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How to Protect Your Intellectual Property When Using Crowdfunding

Corporate Counsel
September 5, 2012

Popma, Scott J., Shah, Elizabeth A.

Article

Authored by Scott J. Popma and Elizabeth A. Shah

The passage of the Jumpstart Our Business Startups Act (the JOBS Act) into law in April 2012 and the recent successes of the online funding site Kickstarter have raised crowdfunding's profile in the public consciousness. Crowdfunding is a way of raising capital from a large number of small donors. Currently, Kickstarter and a handful of other donation-based crowdfunding portals are operating in the United States.

The number of crowdfunding portals is expected to grow rapidly after the Securities and Exchange Commission implements the JOBS Act in early 2013, which will legalize equity-based crowdfunding investment, allowing companies to sell up to $1 million of securities annually. Crowdfunding presents an exciting opportunity to raise money or to pre-sell a product while building product buzz and an engaged customer base. For example, Pebble Technology raised over $10.2 million from 68,000 donors—to fund the creation of a smartphone-connected wristwatch—in just 37 days using Kickstarter.

In order to engage the crowd, a large quantity of information about the project is shared with the public, either voluntarily in the case of donation-based portals or, as will be required by law, in the case of portals offering crowdfunded securities. If this information sharing includes previously confidential technological details, it could be considered a public disclosure under U.S. patent laws, which could trigger patent filing deadlines.

Those using crowdfunding (either donation-based or equity-based) must be mindful of these filing deadlines to ensure that they do not jeopardize their intellectual property rights. This is particularly true for crowdfund issuers that have used government funding or resources while developing their ideas, as they may be subject to the Bayh-Dole Act (BDA). The BDA allows government contractors to elect to retain title to an invention that was created with the aid of government funding, but only if they follow specific steps, described below, in a timely fashion. Crowdfund issuers who have used government funding must ensure that their crowdfund offerings comply with the requirements of the BDA, particularly in light of the recent amendments to the BDA and patent laws effected by the America Invents Act (AIA) patent reforms.

Crowdfunding Disclosures May Trigger BDA Provisions

A public crowdfunding disclosure may have an impact on the timing of two BDA requirements: 202(c)(2), the written election to retain title, and 202(c)(3), the agreement to file patent applications covering the subject invention before statutory bars. The deadline for electing to retain title to an invention under the BDA is two years after disclosing the invention to the government. However, this deadline may be moved up significantly by a public disclosure of the invention, including, in many cases, the disclosures associated with a crowdfund offering.

The AIA-amended BDA provides that if the AIA's one-year grace period for filing a patent application would end before the BDA's two-year grace period for electing to retain invention rights, the time for written election to maintain invention rights may be shortened by up to 60 days before the end of the AIA's one-year grace period. Failure to act within the allotted time period could lead to forfeiture of rights to retain title to the invention.

Crowdfund issuers also should be wary of the AIA's one-year grace period for filing patent applications. In March 2013, the AIA will change the United States patent laws to a first-to-file system. This change will broaden the scope of prior art, and inventors will no longer be able to "swear behind" art developed between an inventor's date of invention and patent application filing date. Moreover, if another party files for the same invention first they may get rights to the invention. Thus, to avoid this potentially invalidating art, crowdfund issuers should file applications and elect rights to an invention as soon as possible and not rely on the one-year grace period for filing a patent application.

Disclosure Requirements of the JOBS Act

For those seeking to offer a crowdfunded security, the crowdfunding provisions of the JOBS Act contain certain disclosure requirements, including disclosure of the anticipated business plan of the issuer and a description of how the securities are being valued. The JOBS Act also imposes liability for material misstatements or omissions made during the offering.

Crowdfund issuers must take care to disclose all required information to potential investors. For those subject to the BDA, this will include notifying investors about all rights that the government has or may have to the invention. This is particularly true if the company has not yet filed a patent application or has not yet made a written election to retain invention rights.

An investor may elect to purchase crowdfunded securities based on the perceived value of the technology described in the crowdfunding disclosure. However, if the company fails to follow the requirements of the BDA and does not properly elect to retain rights, the government, not the company, may obtain the patent rights to the disclosed technology. This may adversely affect the value of the securities and could trigger allegations of a material misstatement or omission. Failure to secure patent rights properly or to properly disclose government ownership interest could open the door to charges of securities violations under the JOBS Act.

Best Practices for Securing Intellectual Property and Complying with the BDA when Crowdfunding

Given the complexities of intellectual property ownership under the BDA, companies should take special precautions to ensure that they have clear title to their IP rights before they make a crowdfund offering. Following are some best practices to consider:

  • Once a federal agency is informed of an invention, the inventing entity should quickly follow the BDA procedures and make a written election to retain title to the invention. It should file a patent application as soon as possible, and under no circumstances should it file the application later than one year after any public disclosure.
  • If the company will offer securities, it should elect to retain title to any IP that contributes to the basis for the valuation of a crowdfunding offering before the offering. This will help to ensure that the valuation properly reflects the company's ownership of the invention.
  • If the company cannot afford to file a patent application before raising funds, it should consider filing a provisional patent application as a filing date placeholder. Provisional applications can be less formal than regular patent applications and often can be filed using materials that already have been prepared for the crowdfunding disclosures. Provisional patent applications are an inexpensive way to preserve patent rights under the first-to-file system of the AIA.
  • The crowdfunded security offering should clearly inform potential investors of the government's rights or potential rights to the invention. Even if patent rights are elected in a timely fashion, the government still maintains certain rights under the BDA (e.g., "march-in" rights). Although these rights may be rarely used, they may still affect the company's valuation and should be disclosed. Such disclosures may curb liability and protect against accusations of material omissions or misstatements under the JOBS Act.
  • Finally, the BDA only covers inventions that were made using government funding. To limit the BDA's applicability, businesses should segregate out as much IP as possible by differentiating it from the subject matter covered by any government funding agreements.

Crowdfunding is a new and potentially powerful tool. Following these steps will help to ensure that a business has clear title to its IP rights and that it has disclosed all necessary information to potential investors.

Reprinted with permission from the September 5, 2012 edition of Corporate Counsel. © 2012 ALM media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382, reprints@alm.com or visit www.almreprints.com. This article is for informational purposes, is not intended to constitute legal advice, and may be considered advertising under applicable state laws. This article is only the opinion of the authors and is not attributable to Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, or the firm's clients.