition—and therefore a violation of Section 5—for employers to enter into Non-competes with workers.

Unless a court intervenes, the new rule becomes effective 120 days subsequent to April 23, 2024.

Here are some of the legal parameters of the FTC non-compete ban:

Non-Compete Defined (16 CFR Part 910.1)

(1) A term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from:

(i) seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or

(ii) operating a business in the United States after the conclusion of the employment that includes the term or condition.

(2) For the purposes of this part 910, term or condition of employment includes, but is not limited to, a contractual term or workplace policy, whether written or oral.

Definitions of Persons Affected by the Ban – Abbreviated

Officer: A president, vice president, secretary, treasurer or principal financial officer, comptroller or principal accounting officer, and any natural person routinely performing corresponding functions with respect to any business entity whether incorporated or unincorporated.

Person: Any natural person, partnership, corporation, association, or other legal entity within the Commission’s jurisdiction, including any person acting under color or authority of State law.

Preceding Year: A person’s choice among the following time periods: the most recent 52-week year, the most recent calendar year, the most recent fiscal year, or the most recent anniversary of hire year.

Senior Executive: A worker who:

(1) Was in a policy-making position; and

(2) Received from a person for the employment:

(i) Total annual compensation of at least $151,164 in the preceding year; or

(ii) Total compensation of at least $151,164 when annualized if the worker was employed during only part of the preceding year; or

(iii) Total compensation of at least $151,164 when annualized in the preceding year prior to the worker’s departure if the worker departed from employment prior to the preceding year and the worker is subject to a non-compete clause.

Worker: A natural person who works or who previously worked, whether paid or unpaid, without regard to the worker’s title or the worker’s status under any other State or Federal laws, including, but not limited to, whether the worker is an employee, independent contractor, extern, intern, volunteer, apprentice, or a sole proprietor who provides a service to a person. The term worker includes a natural person who works for a franchisee or franchisor, but does not include a franchisee in the context of a franchisee-franchisor relationship.

Unfair Methods of Competition (16 CFR Part 910.2) – Abbreviated

(a) Unfair methods of competition—(1) Workers other than senior executives. With respect to a worker other than a senior executive, it is an unfair method of competition for a person:

(i) To enter into or attempt to enter into a non-compete clause;

(ii) To enforce or attempt to enforce a non-compete clause; or

(iii) To represent that the worker is subject to a non-compete clause.

Exceptions to the FTC Non-Compete Ban (16 CFR Part 910.3)

(a) Bona fide sales of business. The requirements of this part 910 shall not apply to a non-compete clause that is entered into by a person pursuant to a bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets.

(b) Existing causes of action. The requirements of this part 910 do not apply where a cause of action related to a non-compete clause accrued prior to the effective date.

(c) Good faith. It is not an unfair method of competition to enforce or attempt to enforce a non-compete clause or to make representations about a non-compete clause where a person has a good-faith basis to believe that this part 910 is inapplicable.

Ask Us Anything… about Intellectual Property!

If you or your business are located in the greater Cincinnati, Indianapolis, Lexington, or Louisville standard metropolitan statistical areas and have a topic or question you would like Business Patent Law, PLLC to address in the blog, please send us an email.

Business Patent Law, PLLC provides intellectual property and business counsel for businesses and companies.  If you need assistance, please contact Business Patent Law, PLLC.

If you would like to stay up-to-date with news that impacts your business and intellectual property, sign up for Business Patent Law’s Monthly Mailer™ newsletter.

Trade Secrets - What are they and how do you protect them

What Are Trade Secrets?

Trade Secrets

Trade Secrets are a type of intellectual property that can be of great value to the owner over a period of years. For something to be a Trade Secret, it must be kept secret. Public disclosure of a Trade Secret destroys the value of the Trade Secret.

Depending on the circumstances associated with the Trade Secret, federal (18 U.S.C 1831-1839), State or common law may determine the rights of the owner of the Trade Secret. 18 U.S.C 1831-1839, for instance, has both criminal and civil provisions.

Forty-eight of the 50 States have adopted the Uniform Trade Secrets Act (UTSA) which became the law of those States.

Definitions of Trade Secrets

U.S.C. 1939 (3) reads:

“…(3) the term “trade secret” means all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if—

          (A)    the owner thereof has taken reasonable measures to keep such information secret; and

          (B)    the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information;…”

The UTSA defines “trade secret” as:

“”Trade secret” means information, including but not limited to, a formula, pattern, compilation, program, device, method, technique, or process, that:

  1. Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and
  2. Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”

What is misappropriation?

 18 U.S.C. 1939 (5 & 6) read:

 (5)   the term “misappropriation” means—

          (A)    acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or

          (B)    disclosure or use of a trade secret of another without express or implied consent by a person who—

                    (i)     used improper means to acquire knowledge of the trade secret;

                    (ii)    at the time of disclosure or use, knew or had reason to know that the knowledge of the trade secret was—

                              (I)     derived from or through a person who had used improper means to acquire the trade secret;

                              (II)   acquired under circumstances giving rise to a duty to maintain the secrecy of the trade secret or limit the use of the trade secret; or

                              (III)  derived from or through a person who owed a duty to the person seeking relief to maintain the secrecy of the trade secret or limit the use of the trade secret; or

                    (iii)   before a material change of the position of the person, knew or had reason to know that—

                              (I)     the trade secret was a trade secret; and

                              (II)   knowledge of the trade secret had been acquired by accident or mistake;

What are Improper Means?

 (6)    the term “improper means”—

          (A)    includes theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means; and

          (B)    does not include reverse engineering, independent derivation, or any other lawful means of acquisition;…”

The UTSA Defines “Improper Means” and “Misappropriation”

(1)     “Improper means” includes theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means;

(2)     “Misappropriation” means:

(a)     Acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or

(b)     Disclosure or use of a trade secret of another without express or implied consent by a person who:

    1. Used improper means to acquire knowledge of the trade secret; or
    2. At the time of disclosure or use, knew or had reason to know that his knowledge of the trade secret was:
    3. Derived from or through a person who had utilized improper means to acquire it;
    4. Acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use; or
    5. Derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use; or
    6. Before a material change of his position, knew or had reason to know that it was a trade secret and that knowledge of it had been acquired by accident or mistake.

If your company needs assistance protecting its Trade Secrets, please contact Business Patent Law, PLLC.

Ask Us Anything… about Intellectual Property!

If you or your business are located in the greater Cincinnati, Indianapolis, Lexington, or Louisville standard metropolitan statistical areas and have a topic or question you would like Business Patent Law, PLLC to address in the blog, please send us an email.

Business Patent Law, PLLC provides intellectual property and business counsel for businesses and companies. If you need assistance, please contact Business Patent Law, PLLC.

If you would like to stay up-to-date with news that impacts your business and intellectual property, sign up for Business Patent Law’s Monthly Mailer™ newsletter.

Mask Mark Protection

What are Mask Works?

Mask Works are a type of intellectual property created by the Semiconductor Chip Protection Act (SCPA) of 1984.

Statutory Mask Works rights are set forth in Title 17 United States Code §§ 901-914. In general, the SCPA allows for the protection of the combination of a mask and a semiconductor chip.

Some Requirements for and Rights associated with Intellectual Property Protection of Mask Works

  • A mask work must be a series of related images, however fixed or encoded (1) that have or represent the predetermined three dimensional pattern of metallic, insulating, or semiconductor material present or removed from the layers of a semiconductor chip product; and (2) in which series the relation of the images to one another is that each image has the pattern of the surface of one form of the semiconductor chip product.
  • A semiconductor chip product is defined as the final or intermediate form of any product (1) intended to perform electronic circuitry functions and (2) having two or more layers of metallic, insulating, or semiconductor material, deposited or otherwise placed on or etched away or otherwise removed from a piece of semiconductor material in accordance with a predetermined pattern.
  • The Registration of the Mask Work is effective on the date of the Registration or the date the Mask Work is first commercially exploited anywhere in the world by an owner as defined in 17 United States Code § 902.
  • A Registration of the Mask Work is effective for ten years. However, to secure protection of the Mask for the entire 10-year term, the owner must register the work with the Copyright Office within two years of the date on which the Mask work is first commercially exploited or the potential protection will be lost.
  • 17 United States Code § 905 reads, “The owner of a Mask Work provided protection under this chapter has the exclusive rights to do and to authorize any of the following: (1) to reproduce the Mask Work by optical, electronic, or any other means; (2) to import or distribute a semiconductor chip product in which the Mask Work is embodied; and (3) to induce or knowingly to cause another person to do any of the acts described in paragraphs (1) and (2).”

Limitations of Owner’s Rights

  • Protection is not available for a Mask Work that is not original or consists of designs that are staple, commonplace, or familiar in the semiconductor industry, or variations of such designs, combined in a way that, considered as a whole, is not original.
  • It is not an infringement of the exclusive rights of the owner of a Mask Work for— (1) a person to reproduce the Mask Work solely for the purpose of teaching, analyzing, or evaluating the concepts or techniques embodied in the Mask Work or the circuitry, logic flow, or organization of components used in the Mask Work; or (2) a person who performs the analysis or evaluation described in paragraph (1) to incorporate the results of such conduct in an original Mask Work which is made to be distributed. 17 United States Code § 906.
  • An innocent purchaser of an infringing semiconductor chip product — (1) shall incur no liability under this chapter with respect to the importation or distribution of units of the infringing semiconductor chip product that occurs before the innocent purchaser has notice of protection with respect to the Mask Work embodied in the semiconductor chip product and (2) shall be liable only for a reasonable royalty on each unit of the infringing semi­conductor chip product that the innocent purchaser imports or distributes after having notice of protection with respect to the Mask Work embodied in the semiconductor chip product. 17 United States Code § 907.

Mask Work Notice

  • The notice shall consist of— “(1) the words “Mask Work”, the symbol *M*, or the symbol Ⓜ (the letter M in a circle); and (2) the name of the owner or owners of the Mask Work or an abbreviation by which the name is recognized or is generally known.” 17 United States Code § 909.

If your company needs assistance with registration of Mask Works, please contact BPL.

If you or your business are located in the greater Cincinnati, Indianapolis, Lexington, or Louisville standard metropolitan statistical areas and you have a topic or question for Business Patent Law, PLLC to address in the blog, please send us an email.

Business Patent Law, PLLC provides intellectual property and business counsel for businesses and companies.  If you need assistance, please contact Business Patent Law, PLLC.

If you would like to stay up-to-date with news that impacts your business and intellectual property, sign up for Business Patent Law’s Monthly Mailer™ newsletter.

Legal licenses and licensing agreements

Licenses: What You Need to Know

Licenses Defined

We can define licenses as, “an owner giving permission to a legal entity or a real person to make, produce, or use an owner’s tangible and/or intangible property.” Almost anything can be the subject of a License. It is best to have a written document for any License agreement.

Types of Licenses

There are exclusive and nonexclusive Licenses.

When the owner grants an exclusive License, it means that the owner will not grant another License to a third party.

Whether an exclusive or a nonexclusive License is granted can impact the bargaining power of the Licensor or the bargaining power of the Licensee. For example, a multinational franchisor may not grant exclusive Licenses while a start-up may be happy to grant an exclusive License.

What to Include in a License Agreement

  • As long as it is legal, a License may contain any type of clause or section related to the owner’s tangible and/or intangible property as well as the duties of each party
  • Definitions regarding the meanings of specific words used in the License
  • Grant of permission to make, produce, or use an owner’s tangible and/or intangible property
  • Specific description(s) of the licensed tangible and/or intangible property
  • Description of each geographic territory covered by the License and the term of the License
  • Obligations to commercialize the licensed tangible and/or intangible property and milestones payments
  • License fees and running royalties
  • Licensee’s progress reports, records and audits
  • Banks and currency used for payments and timing of payments
  • Ownership of jointly created tangible and/or intangible property related to the licensed tangible and/or intangible property
  • Confidentiality and trade secrets
  • Licensee’s guarantees to comply with governmental regulations in all jurisdictions where Licensee is using or selling the licensed tangible and/or intangible property
  • Dispute resolution
  • Termination and wrap-ups
  • Continuing obligations after termination

The above are just some sections and clauses that can be included in Licenses.

License Agreements can be complicated contracts. If your company needs assistance to prepare its Licenses or your company needs help to determine if it is advantageous to execute a License, please contact Business Patent Law, PLLC.

Business Patent Law, PLLC provides intellectual property and business counsel for businesses and companies.  If you need assistance, please contact Business Patent Law, PLLC.

If you would like to stay up-to-date with news that impacts your business and intellectual property, sign up for Business Patent Law’s Monthly Mailer™ newsletter.

Royalties and Taxes

Royalties and Taxation

What are Royalties?

In Revenue Ruling 81-178, 1981-2 C.B. regarding royalties, the Internal Revenue Service stated:

“To be a royalty, a payment must relate to the use of a valuable right. Payments for the use of trademarks, trade names, service marks, or copyrights, whether or not payment is based on the use made of such property, are ordinarily classified as royalties for federal tax purposes.”

Patents, Trademarks & Copyrights are Valuable

Patents, trademarks, and copyrights are valuable. Intellectual property portfolios of Patents, Trademarks and Copyrights are assets of your company and can provide a stream of royalty income for your company.

26 Code of Federal Regulations (CFR) 1.61-8 – Rents and Royalties

CFR 1.61-8, in part reads, “(a) In general. …Gross income includes royalties. Royalties may be received from books, stories, plays, copyrights, trademarks, formulas, patents, and from the exploitation of natural resources, such as coal, gas, oil, copper, or timber.

  • License agreements of Patents, Trademark and Copyrights are contracts that include royalty payments to the owner of the intellectual property.
  • License agreements can have long term benefits for both the licensor and the licensee.
  • Royalty agreements can be difficult to negotiate and understand.
  • It is wise for parties to license agreements to be represented by independent counsels.

Business Patent Law, PLLC does not practice taxation law. However, in view of US federal taxation laws, royalties are generally treated as passive ordinary income.

Under certain circumstances, transfers of Patent rights are treated as capital gains

26 Internal Review Code (IRC) 1235, in part, reads:

(a) General A transfer (other than by gift, inheritance, or devise) of property consisting of all substantial rights to a patent, or an undivided interest therein which includes a part of all such rights, by any holder shall be considered the sale or exchange of a capital asset held for more than 1 year, regardless of whether or not payments in consideration of such transfer are—

(1) payable periodically over a period generally coterminous with the transferee’s use of the patent, or

(2) contingent on the productivity, use, or disposition of the property transferred.

If you need legal assistance with your company’s license-royalty agreements or intellectual property matters, please contact Business Patent Law, PLLC.

Business Patent Law, PLLC provides intellectual property and business counsel for businesses and companies.

If you would like to stay up-to-date with news that impacts your business and intellectual property, sign up for Business Patent Law’s Monthly Mailer™ newsletter.

 

covid19 response

COVID19 Office Response

Our offices remain open and serving clients. We have only made a few changes to the way we do business. We are able to work with you by phone and email, as always, but are not meeting in person at this time. This is to protect our clients and staff. It will not impact the quality or timeliness of your service and we intend to keep your matters on track and on time.

Since our practice is primarily of national and international scope, changes in operations in the various state court systems will not likely impede most matters managed by us.

Federal Courts and the United States Patent and Trademark Office (USPTO) made some changes to standard operating practices. For example, USPTO offices are closed to the public and some petition fees may be waived and extensions of certain patent and trademark deadlines may be possible. In-person oral hearings and meetings with USPTO employees are not possible at his time.  However, for years, Business Patent Law has used digital technologies to communicate with the USPTO, other federal agencies and our foreign clients and associates.

If you want to know how this impacts your intellectual property and business concerns, please contact us and we can discuss it.

Rental Property and Intellectual Rights

Real Estate Rental, Tangible Property and Intellectual Property Rights

Relationship Between Commercial Rental Property and Inventories

Landlords own the real property rented by tenants (rental property). Tenants have an interest in the use of that real property. A commercial landlord rents square footage to the tenant and grants the tenant permission to operate a business from the rented space. Under most commercial leases, inventory remains the personal property of the tenant. Landowners may also operate their own businesses from commercial real properties.

Real Property Cases: Traditionally Matters for State Courts, However…

For centuries, disputes involving real property and rental property contracts have fallen under the law of the jurisdiction where the real estate is located. Each State has its own version of its real property laws. However, in today’s world, federal laws can influence a State’s real property laws.

Intangible Patented Inventions as Tangible Personal Property

A Patentee can sell tangible widgets that include intangible patent rights for the circuitry, processor, and memory that cause the tangible widgets to operate differently from unpatented widgets. Patent infringement of the patented widget can result when someone who did not purchase the patented widget from the Patentee makes, uses, sells or offers to sell the patented widget without the permission of the Patentee.

Under United States law, Patent infringement cases have exclusive jurisdiction and venue in federal district courts.

When Patented Widgets are Offered for Sale on Consignment

Possible interactions between the real estate owner or the commercial tenant (hereinafter Commercial) and the Patented Widgets Owner (hereinafter PWO):

  • As long as Commercial and PWO meet the terms of the consignment agreement, both parties are probably happy.
  • When Commercial refuses to pay PWO according to the consignment agreement, the PWO could sue the Commercial for breach of contract in a State court.
  • When Commercial refuses to honor the consignment agreement and subsequently gives the patented widgets to a third party who thereafter uses the patented widgets in the third party’s plant. Under the Supreme Court’s Impression Products, Inc. v. Lexmark International, Inc., 581 US 1523 (2017) case, because there was no sale of the patented widgets by the Patentee, PWO can sue both the thirty party and Commercial in a federal district court for patent infringement. Any case by PWO for breach of contract by Commercial would likely be joined with the patent infringement case in federal court.

The commercial tenant (hereinafter Tenant) and the PWO:

  • When Tenant sublets a space for a booth to PWO and PWO fails to pay rent to Tenant, the Tenant can sue PWO in State court for collection of unpaid rent.
  • In a State that provides for commercial landlord lockouts and seizures of personal property, Tenant fails to pay rent and the landlord locks out and seizes all inventory including PWO’s patented widgets. Under the lease, Tenant did not have a right to sublet space to PWO and the landlord is unaware that PWO’s patented widgets are not part of Tenant’s inventory. After seizing PWO’s patented widgets, the landlord sells PWO’s patented widgets to a third party who resales the patented widgets to a fourth party who destroys the patented widgets and sells the junked parts to a recycler. Under Impression Products, Inc. v. Lexmark International, Inc., 581 US 1523 (2017), because there was no sale of the patented widgets by the Patentee, PWO could sue the commercial landlord, the third party and the fourth party for patent infringement in federal court. For the landlord, the third party and the fourth party, reliance solely on real estate law is insufficient to prevent a patent infringement lawsuit in federal court.

Have More Questions About Intellectual Property?

Contact Business Patent Law, PLLC  to get your questions answered and to discuss possibilities for your business and intellectual properties.

If you would like to stay up-to-date with news that impacts your intellectual property, sign up for Business Patent Law’s Monthly Mailer™ newsletter.

LLC friendly states

Organizing Your LLC Intellectual Property Startup

Limited Liability Company – IP Startup

One or more Limited Liability Companies, can be be beneficial for Intellectual Property startups. As indicated in a prior blog, it is prudent for companies owning Intellectual Property rights to hold the Intellectual Property in a holding company and to have the goods/services associated with the Intellectual Property owned by a separate manufacturing/distribution company.

LLC Organization and Tax Law

Should organizers of a Limited Liability Company seek the advice of a tax professional prior to organization the LLC?  Yes.

Business Patent Law, PLLC does not provide tax counsel. However, with the ever-changing tax codes, organizers should consult with a tax professional. If an inappropriate jurisdiction is initially selected for the organization of the LLC, it may not be cost-efficient to redo the LLC’s organization in another jurisdiction.

Limited Liability Companies are Legal Entities

Limited Liability Companies are legal entities of the state (or District of Columbia) in which the LLC is organized.

For a Limited Liability Company with all members domiciled in the same jurisdiction, some states offer more owner friendly in-state taxation and fees to the citizen-members than other states.

You should review a state’s securities laws (and jurisdictional fees associated with the capitalization of the LLC) to determine if a state other than your home state may be better for the organization of the LLC.

As a general rule, a Limited Liability Company is treated as a pass through entity for federal income taxation purposes.

Where Should I Organize my LLC?

Where Should the Organizers Organize a Limited Liability Company? It depends

  • The nature of the LLC’s business can affect which jurisdiction is more favorable, e.g., some jurisdictions provide favorable state and local tax preferences for certain businesses
  • Some jurisdictions are more organizational, fee and tax-friendly than other jurisdictions
  • Management of an LLC can find it advantageous to organize in a first jurisdiction and locate the LLC’s principal office in a second jurisdiction
  • Some jurisdictions require out-of-state members to pay jurisdictional taxes in the jurisdiction where the LLC is organized or conducts business while other jurisdictions do not tax out-of-state members

Business Patent Law, PLLC has a history of working with tax professionals to optimize the organizational structures of LLCs. Because of our experience with different jurisdictions, Business Patent Law, PLLC (in conjunction with a trusted tax professional) can create a workable organizational structure for LLCs.

If you have questions about the organization of a Limited Liability Company or  Intellectual Property matters, please contact Business Patent Law, PLLC and we will discuss possibilities for your business and intellectual properties.

If you would like to stay up-to-date with news that impacts your intellectual property, sign up for Business Patent Law’s Monthly Mailer™ newsletter.

Intellectual property as collateral for small businesses

Can Intellectual Property Be Used As Collateral For A Loan?

Can your company’s intellectual properties be used as collateral for a loan? Yes, under certain situations. For instance, if a specialized insurance policy is used to establish a value for the intellectual property, the property can be used as collateral for loans from commercial banks.

Sources of Quick Cash

Occasionally, your company may need a quick influx of cash that exceeds your balance sheet’s liquid assets.

Traditional Sources for Cash Include:

  • Commercial Bank Loans
  • Government Grants
  • Small Business Administration Loans
  • Sale of Stock or Bonds

Other Sources of Cash: Angel Investors

Other potential sources of quick cash for your company are “angel investors.” Angel investors generally take greats risks when in investing in a startup or a company with few sales and expect large returns for their investments in return.

Beware of using Angel investors since the terms of “angel contracts” can cause companies to cease doing business.

Quick Cash for Publicly Traded Companies

You may have heard, “When you don’t need a loan, the bank is ready to lend more than you need!” If you do need a loan and your publicly traded company needs quick cash, you may consider:

  • Prime Rate Loans from Large Commercial Banks
  • Lines of Credit
  • Sales of Stocks or Bonds

Quick Cash for Private Companies

Private sales of stocks or bonds are an excellent source of capital for companies not traded in the public markets, but this is not usually an option for quick cash.

Before offering or issuing stocks or bonds, a privately traded company must be careful not to violate the Securities Laws of the United States or the “Blue Sky” laws of the state were buyers reside.

Disputes over the dilution of equity for current stockholders is a serious deterrent for using the sale of stock or bonds to raise capital.

SBA Secured Loans

Currently, the Small Business Administration will not guarantee an intellectual properties secured loan.

Collateral Protection Insurance for Your Company

Some startups or smaller and medium-sized companies have valuable intellectual property portfolios. These same companies frequently encounter cash flow difficulties.

Although intellectual properties are valuable assets for companies, most commercial banks are ill-equipped to determine the fair market value of the intellectual properties.

If you decide to leverage your company’s intellectual property portfolio, you can purchase a collateral protection insurance policy from a commercial insurance carrier. The collateral protection insurance policy establishes the value of the company’s intellectual properties (which can be used as collateral for the loan) and insures the lender against default on the loan.

Is An Intellectual Property Secured Loan Right for My Company?

This quick cash strategy is not for every company, but if you want to learn more about this option for your company, contact Business Patent Law, PLLC . We can discuss possibilities for your business and your intellectual properties.

If you would like to stay up-to-date with news that impacts your intellectual property, sign up for Business Patent Law’s Monthly Mailer™ newsletter.

manufacturing and business strategy

Business Strategy: Patent Portfolios and Holding Companies

Is it a prudent business strategy for a holding company (Company H) to own the patent assets used by Company A in manufacturing products sold by Company A?

Perhaps, let’s consider the following scenario:

Manufacturing/Distribution Considerations

  • Company A has been in business for several years and has an impressive twenty percent market share for its Widget.
  • The Widget generates one-half of Company A’s profits.
  • Company A has a superb engineering staff that has patented various improvements of the Widget invention creating a profitable patent portfolio for Company A.
  • Company A also generates royalties from its patent license agreements with other companies.

Supply Chain Problems

  • For several years, SupplyCo provided Company A with 99% pure Critical Composition to manufacture its Widgets, but due to temporary utility power supply limitations, Company A was able to deliver only 96% pure Critical Composition to Company A.
  • To meet pressing needs of its customers, Company A shipped 20 tons of Widgets made with 96% pure Critical Composition.
  • During the subsequent six week period, due to the number of injuries to the users of the Widgets manufactured with 96% pure Critical Composition, a national recall of the 20 tons of Widgets was initiated by Company A.
  • Unable to weather the recall and the pending lawsuits, Company A was forced to declare bankruptcy and the Widget patent portfolio was eventually sold in liquidation by the bankruptcy trustee.

Could the Sale of Company A’s Patent Portfolio been Avoided?

Generally – Yes – as long as the transactions between Company A and Company H are arms’ length dealings.

To minimize devaluation of an intellectual property portfolio, management can use one or more holding companies in their business strategy, such as limited liability companies to stabilize the value of the portfolio in the event the “unthinkable” occurs.

Advantages of Using a Holding Company for Intellectual Property

If Company H had owned the Widget patent portfolio and granted Company A an exclusive license to make, use and sale the patented Widgets, then:

  • The Widget patent portfolio would not have been part of Company A’s bankruptcy and liquidated by the bankruptcy trustee.
  • Company H would remain in business and could grant an exclusive license to Company X to make, use and sale the profitable Widgets.
  • Company H could sell the valuable Widget patent portfolio to Company Y.
  • It is likely that royalty income to Company H would be deemed as passive income.
  • It is probable than any sale of the Widget patent portfolio to Company Y would be determined to be a long term capital gain.

Other Considerations for Using a Holding Company as a Business Strategy

  • Better supply and manufacturing quality control – thereby avoiding the Widget recall and the ultimate demise of Company A.
  • Remove Company A’s engineering department from Company A and setup Company E to do business with Company H, identified above, to better take advantage of the tax code’s provisions for intellectual properties.
  • Company E can provide special enticements for its engineering staff to better retain and recruit the best engineering staff that will create subsequent generations of better and more profitable Widgets for licensing by Company H to Company A.
  • Special enticements for the engineering staff apply only to Company E – not Companies H or A.
  • Company E can be easily located in an area where Company E takes maximum advantage of governmental tax incentives.
  • Regardless of what happens to Company A utilizing this business strategy, Companies H and E remain viable entities.

As you can see, there are many different business strategies which o utilize corporate structures to maximize profits and reward the best efforts of employees. This illustration provides only a few of those options.

Contact Business Patent Law, PLLC and we will discuss possibilities for your business and intellectual properties.

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