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Intellectual Property Protection for Startup Software

Intellectual Property Protection for Startup Software

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The intellectual property of the company is an important component of its value thereof, and when speaking about a startup, the intellectual property at the initial stage is probably the only asset possessed by a company or entrepreneur, creating a new project.

It is the object of intellectual property that represents the potential to attract a startup investor or buyer. Therefore, the issue of protection of an object of intellectual property has fundamental importance. However, in the stream of current problems and tasks, this issue is usually relegated to the background. As a result, this can lead to the loss of the only asset that can bring the main profit to the owner of a startup.

Therefore, it can be safely said that without the due organization of intellectual property rights protection, business development becomes ineffective or impossible, especially business for the production and distribution of innovative or high-tech products.

Startup intellectual property rights protection becomes particularly important also for the reason that these facilities in newly established companies are most vulnerable. This, first of all, is due to the inadequacy of funds of such companies for due legal support, in particular, and the excessive complexity of the procedures that determine the mechanisms of protection of intellectual property rights in the legislation.

Let us focus on some issues of legal regulation of protection of intellectual property rights, enshrined in the current legislation of Ukraine. 

It is obvious, that the software created by a startup as an object of intellectual property is a basic asset of the company, therefore, certain thoughtful measures should be taken to protect it. 

Any startup involves a person who will own the intellectual rights to the created product.   It may be a legal entity (if it comes to big business) or an individual, if the startup is small, namely, a group of programmers who choose a team leader for themselves, and, as an option, all these rights are registered to a chosen team leader. These rights are advised to be registered to protect against unscrupulous competitors, as well as against members of one’s own team, who can decide to get separated from this business and to “borrow” the product (or its key components), created collectively in this startup.

The international and national legal practice highlights, to the date, three main most effective options for the protection of intellectual property rights, in particular:

  • Copyright, covering works in the field of science, literature, and art;
  • Patents that secure to the author the right to the invention or utility model;
  • Trademarks or Servicemarks used by the right holder and manufactures for their products.

The fact is that the computer programs according to the legislation that regulates the sphere are protected as the literary works are. Perhaps this is due to a certain commonality of displaying the lines of a literary work and a computer program filled with letters or operator characters, as well as the similarity, from the point of view of legislators, of the imaginative process regarding the creation of forms of the author's works of literature and computer programs.

Since Copyright does not provide maximum protection, it is rather variable. If you change the description/essence of the object, which Copyright is registered by at least 10%, the protection by Copyright registration will no longer work effectively. Therefore, it is advisable to receive any additional guarantees of protection that patents may grant. As a rule, these are patents for a utility model or invention. It is practically impossible to obtain a patent for an invention, since it is necessary to prove the complete novelty of the essence of the registered object, and it is quite difficult to do.

In this connection, most of the applicants try to obtain patents for a utility model, and it is relatively easy to do. What you need is to simply explain to the registering authority in Ukraine (Ukrpatent) what is so special about this software in terms of some processes or in terms of achieving goals with the use of such software, and in a short period of time and having suffered relatively small expenses a one can obtain the patent. Being the owner of the copyright registration and the patent, the appropriate holder, first of all, is protected to the maximum extent possible in Ukraine against the unauthorized use by third parties of  the idea or product without his permission, and secondly, the main advantage is that he becomes entitled to get payments in his favor in the form of royalties. The latter means that the right holder may transfer the rights to use the object of intellectual property rights to third parties (a patent or copyright, or both), receiving either royalties payments for the use of the rights or payments in the form of deductions of a different nature as a way of compensation for the use of the object by a third party on an industrial (the smaller, but already big enough ) scale in its production (in other activity areas).

It is important to understand that to patent most of the technological tools and tools of a startup that are involved in real innovation processes preferable. The software industry at the level of international legal institutions recognizes the importance and necessity of patents for registering their own innovations and gaining strategic advantages in the market. Having achieved some success at certain point problems may arise when any technology, a program, or a brand is exposed. As a negative example, we can mention a Ukrainian startup focused on DNA tests. However, after three years of successful work, the startup founders received a lawsuit from a competitor for patent technology infringement. By that time, the startup had already collaborated with several laboratories that performed measurement with their technology involved. It turned out that competitors bought the rights to the technology, and to prove the startup right to use it turned out to be very difficult. After consulting lawyers, the representatives of the startup realized the impossibility to conduct the process of defending their rights for the lack of funds. As a result, the startup has ceased to exist. The importance of documentary protection of intellectual property rights is indisputable, but not yet being the patent owner, it is necessary to monitor the competitor's activity, for example, checking patent applications towards startup’s activity to avoid getting in the above situation.

A copyright protection strategy on a program may include the registration of program code as copyright object. It is the official registration that gives a significant advantage to the author in case of violation of his rights, and in cases of disputes or disagreements emergency. The law establishes the presumption of authorship in relation to the person who applied first for registration of copyright on a computer program. Accordingly, in the event that a start-up reveals the fact of using his own property software by third parties with no legal grounds, such a startup can defend its interests in a court having a copyright registration certificate. And vice versa,  the one to dispute the copyright on a computer program of a startup, must prove the fact of his authorship in court, to do what having no copyright registration document for an object and is a difficult thing to do.

Similar to copyright on a literary work, the copyright validity on a computer program starting from the moment of its creation and lasts for the entire life of the author, and expires postmortem seventy years after, to begin from January, 1 of another year following the year of death of the author of the program or one of the last collaborators who survived others.

It should be noted that the software copyright, even registered, does not apply to its embodied concept: the ideas, processes, activity methods or mathematical concepts in their own right, as a  computer program basis  (including devices, that are a part of the program providing the dialogue with the user (interface) and its compatibility with the hardware elements); the logic and algorithm of the program, as well as programming languages. Consequently, the author of a computer program must realize that if a certain algorithm for solving a task set forth in his program, this algorithm itself will not be protected by copyright. In order to eliminate this copyright lack, in Ukraine, the applications to obtain a patent for an invention (utility model) are filed with increasing frequency in order to keep safe and protect the algorithm (method) of a computer program for solving a specific task. The difficulty of applying such protection lies in the fact that the author of the program should understand how to express the algorithm embodied in his program as the action of material objects over material objects.

The national legislation of Ukraine provides for both civil and administrative and criminal liability for violation of intellectual property rights.

 In particular, according to Art. 176 of the Criminal Code of Ukraine, persons, guilty of illegal reproduction, distribution of works of science, literature and art, computer programs and databases, as well as illegal reproduction, distribution, performance of recordings, video games and broadcast programs, their illegal replication and distribution on various information carriers, if the actions entailed large-scale material damage, are prosecuted. Considering the fact that the software endowed with the largest share of the intellectual property rights of startups, and it is protected as a literary work, this article is extremely relevant to our issues.

Art. 177 of the Criminal Code of Ukraine establishes the criminal liability for violation of the rights to the invention, utility model, industrial design, integrated circuits topography, plant variety, a proposal for innovation in cases it has caused large-scale material damage.

In accordance with the Law of Ukraine "On Copyright and Related Rights", violation of copyright and (or) related rights, that gives the grounds for the protection of such rights, including judicial protection, are:

- the commission by any person of actions that violates the personal non-property rights of  copyright and (or) related rights subjects, as well as their property rights, defined by the Law, as well as abuse by officials of the collective management organization which led to non-payment or improper distribution and to payment of remuneration to the owners;

- the copyright and (or) related rights piracy as publication, reproduction, importation into the customs territory of Ukraine, export from the customs territory of Ukraine and distribution of counterfeit copies of works (including computer programs and databases), sound recordings, videograms, illegal publication programs of broadcasting organizations, camcorder, cardsharing, as well as Internet piracy, that is, the commission of any actions, recognized as violation of copyright and (or) related rights with the use of Internet-based network;

- the plagiarism – promulgation (publication), fully or partially, of someone else’s work under the name of a person who is not the author of this work;

- the importation of copies of works (including computer programs and databases), phonograms, videograms, broadcast programs into the customs territory of Ukraine without copyright and (or) related rights owners’ permission;

- the commission of acts, posing a  threat to copyright and (or) related rights violation;

- any actions for consciously circumventing technical means of copyright and (or) related rights protection, in particular, manufacturing, distributing, importing actions for the purpose of distributing and the use of means for such circumvention;

-  falsification, alteration or withdrawal of information about management of the rights, in particular in electronic form, without the permission of the copyright and (or) related rights or a person exercising the business administration;

 - distribution, importation into the customs territory of Ukraine for the purpose of distribution, public communication of objects of copyright and (or) related rights, from where the information on the management of the rights is withdrawn or modified without permission of the subjects of copyright and (or) related rights, in particular in electronic form;

- camcorder, cardsharing.

In case of violation of copyright and (or) related rights by any person, the person whose rights are violated has the right to:

1. Demand recognition and restoration of his rights, including prohibiting actions that violate copyright and (or) related rights or pose a threat to their violation, as well as the application of financial sanctions in case of violation of property rights;

2. Appeal to court with a claim for the restoration of violated rights and (or) the suppression of actions that violate copyright and (or) related rights or pose a threat to their violation;

3. File claims for compensation of moral (non-pecuniary) damage;

4. File claims for damages (property damages), including losses of profits, or income recovery by the infringer of rights due to violation of copyright and (or) related rights, or reimbursement;

5. And many other rights provided by law.

In addition, remember about the cross-border use of products developed by start-ups. In this case, the registration of international patents is required. Why do it? It is done for the reason that, basically, most startups are not made for a specific country, but for the purpose of selling them abroad. Therefore, it is necessary to understand that the registration exclusively in Ukraine will be valid, to a large extent, exclusively within Ukraine. In order to obtain proper protection in other countries, both the patent and the copyright should be registered for the countries considered to be a potential market. This procedure is rather expensive, and to register, it is necessary to preliminary decide on the list of countries where the protection of rights is necessary in country-specific order to submit certain applications. Two main options for filing applications may be identified. The first is to apply for registration of copyright and patents directly and separately in each country, that is a very long-term and very specific process. And the second, the simplest one, chosen by start-ups in Ukraine is to register both the copyright and patent in Ukraine, which is the source country and then to extend the patents to the start-up of the necessary country. This option is much faster and easier, the presence of special systems, the same Madrid Convention, suggests the possibility of such distribution, and everybody is using them. It should be noted that in terms of protecting intellectual property, these two options have no differences.

At the same time, it is not a secret to anyone that lawsuits are a long-term and expensive way to protect somebody’s rights. It particularly concerns startups, most of which, as mentioned before, is quite limited in financial and human resources, time resource included. Therefore, preventive measures to infringe intellectual property rights should become a matter of priority.

When it comes to a group of persons (a legal entity) it is very important, in addition to various types of registration of rights, to form a relationship with the actual software developers, i.e. with programmers or managers. If they are employed people, then their job descriptions, employment contracts (in Ukraine, as a rule, labor contracts are not used in a given sector while the job description is valid), it should be clearly stipulated, including everything created by them as part of the development of this startup, all the intellectual property rights are automatically transferred, as the official works, directly to the person who will be identified as the holder of intellectual property rights. Speaking about the fact that these programmers’ work is based on civil law or business contracts, these contracts should provide for an automatic transfer of intellectual property rights to what these programmers have created for the customer and in order to avoid any additional problems, for example, of a financial nature, it is necessary to indicate that the cost of these rights is included in the cost of services, i.e. they are not paid additionally, and next, within the payments’ framework for services they are supposed to receive payments for the transfer of intellectual property rights to products of intellectual labor.

Usually, business owners believe that others are key-aspects, such as product development, qualified employees search, attract investments. The portfolio of intellectual property creation and support to this background seems an unnecessary and expensive whim that diverts focus away from the principal and hinders the rapid introduction of products into the market.

The prevention of claims for intellectual property rights by third parties is, in particular, an important aspect. It happens that new ideas arise in the process of discussions with friends, colleagues, during various brainstorming sessions, production meetings, etc. As a result, several participants in the discussion may submit a joint application for financing a startup or act as co-founders of a startup company.

Starting a business as a co-founder of a project to create an innovative product, it is necessary to define the conditions for the relationship to create and use intellectual property by entering into corresponding agreements. At this stage, such means of ensuring the protection of business ideas as to exchange written messages, even if by e-mail, which will attest the understanding of the volume of participation of each of the co-founders in the creation and development of the object of intellectual property rights are not to be neglected.

Companies should also provide standard non-disclosure agreements for all parties that may have access to any confidential or proprietary information, including all founders and employees. Non-disclosure agreements or confidentiality agreements determine the amount of the protected, information by determining how by whom and under what conditions it can be distributed. Thus, such an agreement will help to protect corporate secrets from accidental leakage.

Companies should also register domain names, account names, and corporate names. Such additional steps will strengthen the company's brand, will effectively monitor and track all the attempts made by third parties.

By way of conclusion, it should be reiterated that the success of a startup depends not only on the uniqueness of the software and business ideas for its implementation and use but also on the ability to protect them. In this case, any investor who assesses both the opportunities and the risks, contained in this or that project, will prefer the one that is protected, including its legal protection. In this case, the investor or buyer of a start-up project is sure not to lose the invested funds and planned income consequently to any legal claims from a competitor 

By Serhiy Dzis, Partner SDM Partners 

Ukraine Knowledge Partner

AVELLUM is a leading Ukrainian full service law firm with a key focus on Finance, Corporate, Dispute Resolution, Tax, and Antitrust.

Our aim is to be the firm of choice for large businesses and financial institutions in respect of their most important and challenging transactions.

We build lasting relationships with our clients and make them feel secure in new uncertain economic and legal realities.

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