Someone stole my startup. Or did they? Opinion piece: Roy Taberer – Taberer Attorneys
“If you are a start-up and you’re in a dispute and you’re going to consult a lawyer, you’re in trouble. Don’t litigate. Walk away.”
That’s the advice that Roy Taberer, Owner and Patent Attorney at Taberer Attorneys, would offer to startup teams caught up in disputes between themselves. “If the relationship breaks down, many of these disputes revolve around who owns what,” says Taberer. Knowing a few basics at the outset will help to avoid conflict, and if not, to know what to do if one arises.
Agree to agree
If a team is already in dispute, it may be too late to hear the first piece of advice: “The best time to get a lawyer is upfront, rather than down the line,” says Taberer. He refers to the importance of investing time and money to incorporate a company and to create a shareholders’ agreement as early as possible.
The company owns any assets and the shareholders own the company. In this case, the asset is the code or product that the team has developed. The agreement should be explicit about dispute resolution procedures and how the shares in the company are to be disposed of in the event of a dispute, death or a life-changing circumstance.
For startups wanting to save money by creating a partnership, Taberer cautions against this. “To be fully protected, there’s no real alternative but to incorporate a company,” he says. Partnerships don’t exist as legal entities, and therefore cannot own any assets. Even if the founders have written a partnership agreement, these agreements often do not deal with all circumstances and would then offer little guidance should circumstances arise that are not explicitly addressed.
What to expect when you’re protecting
The second point is to understand what is protectable.
“An idea is just an objective. There’s nothing protectable in that. To be protected, the idea needs to materialise into something novel and inventive or original” says Taberer. Once that exists, there are four kinds of protection: patents, which protect inventions — these, generally, are physical solutions to a technical problem; trademarks, which protects a product’s unique brand and visual identity; copyright, which protects works of art, literature, music and computer programmes; and design, which protects a product’s design or look.
In the tech environment, a startup’s primary intellectual property (IP) is the code it produces. Legally, code is described as a computer program which is therefore protected by copyright law. The rights to the work automatically rest with the person or persons who authored it. Copyright protection remains in place for 50 years.
Taberer explains: “Code is analogous to a piece of literature and therefore justifies copyright. It’s a coder’s way of expressing himself or herself in a computer language. The common tool is the language. Copyright protectability lies in how the coder uses the language originally for a particular outcome.”
The key is originality: As long as you can prove that you originated the work, you can claim that it is proprietary.
Take ownership — if you can
Things get murky when there is a team involved in developing the code.
The third lesson is to know the difference between origination or inventorship and ownership. Taberer explains: “All IP arises from flesh and blood people, not from juristic people like companies. The IP will have originated from a person, or a group of persons, but those persons may not necessarily own it.”
If a dispute arises about ownership, the assessment will need to be done to determine who originated or invented the IP and then who owns that IP. Often, there is an intervening legal obligation to assign the IP to another. This assignment may take effect automatically, such as in an employment contract, when the fruits of the development are the employer’s, or by an agreement, either written or implied.
Assignment is defined as a legal act of transferring an intangible item with the intention of passing ownership. “Who owns the IP is one of the most overlooked aspects of a business that’s built on innovation. It has the potential of collapsing the startup.”
If you pay, it’s not always yours
The next point to remember is that payment doesn’t necessarily equate to ownership. This is a particularly pertinent point, particularly in cases where a founder commissions an external developer to write the code for an application, for example. If a developer is contracted to develop something and they’re paid to do that work, the ownership in copyright in the code doesn’t automatically transfer. “Startups get into a bind over who owns the work, who transferred the ownership and what was transferred,” says Taberer.
Taberer highlights a common misconception in this respect: “If you’re outsourcing the software development, that’s the weakest link of all. Payment doesn’t necessarily imply ownership — there could be the interpretation that you merely bought a licence to use the software. You don’t own the work, unless the developer expressly assigns ownership to you.” Rarely is that agreement clearly defined, says Taberer.
Choose the route for you
So what happens if the worst happens?
The shareholders’ agreement should dictate how a dispute should be handled. “There are four possible routes,” explains Taberer.
First, start with conciliation to try and find resolution amicably. If that doesn’t work, go to mediation, which is a bit like going to a counsellor to resolve a problem in a relationship. However, mediation is no guarantee that a dispute will be solved. “There is only a fifty-fifty chance that it will succeed,” says Taberer.
Arbitration is the next step, albeit an expensive one. “Arbitration can expedite matters and can result in a binding order, but it can be very expensive,” he says.
If you don’t have the money for a private arbitration, then litigation could be an option. But while litigation is cheaper, it could tie up the disputing partners into a long and drawn-out conflict.
“There is a fifth option,” says Taberer. “If someone has run off with your idea, your best option is simple: out-compete. Any investor will want to see a clear chain of ownership, so if your rival tries to develop it, they’ll run into trouble down the line anyway.”
“Walk away,” he says, “build a better business.” Just, next time, don’t forget the shareholders’ agreement and the clear chain of ownership.