MERGER SHE WROTE
Merger She Wrote is a podcast for business owners looking to scale, sell, or transition their companies. Each episode unpacks the strategies behind successful exits, the pitfalls to avoid, and the steps to maximize value. Featuring expert insights and real-world case studies, this podcast helps you navigate the complexities of M&A with confidence. Whether you're planning your next move or just starting to think about the future, Merger She Wrote gives you the knowledge you need to make informed decisions and build a business buyers want.
MERGER SHE WROTE
EP 16 | The Role of IP Due Diligence in Successful Business Acquisitions
Deals fall apart quietly when intellectual property isn’t what it seems.
IP attorney and professor Michelle Gross joins Paloma Goggins to unpack how patent validity and ownership can make or break a deal. From missing assignments and lapsed fees to hostile inventor issues, she explains the red flags that derail valuations and delay closings.
Michelle also breaks down the trademark pitfalls most founders overlook, like stock-logo copyrights and unenforceable claims, plus how to run quick checks to protect your brand before diligence begins.
Hit play for a must-hear guide to safeguarding your IP, strengthening your valuation, and avoiding last-minute deal killers.
In the world of business, not all deals are what they see. Fortunes rise, empires crumble, all with a stroke of a pen. Mergers, acquisitions, and hostile takeovers. Welcome to Mergers She Wrote, where we examine strategies and stories behind the biggest deals in business. Because in MA, the real risks are the ones you don't take. Welcome back to Mergers She Wrote. I'm Paloma Goggins, your host and the owner of Nocturnal Legal. Today's guest is the owner of her own intellectual property law firm. And she's here to spill all the details as to how you can protect your intellectual property and how IP takes a big role in mergers and acquisitions. Michelle, it is so lovely to have you on today.
SPEAKER_00:Thank you so much for having me. It's a pleasure to be here.
SPEAKER_02:Yeah, so I Michelle Gross is the owner of her own law firm, but I would love for her to do her introduction because she's also an esteemed professor. So please introduce yourself for us.
SPEAKER_00:All right, so my background is actually in physics. Um and additionally, I also have a business degree in finance. So I have kind of a mixed background for an IP attorney. Um I've been teaching for uh over 15 years now at uh Arizona State and also at Washington University, um, directing their intellectual property law clinic, um, and in addition, obviously, to my to my law firm, which is uh a transactional intellectual property practice.
SPEAKER_02:Very nice. I I want to dispel one rumor right off the bat because a lot of people will ask me as a business attorney, can you do patents? And so I'll let Michelle explain it, but you need a patent bar. So explain like what's the difference between me and you in terms of patent bar and all of the licensing involved to be an IP attorney.
SPEAKER_00:Yeah, so in order to be a patent attorney, a person needs to have a minimum of a four-year science or engineering degree to be able to qualify to sit an additional bar exam, which is the patent bar exam. And so um, once uh a person sits that exam, then assuming that they also have a law degree, they will become a patent attorney. Um, but there are actually patent agents. So if a person passes the patent bar exam and does not choose to become an attorney, um, they they still can can actually represent clients and draft patents and and file before the patent office.
SPEAKER_02:Oh, good to know. I I didn't know that. So even a lesson for me today. I suspect I'll have more lessons today because I know I know a little bit about uh trademark and things like that, but I am uh I'm not well versed in the patent world. So I'm very uh interested and excited to learn from you today. So I'd love to just jump in. We'll start with uh the first question I have for Michelle today, and then we'll just take it from there. So when you're brought into diligence on an acquisition, so anybody who's looking to buy or sell a business, you go through the diligence process, which is really just a fancy way of saying investigating the business, making sure you want to buy it. Uh, what is the first thing to look for in a company's intellectual property portfolio? And can you share an example where that early review might have made a big difference?
SPEAKER_00:Sure, absolutely. So I like to think of it as kind of there, there are two prongs of topics that are of utmost importance when undertaking due diligence. So the first one is validity of the actual intellectual property. Um, the second one would be ownership issues. So let's dive into validity first. So when we're talking about validity, typically we're thinking about patents and uh you know what's going on in a company's patent portfolio. So um so there are a number of issues that can that can impact whether or not an issued patent is actually valid and enforceable. So the first would be there may have been issues that occurred during the examination process where potentially the examiner did not find relevant prior art and did not make the proper rejections that they should have, and then the patent ends up issuing when really it shouldn't have, if the examiner would have had everything before them that they should have been looking at. So that's issue number one. Um so if we're seeing patents in the portfolio that have claims that appear to be quite broad for the period of time in which the application was filed, we really want to dig into that a bit more to see you know, is should this patent really even have issued in the first place? Because if not, um and and if it turns out that um, you know, it really shouldn't have issued, if you go and try to enforce that patent, your your opponent is obviously going to find that same prior art that should have been cited, point that out, and you're gonna end up with the patent becoming invalidated at that point. So it's important to know those types of things. There are other issues that then after the patent issues that can lead to invalidity. So for example, um patents in the US have maintenance fees that need to be paid three and a half, seven and a half, and eleven and a half years after the patent issues to keep the patent in force. If you don't pay the fee, the patent lapses. Okay, so um it's important to check and see are you know, are there were the maintenance fees paid? Or potentially, you know, has something lapsed that you think would still be uh enforceable? Um in in the foreign patenting realm, um, annual annuities need to be paid to keep those patents in force. And so it's important to look into that to see, you know, has that actually occurred or not. It's also important to check the court records to see has has has this patent been litigated before? And if so, was there anything that, you know, were there any claims that were invalidated? What happened in that litigation? So it you really kind of have to, you know, to do some some real work to dig into that and make sure that what you have is actually valid. Now, ownership is another big issue. So very frequently, obviously, when companies are building a patent portfolio, you know, they've got a number of engineers and employees working on these things. Well, things don't always work out well, right? And so sometimes we end up with disgruntled employees who leave the company. And if they have not actually assigned their ownership back to the company, that can cause a problem. Because with a patent, all of the co-inventors that are present on an issued patent have equal rights in what they can do with that patent. And there's no requirement that they have to account to the other inventors. So let's say you had three inventors on it on a patent, and you know, one of the engineers becomes disgruntled, leaves the company, refuses to sign any of the documents, doesn't assign ownership to the company. That person then still has as much rights as what the company does that the other two have assigned to you. Interesting. So they can go out, they can license, they, you know, they can um you know do all sorts of things, and they and there's no requirement then that the profits from whatever they're doing to monetize this would have to be shared. So you can see where that can has potential to create some huge messes if you have those loose ends sitting out there. And it's not uncommon that you know you'd end up with the we call it a hostile inventor situation where the inventor just says, I want nothing to do with this, I'm not going to sign anything. Um, and so so really the way what you want to do to protect against that is to make sure that uh that as a company that your employees are bound by a good IP agreement, when which should just be part of the standard paperwork that they're signing when they come on with the company. Um additionally, if there are any independent contractors involved, you want to make sure that they have a good IP agreement in place where all of that is is basically obligated to be assigned over to the company because that way if this person refuses to comply and refuses to assign, you now have a contract that you can enforce against them.
SPEAKER_02:And I think that last point is is so valid, not just in the MA space, because for starters, if you're acquiring a business and we find out you don't have those contracts in place, the chance that you have a patent or some other, even just general intellectual property that could be there so that they can make a claim to impacting overall the the value of the assets you're purchasing, um massive impact, but also there's so many people, especially in the valley that I speak to that are starting their you know business with friends, with family, you know, business partners that they've met along the way. And everyone is so quick to trust. And I always say, okay, operating agreement, you got to get one of those in place. It's like the um I always say it's like the prenup of businesses. But also to your point, you've got to have if if the people are also contributing and inventing and doing things that are related to what is being produced by the company, that's gotta be factored into the operating agreement and also probably an employment document of some kind, whether that's a 1099 and an independent contractor agreement, or even just flat out assignment of rights, right? Um I always hate it when people come to me and they have, you know, they're like, oh, you know, I want to jump ship, you know, this big corporation that I work for and I want to go work with my cousin who's doing some really cool stuff, kind of related. Look at my contract. Can you like tell me, you know, is there non-compete? What was the restrictions? And they've got like that chunky, like giant one page of like all discoveries, inventions, thoughts, process, you know, and that that that's a good job on our part from an attorney's perspective, like working for the company, right? But um, sometimes it's so broad that it encompasses everything they do, even if it's unrelated to the business. And so I always tell people, I'm like, yeah, it goes both sides. Companies gotta protect what they're you know, making and and investing their money into from an RD perspective. But on the flip side, the employees too gotta also think about what's the longevity for them. Are they gonna be at this company forever? You know, let's not overstep the boundaries. So I love that you brought that up, the assignment of the IP part. Going back to what you said about the patent stuff, um, you know, so let's say you've got, you know, people that just you were talking about having a patent file, but it's not very enforceable. Like, how frequently does that occur? Is that something that's common? Does it happen when like corners are cut? Like, how does that happen in the first place?
SPEAKER_00:Yeah, that's a good question because there there are a number of instances where that that occurs. So some of it is just basically, uh I mean, some of it just falls on the examiner, how how good a job the examiner is going to do. But anyone who is associated with the drafting and filing of the patent, meaning the inventors, the attorney, the company that owns the patent, everyone has an obligation to disclose anything that's material to patentability that they're aware of to the patent office so that it gets before the examiner. Now, a lot of a lot of inventors are smart enough to realize, okay, this is going to be damaging and this might cause my patent not to issue, and they may be reluctant to disclose it. The reason that you actually want to err on the side of disclosing everything, I mean, not only do you have an obligation to do it, but if if the examiner actually considers those references, then they get printed on the front page of the patent that when it issues, and there's actually a presumption of validity over all of those references. Okay, so so basically, I mean, sometimes it can just be that the examiner doesn't do a very good job. Um, you know, other times it can be that someone was trying to hide the ball and you know, files on something. It's it seems to be very industry specific. I mean, I've I've, you know, for example, I had um a client in the um additive manufacturing, they basically made um industrial additive manufacturing, so industrial 3D printing equipment. And, you know, they had a competitor that was very, very big on enforcing and wanting to, you know, wanting to come after them for every little thing. And they had some patents that issued that were just incredibly broad that they were attempting to assert or threatening to assert. And it was really not very difficult to run a prior art search and find art that would actually knock that out and invalidate that patent if they wanted to pursue it. So I, you know, how exactly that went through got through, and the examiner didn't find any of these things, you know, that's somewhat of a mystery. Um, sometimes it'll be that there is um maybe there's a foreign reference that really reads on something, or there's a product being sold in a foreign country that would read on the client's invention, and the examiner just doesn't find it because it's the whatever describes it as written in a foreign language, or you know, they just don't, they're just not doing a thorough enough internet search. They're looking just at patents and publications, but really there's a product out there that would read on it, and therefore that would invalidate the patent. So there's a number of ways that things can actually get missed, just innocently, basically.
SPEAKER_02:So that's interesting. It's I feel like one of the things that's so common, and it kind of ties into the question I asked and the next question that was I was gonna ask, but when you see people really fighting over trade names that they've registered, um, I feel like part of me coming from a non-IP background, I you know, when someone gets sent a letter and it's a threatening letter and it sounds really serious. I think for most just lay people or the regular, the regular person who doesn't have a background in business law or intellectual property law, they look at it and it looks really scary. I what is really the difference for for anyone listening? Like, what is the difference between someone who's writing a letter and they really do have an enforceable right from a trade name or trademark perspective, versus someone who's really just, like you said, throwing their weight around and hoping that people comply, even though it's really not very enforceable?
SPEAKER_00:Yeah, so what you really need to look at there is first of all, I mean, there's a number of issues. So obviously, whoever's trying to enforce against you has to be the senior user. So were they actually using the mark first? Or, you know, do they even know when you started using the mark? Are they just taking a stab in in the dark to see if they can shake the trees and get somebody to comply who doesn't know what they're, you know, who isn't gonna get counsel and actually have this reviewed? But secondly, it's also from an infringement perspective, do the goods and services actually overlap? And is the name actually confusingly similar? Those are the things that you have to really look at because you know, somebody can have a similar sounding name, but if the if the goods and services aren't really related, wouldn't typically be sold in the same channels of trade, et cetera, then you know that's not going to be enforceable. So it really is important to have an IP attorney actually look at that and to and to determine the merits. Because I've definitely had a lot of small businesses come to me and because they've received a season-to-sist letter. And when you really look at the merits, there's really nothing here. And a good response letter back from an IP attorney will typically take care of that matter, unless for whatever reason, you know, the client is now has now started to tread into the territory of large companies that have very deep pockets. Those, you know, generally are going to create more of a problem. I mean, I've had clients who have, you know, come to me with issues, they've you know treaded into the territory of a major motion picture company, uh a major university, various things like that. So if that's the case, um, you know, now you you they have deep pockets and and you probably want to address that very differently because they are typically given a wider breadth of ability to enforce the their marks, if they're famous marks or if they're um basically, you know, large companies that have deep pockets that are gonna just keep fighting. That that's a different approach than if you just get you know cease and desist from someone that appears to be out there just fishing around to see, okay, well, we for whatever reason we woke up and we want to police our trademarks now where we hadn't been doing that.
SPEAKER_02:So it's unfortunate to hear. I mean, I know it's in practice, it's just what happens when it's big corp versus small private companies, but I think it's it's sad to always hear from from you know, someone who lives and breathes the intellectual property world to be like, yeah, you know, it's a different story when it's you know a big corporation that might be able to throw their weight around or bury you in legal fees or you know, do things to make your life miserable, even if maybe at the end of the day their their mark isn't, you know, isn't so similar or they can't enforce their rights like they claim they do, but they're going to make it difficult and spend your money and make you essentially submit to their will, right? Um did you see, and I think this is a while back now, but your your explanation of things brought it to the forefront of my mind, but that um woman who the Sprite uh name lapsed, did you read about that?
SPEAKER_00:No, I had I wasn't aware of that.
SPEAKER_02:So um, and I I might be misrepresenting this because I I read it quite while quite a while ago. So don't hold my feet to the fire on the details here. But um there was a woman who was like an artist or a singer or something like that, and uh her name is Sprite, and she had found that the I I don't remember if it was the the trademark or the trade name or whatever it was, it had lapsed or it was available. And so, you know, Sprite had been Sprite forever, and um they found out that she had essentially swooped in in this window, which like you were talking about this, like you know, there's maintenance fees and all these things to keep things going, and um it lapsed and she she swapped, you know, swooped in and was owning it. And so, of course, you know, uh I think Coca-Cola is like the big brand behind Sprite, and they like, you know, came to her with an offer, and the offer was pretty big. And uh she to my knowledge, based on what I've read, pretty much told them to pound sand, and that is now why we have Stari, because they never got it back, and so they had to rebrand. And um I think it was just a fascinating story because it it shows that even the big brands are susceptible to this idea that you know, even though they might be able to bully the smaller businesses with their, you know, whether it's in compliance or not and infringes on on a bigger mark, but they're just as susceptible to to lapses when uh you know something needs renewal or a payment. Um and whether she made the right decision, I think is to be determined. I think she I had found her social media account and she was posting like regret reels because they had, you know, she could have had a bunch of money in the bank and just used a different name. Uh and they carried on it without much uh damage to the to the brand. Um so I think from that perspective, I mean, are there, you know, I would think that there's people out there being just bad actors waiting for things to lapse.
SPEAKER_00:Yeah, there are. There definitely are. Um and and so it's it's really important that if you have a trademark that you're aware of when those deadlines are and that you're tracking that and that you're filing your renewal documents uh in a timely manner, it's also important that you're actually policing your mark. Because if you fail to police and you basically are allowing others to be out there infringing, just because you know maybe it's a younger company and they just say, Well, I don't want to spend the money on enforcement, okay. Well, if you're letting your mark be used out there and and it's being infringed upon legitimately, what happens then later when you wake up and say, Oh, I I I I want to shut this down now. I've got you know sufficient revenue in my company and I can go out and police this. If it's been too long, okay, you you've basically the the doctrine of latches applies. And what it means is if you've slept on your rights, you've lost them. So you basically could have a registration, but if you've allowed it to be trampled and be widely infringed, you're you're basically not going to be able to enforce that. The you know, the defendant can actually apply that and say, well, we thought it was up for grabs, we thought it was, you know, was perfectly fine to use. You we've been using this for five years and you didn't say a word. So that's something else to, you know, that if you have trademarks that you're concerned with protecting, you do need to actually, you can't put your head in the sand, you do need to be looking at what's going on out there and then getting those cease and desist letters out. A lot of it, if you can get um, you know, the infringer get to the infringers early, a lot of it is innocent infringement. And a lot of the times when I send a cease and desist letter, it the person contacts me back and says, Oh, I had no idea that there was someone had that mark. Okay, I, yep, you know, can you give me, you know, three months to be able to rebrand? And it was like, yeah, okay, sure, that's fine. That's workable. So you're shutting it down and and you know, making sure that all of that stays in check. Um, but yeah, you can't simply ignore infringement that's going on out there, or that can actually cause you to lose your mark.
SPEAKER_02:That's really fascinating. I I was thinking, you know, similarities that people might liken it to as a memory trigger to remember to keep track of your marks is like it when you were explaining it, I was thinking of an easement. You know, the old law school example of like, you know, the next door neighbor's kids cut across your lawn every day to go to the bus stop and you never stop them. And all of a sudden the kids can use your yard to cross for the bus stop legally. You've created an easement that is enforceable. Same concept, um, different, different, uh, different law. Um, but no, that's that's really fascinating. I so for someone who, you know, obviously hiring someone like yourself to do some digging and some real searching to make sure that no one else is utilizing a trademark is probably the best um approach. But for someone who maybe is a younger company and doesn't have the funds besides Google, like what else can they do to make sure that they're doing at least a little bit of digging here and there?
SPEAKER_00:Yeah, I mean, so so basically you'd want to go to the US PTO's records because for anything that's for a trademark that's registered or patent that's issued, you can, it's publicly accessible to see what occurred in the entire file wrapper of all the back and forth with the examiner. So you can look at that and see, you know, does it there are search records in there to see, okay, how good a search did the examiner exact actually do? Um, you know, did they, you know, come up with were the references cited, or does it look like they really, you know, they they they used a you know a three-word search string and that's all they came up with and they likely have missed things. So you can start to glean information like that. Um, and obviously the trademarks are publicly available as well, so you can look at all of those records. You can check to see if um the patent maintenance fees have been paid, you can check to see if um the renewals have been have been filed correctly on the on the trademarks as well.
SPEAKER_02:Okay, good to know. I feel like in my world, working a lot in mergers and acquisitions, you know, one of the things that's a key component in an asset sale where you're not just stepping into the shoes of the previous owner is making sure that all of the intellectual property gets assigned appropriately. I would imagine that finding out through diligence that the ownership isn't sound or the enforceability isn't sound could greatly impact the value of the assets that are being purchased. You know, from your perspective, if you were working with a client and your, you know, potential buyer, helping them through the diligence process, looking at ownership, making sure the intellectual property that's getting purchased is sound. And I think a lot of people they overcomplicate what intellectual property is because I think a lot of people when they hear those that phrase, they think, you know, widget or gadget or you know, watch or you know, uh something that's more technical. But in reality, IP can also encompass your brand, just generally speaking, and and with a lot of small, closely held businesses that don't have very many contracts, shame on you. Um, you know, the brand can be pivotal um to what you're purchasing because there's not much else left besides goodwill and the branding and the name. So, you know, what would be something that you would tell them if you found these things? Like, would you recommend that they not buy the business? Could that be some a path? Like, what would be your sort of, and and this is not legal advice, don't take this as legal advice, but um, you know, what would be something that you would tell them in relation to that so that anybody who's going through that process could be aware, like, hey, this is serious.
SPEAKER_00:Yeah, so so I mean that that definitely happens. Um, and it and it certainly impacts the valuation um uh uh on the acquisition because I mean I had a client that um has has acquired a number of different entities um in various product lines, and they were looking at acquiring an actual uh another entity. The entity claimed and gave us a list of the IP, which I did due diligence on, and then they they had what appeared to be a fairly significant foreign patent portfolio, and they were selling in foreign markets where my client was interested in in obviously maintaining that you those product lines there. And when we started digging into it, and and you know, to do the foreign research, I have to go through foreign counsel and have them dig into some of these things. But it it it became clear that there were a lot of the foreign portfolio had actually lapsed because the annuity payments, the the maintenance fees had not been paid.
SPEAKER_01:Oh shoot.
SPEAKER_00:And I I don't think it was actually a misrepresentation by the the company that that was you know trying to get the deal done because they seemed to be genuinely shocked at the fact that they didn't know. Yeah. They didn't know. Bummer. Yeah. But so that obviously, I mean, there was still value there. So the deal actually did go through, but it went through at a much lower valuation than what, you know, I mean, than what it could have had that, because I mean my client was still interested in obviously being able to sell those products, they were established in that market, but obviously, you know, there's a there's a loss of value there when you know that you can't actually enforce against competitors. So competitors can just come in and sell a competing product and there's nothing you can do.
SPEAKER_02:But yeah, that would be disastrous, um, especially if you're like you know buying one product. It's not like a product, a product uh portfolio. But yeah, I I was thinking the more you talk about the different ways that this can come back and bite someone as a buyer, was thinking about how like HVAC is a hot topic, is a hot, hot buy right now, right? Especially private equity buyers, they love the trades right now. And you know, thinking long and hard about how like there's usually not a whole ton of IP. There's, you know, the the branding associated with the business. Um, not very often that you find an HVAC company that also has an inventor of some special tool or piece that gets incorporated into like an HVAC service. Um, I th although it could happen. Um, but you know, one thing that has come up from time to time that I think is a complementary discussion to what we're saying is the the Google profile. Um, for a lot of businesses, people don't think too long and hard about the social media aspect of being part of the brand and that ownership. And if you buy the business and that profile isn't appropriately transferred, which Google is ultra sensitive, I've seen transfers go wrong where the Google profile gets frozen or temporarily banned. And Google's not as responsive, of course, as everybody wants them to be when things go wrong. And if your entire business livelihood is based on people calling your business by finding it online, having your Google profile either be bad or missing could be absolutely detrimental post-closing and your revenue just isn't there. So flip side and complimentary kind of buyer-beware story is if you don't have the proper rights to the the get the gadgets, the widgets, the products, you know, how how enforceable are your rights post-closing if someone starts selling an identical product? Um and and does that hurt your revenues? And same thing. If no one can find your number online, you're no longer in the Google Map Pack or however you want to phrase it, that's gonna impact your revenues too. So I think there's so much more to the IP conversation than people really realize.
SPEAKER_00:Yeah, there definitely is. And something that I'm seeing more frequently now that I've got clients who are using a lot of these types of platforms to create the big basically uh platforms like Canva, and there's a number of them out there. And they're they're great tools for people to be able to actually, you know, grab templates and and you know, get artwork and do things like that. But one of the things that Canva allows people to do is and encourages them to do is to create a logo. Okay. And so, you know, this happened when basically um, you know, a client came to me, um, their goal is to be acquired, and they're starting to really take off, and they have just been, you know, just been crazy with their branding and just really put really pushing that. And they knew they had a number of issues. And so among them was that they needed some trademark protection. So they had actually, they had they had gone on Canva and they had designed their logo, okay, which they were using on all of their, you know, they have podcasts, they have all sorts of branding that's using this. And when I saw it, I just thought this looks oddly familiar in some way. And so I ran a reverse image search uh on Google to see, you know, is this out there somewhere? And there were a bunch of hits of things that came up. I mean, there was even a company on Etsy that was using that same graphic where you could get custom coffee mugs and t shirts and whatever. Um, so I went back to the client and said, okay, where did this logo come from? Because I they were clearly um you know intelligent to not have just grabbed it off the internet somewhere. And they said, Oh, well, we used Canva to design this. And so I said, Okay, well, let me you know dig into this on Canva. So this, I mean, particularly, once you start digging into the terms on Canva, the average non-attorney is not going to be able to wade through that effectively. Um, so basically, what it came down to, I mean, there's just terms, and if you're using this, then there's these other terms, and it's just links to all these documents. And so it's it's really, I mean, it's a great service, it provides a lot. I'm I'm not saying that, but you need to know what you have rights in when you're using something and actually um basically taking taking any of that you know content out of there. Yes, you have a license to use it, but there are restrictions on how you can use it. And when what it when it actually what it turned out to be was that um Canva actually has a number of different entities that license content to them. Each one of those entities has different terms regarding what you can and can't do. So when you just go and grab a you know a graphic off of there, if it's one of the, if it's some of the licensed content, you need to go and actually figure out what you are allowed to do and what you aren't. And when I last looked at it, it was about six months ago, and there were there were six different licensed content providers on there, none of which would allow you to actually use any of their artwork in an actual trademark or trade name. And so that was strictly prohibited. And so so basically, I mean, it it's sort of it's it's you know misleading to people to say, oh, look, here's this tool, and I can do I can develop my logo for my business, but I can't use it as a trademark. So I mean, it it depending on where the content came from, right? And so it's something to really be aware of because it also means that they don't own the copyright, that you don't own the copyright rights then in this logo that you created with the graphic. So what can happen then is, you know, obviously when the business is small, they're flying under the radar and nobody knows what's going on. But when you get to the point where there's actually some significant exposure there, it would not be unusual to think that whoever has that these entities that have licensed this content to Canva are going to are going to start looking to police and say, oh, actually, this is copyright infringement and it's also a violation of license terms that you agreed to. So, you know, that's something that's just kind of a ticking time bomb down the road if the you know, if you're using that type of of content and you're using it as a trademark. So you really need to dig into where, you know, where did this content come from on Canva? If you've made a material change to it and transformed it in some way, you probably step around that. But just grabbing things off of there, even though you know you might even be paying for a subscription to Canva, it doesn't mean that you can use it as a trademark. And that was very surprising to me. And I'm glad that I uncovered that because I've had a number of additional clients since then where when when they have a logo, my first question is where did this logo come from? And even if they have hired a marketing firm or graphic designer to actually create this and they didn't just do it in-house, a lot of those companies now are relying on those platforms to basically make their jobs easier. Um, because then I, you know, I talked to someone at the marketing company who did the graphic design, and I said, Oh, okay, so how did you develop the logo? He said, Oh, I do, you know, I used Canva. And it was like, okay, we need to take a step back here and see where this came from, whose content was it? And if it turns out that it's licensed content, this this is out the window. We we can't work with that.
SPEAKER_02:Can you imagine paying some expensive fee to have a logo created and go down this rabbit hole and find out it's just from Canva?
SPEAKER_00:Yeah, I've I've had clients, yeah, who obviously were very upset with their graphic designer because I mean they had they had paid money and it turned out it was just basically a stock image that they'd put some, you know, some font over or something. Yeah, it was just like yeah, yeah, they were not happy.
SPEAKER_02:So I I think that's interesting because I, you know, I use Canva for marketing stuff, and even I have seen where um, and it tipped me off as being, you know, I'm sure I didn't do the the rabbit hole dig on the terms and conditions, but I was like, oh, there's some sort of restriction at play here where if you take uh a logo or something that's from their logo catalog and you put it all by itself with no addition, it gives you like the can't download error. So like it can't be by itself without some sort of addition. So that should tip you off if you're in Canva and you're trying to use just a single item and download the image and it tells you like can't download it because it's just not your own thing. It's just like a picture or a logo. Um, that would be a good way probably for you to know that uh what Michelle was talking about is active for that specific item.
SPEAKER_00:Yeah, it's also it's I mean, I if you add something to it, like let's say, I mean, what my client had done was they had they had the the graphic and then they're they had writing next to it. And so that would obviously allow you to still be able to download, but the graphic is still in its original form and it hasn't been modified in any way. And so that's where where you run into the issue. And I mean, another issue is that also, you know, the users on Canva who choose to actually publish and share content on there are basically you know affirming that they have rights, that they have that they own the rights to this. And that may not be the case. Do you really want to trust users posting something and you have no idea where they got this from? I mean, that they're saying that, but I mean, how many people actually who are users actually go and read the terms of what they're agreeing to? So, you know.
SPEAKER_02:No, that's so true. And I I think that your story really, I mean, it elucidates another component of if you're buying a business and you like their logo, one of the questions on the diligence sheet should be where did this come from? And was it from a firm that created it from Canva? Like just because you used a third-party marketing or design firm does not mean anything, potentially. Right. Um, which uh, you know, maybe some diligence in the future from anyone listening is going to get some some people in hot water from buying from buying what they thought was a customer bespoke logo. But um I think, you know, this whole idea that there's there's so many potential pitfalls, um, and and things that I think there's almost like an oversimplification of intellectual property rights when you go. I mean, I I tell this to all of my clients, and I think it applies the same for for your firm. You know, there are places to go on the internet for quick and easy templates, quick and easy filings, quick and easy protection. And you get what you pay for. And I hate to say this, but every time, you know, you and I have a conversation and you tell me something from your practice, I'm like, geez, anybody who's out there doing the quick and easy, like$300 flat fee garbage that's on the internet, how can you ever be certain that what you're protecting is is actually protected through the process that you went through. And for something that is so valuable in today's world, why cheap out? Um, you know, and so I I feel that way about contracts too. I chat GDP is the the bane of my existence. Um definitely. And people always like to say, like, I shortcutted it. Here's the start for you from chat GDP. And I'm like, this is garbage. We're not starting from this. Uh, I appreciate your valiant effort, but um, I I want to take our conversation because I feel like it's a great segue. And I don't think I have it on my list for you, so I'm sorry I'm going on a tangent. But I I get, you know, so many clients who are just general business clients that get letters and emails about pay me this, pay me that for their, you know, trademarks or trade names or their patents or even like infringement claims that are very clearly, you know, intended to extort money out of these individuals. You know, for anyone listening who I mean, we all get these letters, even I get these letters. I get emails with people telling me that the images that I post with my blog posts are infringing. And I get them from websites where it's completely free to download those images and you can put uh, you know, they tell you you could put their um, you know, designation of who had it or not. Like it's the websites that give that for free. And so I'm uh, you know, savvy enough to know that that email or that letter is a bunch of bull, but I worry that, you know, I'm only seeing very the the the top, the cusp of my clients that are getting these letters who have the wherewithal to ping me and say, hey, scanned a letter in that I got in the mail. Is this real? You know, for anybody listening, where, you know, what can you tell them as a warning? What's real, what's not? Where do the the letters usually come from when they're real?
SPEAKER_00:Yeah, so actually, so the USPTO actually has a whole page dedicated to warning people about these types of scams because they are they frequently come from very um you know, very official looking entities that say that they owe additional fees for their patents, that they owe additional fees for their trademarks, or they say something like, someone has tried has attempted to there'll there'll be firms that'll actually reach out. I mean, they reach out to me all the time. Someone has attempted to file, you know, this trademark that you know we've already applied to register in a foreign country. And, you know, we're we wanted to contact you to see if you wanted to file it here and you know, we'll work with you instead. Well, why would they do that? That doesn't make any sense. So yeah, I mean basically, I mean, I always tell my clients that if if you get anything requesting fees and it didn't come from my office, don't pay it, okay? Because everything will come through me. Um, but the it's just it's it's it's you know remarkable how quickly clients are bombarded because as soon as the trademark is filed, there's you know, 15 companies out there that are sending them based on the public record of the trademark, sending them letters saying that they owe something, or yeah, and and obviously, yeah, these these companies that are out there just trolling as far as saying you're infringing on something that clearly is you're not infringing. Um, you really need to, yeah, it to take. I mean, obviously, as an attorney, you know, you know that that's not the case. But yeah, when people get these letters, I mean, obviously, you know, seek counsel, somebody can obviously look at this and you know, give it a quick once-over and see, you know, does this look legit or not? Because we've seen enough of these types of things that we can easily identify, you know, is this something where we actually should assess whether they have a claim or not?
SPEAKER_02:Yes, I to your point, they are so credible looking at times. I mean, I have had some letters show up at my physical office, and I'm just like, wow, they are really stepping up their game because this looks serious, you know. Yes. Um and and uh even even the the past due stuff, I sometimes it looks like bills. I'm like, geez, they did a really great job, the the credibility of it. So word to the wise, if you get something in the mail, regardless of whether you've filed recently, um, you know, reach out to your attorney, reach out to uh an attorney if you don't have one to to just have them, you know, give you the peace of mind. Um, you know, having an attorney as an advisor is something that, you know, I think a lot of people don't realize, like creating those relationships in advance of when you need them because it's always when something goes wrong and then you're scrambling to find a really good connection. So I always tell people, you know, start making those connections early for your business. So anybody who is in the process, and I obviously, you know, I've seen plenty of small privately held businesses start to go through the process of selling their business and their house is not in order, right? Um, and so sometimes we're building the plane as we're flying it, we're putting contracts into place, you know, organizational documents, you know, operating agreement, bylaws, maybe contracts with employees, things that they should have had in place um as they're preparing for sale. And and we're doing it really in the 30 days leading up to sale, which is which is not good. Um and I recommend nobody do that. But for anyone who's in the pre-planning stage, which I hope anyone who's in this process of thinking about selling in the near-term future, they really start to put into motion the steps to get organized, the steps to collect all the information that they're going to have to present during diligence. So it's not a full-time job while they're operating their business. Intellectual property should be on that list. You know, what are what is your recommendation for someone who's like, you know what? Shoot, I'm listening to this episode. I'm realizing I have so many holes. I'm like Swiss cheese. What should they be doing? What would they come to you to help facilitate?
SPEAKER_00:Right. So, I mean, obviously, ideally you'd want to have this done from the start, right? It's like it's the same idea of if you're gonna have your taxes done and you've kept poor records and now you have to scramble and try to pull everything together, it makes it a lot more difficult. So you really want to focus on trying to make sure that you're you're you know dotting your I's and crossing your T's right from the start and keeping meticulous records. But if you haven't, you know, at that point, then it is worth speaking to an IP attorney and saying, okay, if I'm gonna present this as you know, a potential portfolio that I that I'd like to sell, what are they gonna be looking for here? And so at that point, you can go back and assess, okay, you know, how did this come to be? Do we have ownership? We can check the chain of title with recordations of of assignments with the with the patent office, things of that nature to see, you know, is this really in order or not? Because what you don't want to obviously do is to present a potential acquirer, uh, you know, a complete mess. And now, you know, they have to do their due diligence and they're gonna find all these things. So you can do it proactively and make sure that you're cleaning up all of those issues, um, you know, making sure that you have records, um, records of um of of proper uh transfer of ownership, um, records of having IP agreements in place with your employees and your independent contractors. Those are things that you know that that they're gonna be looking for. And if you if you didn't put those things in place at the time that you should have, you need to go back and and and get those things in place. Um, you know, a lot of times if you've hired an independent contractor to do something and there wasn't a work for hire agreement in place or whatever it might be, as long as you still have a good relationship with that that uh party, they're they'll be willing to sign. If there's been a falling out, now you have a problem. But um, but yeah, those are the types of things that you want to address because it's it's it can't be swept under the rug then if you're truly serious about actually selling.
SPEAKER_02:I couldn't have said it better myself. I mean, preparation is is the key to success when it comes to selling. And I think you know, people underestimate how much they should be having conversations with um each uh advisor from each different category, right? It's it's not one size fits all. I always tell people, I'm like, you know, I can't speak to intellectual property, just like, you know, you can't speak to insurance, and like we all are in our own lane. And and I think a lot of people look at, you know, retaining multiple advisors as a cost center, but I will tell you the information that each person who specializes in their own lane can provide is just it's worth it. Um, I think to your point, getting your house in order with intellectual property can save so much headache, um, especially if you find out down the road there is infringement and you've been letting it slide, like you were explaining. I want to touch briefly because I feel like for the average business owner, um, they may not know the difference between the two symbols that we often see in the commercial world and on our products that we buy every day. So, what is the difference between utilizing the little TM after the word and the R with the circle around it?
SPEAKER_00:Right. So anything that you want to actually use as a trademark should have the TM behind it. At least it doesn't have to be in every instance, but at least prominently in whatever you're however you're using the mark. Okay, the reason that you want to do that, um, and and this applies to anything that would not be federally registered. Okay, so the reason you want to do that, even before you you register anything, is that you're basically putting the public on notice that this is actually something that's being used as an actual trademark. It is not a generic term. It's not, you know, it's it's not just something that's up for grabs that everyone can use. This is your branding. Okay, and so you want to have the TM in place then. Um, and then presumably you would want to actually go move forward with the federal registration. So once you federally register, now you have to actually have obtained the registration certificate at this point to be able to use it. You that then you use the circle R registered trademark symbol. Now, why that's important, I mean, why do you care about marking it with a registered trademark symbol? Why don't you just use the TM? The registered trademark symbol basically would allow if you're using that, it will allow you then to actually collect um past dam damages or past infringement without having to actually prove in court that that you at that the the infringing party actually had knowledge of the registration. So it's basically it has put the, it's basically a constructive notice to the public saying this is a registered mark.
SPEAKER_01:Registered.
SPEAKER_00:Right. And so obviously now if you're using, you have to be careful because a lot of clients do get confused and they want to start using the registered trademark symbol after we've filed the application, but before we actually have the registration certificate. And it takes roughly, you know, a year to actually get the registration certificate through the examination process. So the reason you don't, I mean, you can actually be liable for damages for false marking if you're using the registered trademark symbol when you shouldn't be. So use the TM up until up until we get, you know, you actually get the clearance and get and get the actual registration certificate and then switch to the the circle hour registered mark.
SPEAKER_02:That's interesting about the constructive notice. I hadn't thought about how, I mean, it's a reason for why you get to put it on once the registration, right? Because otherwise, how else would anyone know? No one's gonna go searching on the USPTO's website. Obviously, right. Yeah, a regular person isn't going to, so how else would they know that something has been registered? So uh very smart and and good to know for most business owners that don't prematurely use the the registered uh circle, the circle. Don't use the circle before you're registered. I I know, you know, a lot of people who go through the process of getting the word protected for their business or phrase, it it can encompass so many things. And um can you just talk just generically a little bit about, you know, sometimes I see uh, you know, on social media you see like influencers selling courses and the course name has like a TM at the end of it. And I've always wondered, I don't see it very frequently where the R, the R with the circle is used, the registered mark, but like I have seen it every once in a while where people have master classes or you know, um formal online courses that they do have the phrase registered, and then I've also seen um, you know, uh things that are like you wouldn't think of them being as registered, but then they have the registered mark. Um, and so like catchphrases and things like that. You know, can you talk just briefly about how because I think a lot of people think, okay, protecting my mark is logo, logo and business name, but it's so much more than that. Give us some examples of what that could be.
SPEAKER_00:Yeah, it is. So I mean, frequently you want to protect your if you have a slogan or a a tagline of some sort that you're using as part of your branding, it's really important to go and protect that because I mean that that's something that you don't want to just leave it up for grabs and let it let other people use it. And sure, you've got common law rights and the fact that you've been using it, but what happens now is someone goes and registers that. Um, and so yeah, it it is. It's it's basically obviously it's words, it's logos, and that's what we commonly think of, but it's it's anything else that's really serving as your brand. I mean, you can actually uh you can protect a color as a trademark. So you've got the the like the the Tiffany blue box, that blue is protected.
SPEAKER_02:That makes sense.
SPEAKER_00:UPS has protected brown. Um you can protect sounds, so the southwest ding is protected. And so, I mean, there, yeah, there's a lot. Anything that you're using that's basically your brand and your you know overall trade dress, you can you can pursue um protection on, and and you, and you definitely should. The situation that you're trying to avoid is basically just using the mark under common law, and you know, great, you know, why bother to file then? It it's everything's going great. What happens then is if there's a newcomer that comes into the field and they go and they file and fairly federally register the mark for the same or similar goods and services, and you don't say, I mean, at that point, you can you have some opportunities to be able to oppose their ability to register, but you have to catch that while the mark is actually published in the official gazette for 30 days. So most people aren't checking that, right? And then if the mark actually registers and it goes for five years, and the registrant has filed their um initial renewal uh documents and they've they've filed for incontestability, the the ability to actually get that mark canceled um is is very much limited at that point. So it's something that you you know you don't want to leave that opportunity. And what that means for your business then is sure, you were the senior user, you can keep using the mark however you're using it. But now that there's a federal registration that covers the rest of the country, um, you are you were geographically limited to exactly where you did business before and you cannot expand, or you will be infringing on the registrant. And so that's why, you know, that's basically the whole point in filing for federal registration, is so you don't end up in that situation. Because a lot of businesses will say, well, I've used this mark for how long now and I haven't registered it, so why bother now? If that happens and you find yourself in that situation, that can obviously have major implications if you're looking, if your exit strategy is to be acquired and the acquirer wants to actually expand the business. Um, and the courts interpret that very narrowly. They look at zip codes of customers that you've had and such. Um and so if you've got you know something where your um you know the goal is to expand that business, that can really hamper your ability to do it. And you're probably looking at needing to rebrand if you're trying to get into other areas.
SPEAKER_02:So I want to jump back real quick because you talked about the the blue Tiffany box and the brown for UPS. And I I had no idea that you could protect color. I think that is super cool and fascinating. When you're protecting color, is it in conjunction with its use? So, like the blue, it's on the bags, it's on the boxes, it's part of their logo. I actually no, their logo's black. Like, is it does it have to be tangentially related? Because what if I was a business owner and I wanted to use the blue and I wasn't a jewelry store? Could I? Like, I guess what are the I I'm so fascinated by this idea now that you've told it to me.
SPEAKER_00:Yeah, so first of all, to protect something like a color or a sound, it requires what's called acquired distinctiveness, right? So it basically it needs to the the general rule of thumb is that you're you want to be using it consistently for five years. You have to be famous. Well, and you have to have you have to have built up enough recognition, I guess I would say. And you have to have taken steps. You have to have taken steps to be using it as a trademark. So you can't just basically sell something that's a certain color and say, oh, well, that's my trademark. It has to be really, you have to essentially what we put together then to do that is to is to file um affidavits from you know signed by by the the company that is attesting to all you know how much have they put into marketing? Where have they used this? How has this been part of their branding efforts? There's really it's uh it's a fairly high burden to actually show that. I would imagine. So there aren't a ton of these, but I do have a client where we have actually managed to get um a particular color for a certain a particular product, and they have sold that product in that color. And because it is that particular color, they've done this for so long, people recognize the product. So it has to be basically um, I mean, if you were to go and try to enforce that, right? So what's what's gonna end up being done is usually consumer surveys are actually done in those types of enforcement efforts to show that do consumers actually recognize this color as being associated with this brand, or is this something that's just out there? So it's a high standard. It's a it's a very high standard, yeah.
SPEAKER_02:So I mean, you know, just because you've got a color on your website, you need um yeah, I would I would hope there was a high standard because if people just started staking claims on colors, that would that would be wild. Yeah. Well, that's really fascinating. Well, I I have really enjoyed our conversation today. Um, in closing, is there anything else that you know you could share with the listeners or that you would recommend to the listeners that we haven't already covered related to protecting IP or just IP in general?
SPEAKER_00:Yeah, I mean, we've really just scratched the surface here, but uh, I guess I mean, as as a takeaway, I really can't reiterate enough how important it is to address these issues early on. I know that's it's kind of a catch-22, especially for companies that are starting up with regard to you know budgetary constraints and such, but at least getting an IP attorney involved to actually address and help you create a strategic plan for what you should be doing from the start can be just tremendously of value and save you a lot of headaches and legal fees in the long run. Because basically, I mean it's kind of a catch-22 with the patents, right? If you don't file prior to disclosing, you're gonna lose your patent rights. So that's you know that that's a key importance. But then if you start using a trademark and you didn't do a proper search and you know you get a cease and desist letter and have to rebrand midstream, that's detrimental too. I mean, you can, you know, obviously if you agree to cease and desist, you're it's going to end that matter will end there, but now you have to at the expense of a rebranding. And so, you know, typically when those those events happen, rebranding is what you're looking at. And that's really unfortunate and can be really costly. And then keeping good records to make sure that, you know, if your exit strategy is is to be acquired, those things are all, you know, keep keep all your ducks in a row and it'll make it a lot easier and give you a higher valuation than um, you know, than than if these things have not been been properly addressed along the way.
SPEAKER_02:Absolutely. I think always the the key take-home for for most businesses is no matter the industry, organization, keeping your house in good order, making sure that you've got things on hand. I can't tell you how many times people are like, yeah, I filed my entity in you know 1989 and I have no documentation to prove it, other than like the microfilms with the ACC. We gotta go down to the office so they can scan them. Um, so you know, to the extent that you can start collecting, you know, start making binders, start making folders, start start creating digital archives, you know, start doing the stuff that you know you have for your own family's documents for your business. Um, but I know we just scratched the surface. So I, you know, it'd be great to have you back for another conversation.
SPEAKER_00:I would love to, yes. I certainly would enjoy that.
SPEAKER_02:Awesome. Well, thank you so much. And if you like this episode, please like, share, or comment. Tune in next time to Mergers She Wrote. In the world of business, not all deals are what they see. Fortunes rise, empires crumble, all with a stroke of a pen. Mergers, acquisitions, hostile takeovers. Welcome to Mergers She Wrote, where we examine strategies and stories behind the biggest deals in business. Because in MA, the real races are the ones you don't take.