Chapter 12

The Importance of
Intellectual
Property
Bruce R. Barringer
R. Duane Ireland
Copyright © 2016 Pearson Education Ltd. 12-1
 Chapter Objectives
1 of 2

1. Define the term “intellectual property” and describe

its importance.
2. Explain what a patent is and describe different
types of patents.
3. Describe a trademark and explain the process
entrepreneurs use to obtain one.
4. Describe a copyright and identify what a copyright
can protect.
5. Describe a trade secret and understand the common
causes of trade secret disputes.

Copyright © 2016 Pearson Education Ltd. 12-2

 Chapter Objectives
2 of 2

6. Explain what an intellectual property audit is and

identify the two primary reasons entrepreneurial
firms should complete this type of audit.

Copyright © 2016 Pearson Education Ltd. 12-3

 The Importance of Intellectual Property

• Intellectual Property
– Is any product of human intellect that is intangible but has
value in the marketplace.
– It is called “intellectual” property because it is the product of
human imagination, creativity, and inventiveness.
• Importance
– Traditionally, businesses have thought of their physical
assets, such as land, buildings, and equipment as the most
important.
– Increasingly, however, a company’s intellectual assets are the
most important.
Copyright © 2016 Pearson Education Ltd. 12-4
Common Mistakes Firms Make in Regard
to Protecting Their Intellectual Property

Not properly identifying Not fully recognizing

all of their the value of their
intellectual property. intellectual property.

Not using their

Not legally protecting the
intellectual property as
intellectual property
part of their overall
that needs protecting.
plan for success.

Copyright © 2016 Pearson Education Ltd. 12-5

 Determining What Intellectual
Property to Legally Protect

Criteria 1 Criteria 2

Determine whether the Decide whether the

intellectual property in intellectual property in
question is directly question has value in
related to the firm’s the marketplace.
competitive advantage.

Copyright © 2016 Pearson Education Ltd. 12-6

 The Four Key Forms of
Intellectual Property

Patents Trademarks

Copyrights Trade Secrets

Copyright © 2016 Pearson Education Ltd. 12-7

 Patents

• Patents
– A patent is a grant from the federal government conferring
the rights to exclude others from making, selling, or using
an invention for the term of the patent. (See the next slide
for a full explanation.)
• Increasing Interest in Patents
– There is increasing interest in patents.
• Since Patent #1 was granted in 1790, the U.S. Patent & Trademark
Office has granted over six million patents.
• The patent office is strained. It now takes an average of 29.1
months from the date of first filing to receive a U.S. patent.

Copyright © 2016 Pearson Education Ltd. 12-8

 Proper Understanding for What a
Patent Means
A patent does not give its owner the right to make, use, or sell an invention;
rather, the right granted is only to exclude others from doing so.
As a result, if an inventor obtains a patent for a new kind of computer chip,
and the chip would infringe on a prior patent owned by Intel, the inventor
has no right to make, use, or sell the chip.
To do so, the inventor would need to obtain permission from Intel. Intel may
refuse permission, or ask that a licensing fee be paid for the rights to infringe
on its patent.
While this system may seem odd, it is really the only way the system could
work. Many inventions are improvements on existing inventions, and the
system allows the improvements to be (patented) and sold, but only with the
permission of the original inventors, who usually benefit by obtaining
licensing income in exchange for their consent.
Copyright © 2016 Pearson Education Ltd. 12-9
Growth in Patent Applications in the
United States

Copyright © 2016 Pearson Education Ltd. 12-10

Three Basic Requirements for
Obtaining a Patent

Copyright © 2016 Pearson Education Ltd. 12-11

 Types of Patents

Type Type of Invention Covered Duration

New or useful process, machine, 20 years from

Utility manufacturer, or composition of material or the date of the
any new and useful improvement thereof. original
application.
14 years from
Invention of new, original, and ornamental the date of the
Design design for manufactured products. original
application.

20 years from
Any new varieties of plants that can be
Plant the date of the
reproduced asexually.
original
application.
Copyright © 2016 Pearson Education Ltd. 12-12
 Business Method Patents
(Special Utility Patent)

• Business Method Patent

– A business method patent is a patent that protects an
invention that is or facilitates a method of doing business.
– The most notable business method patents that have been
awarded:
• Amazon.com’s one-click ordering system.
• Priceline.com’s “name-your-price” business model.
• Netflix’s method for allowing customers to set up a rental list of
movies to be mailed to them.

Copyright © 2016 Pearson Education Ltd. 12-13

The Process of Obtaining a Patent

Copyright © 2016 Pearson Education Ltd. 12-14

 Patent Infringement

• Patent Infringement
– Takes place when one party engages in the unauthorized
use of another party’s patent.
– The tough part (particularly from a small entrepreneurial
firm’s point of view) is that patent infringement cases are
costly to litigate.
• A typical patent infringement case costs each side at least $500,000
to litigate.

Copyright © 2016 Pearson Education Ltd. 12-15

 Trademarks

• Trademark
– A trademark is any word, name, symbol, or device used to
identify the source or origin of products or services and to
distinguish those product or services from others.
– Trademarks also provide consumers with useful
information.
• For example, consumers know what to expect when they see a
Macy’s store.
• Think how confusing it would be if any retail store could use the
name Macy’s.

Copyright © 2016 Pearson Education Ltd. 12-16

 The Four Types of Trademarks
1 of 2

Type Types of Marks Covered Duration

Any word, name, symbol, or device

used to identify and distinguish one Renewable every
Trademark 10 years, as long
company’s goods from another.
as the mark
Examples: Apple, d.light, GoPro,
remains in use.
DripCatch, and Brain Sentry.

Similar to trademarks; are used to Renewable every

Service mark identify the services or intangible
10 years, as long
activities of a business, rather than a
business’s physical products. as the mark
remains in use.
Examples: 1-800-FLOWERS,
Amazon.com, CoachUp, and Dropbox.

Copyright © 2016 Pearson Education Ltd. 12-17

 The Four Types of Trademarks
2 of 2

Type Types of Marks Covered Duration

Trademarks or service marks used by

the members of a cooperative, Renewable every
Collective 10 years, as long
association, or other collective group.
mark as the mark
Examples: Rotary International and
remains in use.
International Franchise Association

Marks, words, names, symbols, or Renewable every

Certification devices used by a person other than
10 years, as long
mark the owner to certify a particular
quality about a good or service. as the mark
remains in use.
Examples: 100% Napa Valley and
Underwriters Laboratories

Copyright © 2016 Pearson Education Ltd. 12-18

What is Protected Under Trademark Law
1 of 2

Item Example(s)

Words Birchbox, Warby Parker, DripCatch

Numbers 3M, Boeing 787, AT&T

and letters

Designs
Nike swoosh logo
and logos

Sounds MGM’s lion’s roar

Copyright © 2016 Pearson Education Ltd. 12-19

What is Protected Under Trademark Law
2 of 2

Item Example

Fragrances Stationery treated with a special fragrance

Shapes Unique shape of the Apple iPhone

Colors Nexium—the “purple pill”

Trade dress The layout and décor of a restaurant

Copyright © 2016 Pearson Education Ltd. 12-20

 Exclusions From Trademark Protection

Item Example
Immoral or Profane words
scandalous matter
Labeling oranges “Fresh Florida
Deceptive matter Oranges” that aren’t grown in Florida

Phrases like “golf ball” and “fried chicken”

Descriptive marks are descriptive and can’t be trademarked

Surnames Common surnames like “Anderson” or

“Smith” can’t be trademarked
Copyright © 2016 Pearson Education Ltd. 12-21
The Process of Obtaining a Trademark

Copyright © 2016 Pearson Education Ltd. 12-22

 Copyrights

• Copyrights
– A copyright is a form of intellectual property protection
that grants to the owner of a work of authorship the legal
right to determine how the work is used and to obtain the
economic benefits from the work.
– A work does not have to have artistic merit to be eligible
for copyright protection.
• As a result, things such as operating manuals and sales brochures
are eligible for copyright protection.

Copyright © 2016 Pearson Education Ltd. 12-23

 What is Protected By a Copyright?

Literary works Musical compositions

Computer software Dramatic works

Pantomimes and Pictorial, graphic, and

choreographic works sculptural works

Copyright © 2016 Pearson Education Ltd. 12-24

 Exclusions From Copyright Protection

• The Idea-Expression Dichotomy

– The main exclusion is that copyright laws cannot protect
ideas.
• For example, an entrepreneur may have the idea to open a soccer-
themed restaurant. The idea itself is not eligible for copyright
protection. However, if the entrepreneur writes down specifically
what his or her soccer-themed restaurant will look like and how it
will operate, that description is copyrightable.
• The legal principle describing this concept is called the idea-
expression dichotomy.
• An idea is not copyrightable, but the specific expression of an idea
is.

Copyright © 2016 Pearson Education Ltd. 12-25

 Obtaining a Copyright

• How to Obtain a Copyright

– Copyright law protects any work of authorship the moment
it assumes a tangible form.
– Technically, it is not necessary to provide a copyright
notice or register work with the U.S. Copyright Office.
– The following steps can be taken, however, to enhance
copyright protection.
• Copyright protection can be enhanced by attaching the copyright
notice, or “copyright bug” to something.
• Further protection can be obtained by registering the work with the
U.S. Copyright Office.

Copyright © 2016 Pearson Education Ltd. 12-26

 Copyright Infringement
1 of 2

• Copyright Infringement
– Copyright infringement occurs when one work derives
from another or is an exact copy or shows substantial
similarity to the original work.
– To prove infringement, a copyright owner is required to
show that the alleged infringer had prior access to the
copyrighted work and that the work is substantially similar
to the owner’s.

Copyright © 2016 Pearson Education Ltd. 12-27

 Copyright Infringement
2 of 2

• The illegal downloading of

music is an example of
copyright infringement.
• Copyright infringement costs
the owners of copyrighted
material an estimated $25
billion per year in the U.S.
alone.

Copyright © 2016 Pearson Education Ltd. 12-28

 Trade Secrets

• Trade Secrets
– A trade secret is any formula, pattern, physical device,
idea, process, or other information that provides the owner
of the information with a competitive advantage in the
marketplace.
– Trade secrets include marketing plans, product formulas,
financial forecasts, employee rosters, logs of sales calls,
and similar types of proprietary information.
– The Federal Economic Espionage Act, passed in 1996,
criminalizes the theft of trade secrets.

Copyright © 2016 Pearson Education Ltd. 12-29

What Qualifies for Trade Secret Protection?
1 of 2

• Trade Secret Protection

– Not all information qualifies for trade secret protection.
– In general, information that is know to the public or that
competitors can discover through legal means doesn’t
qualify for trade secret protection.
– Companies protect trade secrets through physical measures
and written documents.

Copyright © 2016 Pearson Education Ltd. 12-30

What Qualifies for Trade Secret Protection?
2 of 2

The strongest case for trade secret protection is

information that is characterized by the following.

• Is not known outside the company.

• Is known only inside the company on a “need-to-know” basis.
• Is safeguarded by stringent efforts to keep the information
confidential.
• Is valuable and provides the company a competitive advantage.
• Was developed at great cost, time, and effort.
• Cannot be easily duplicated, reverse engineered, or discovered.

Copyright © 2016 Pearson Education Ltd. 12-31

 Physical Measures for Protecting
Trade Secrets

Restricting access Labeling documents

Password protecting
Maintaining logbooks
confidential computer
for visitors
files

Maintaining logbooks for Maintaining adequate

access to sensitive overall security
material measures

Copyright © 2016 Pearson Education Ltd. 12-32

 Conducting an Intellectual Property Audit
1 of 2

• Intellectual Property Audit

– The first step a firm should take to protect its intellectual
property is to complete an intellectual property audit.
– An intellectual property audit is conducted to determine the
intellectual property a firm owns.
– There are two reasons for conducting an intellectual
property audit:
• First, it is prudent for a company to periodically determine whether
its intellectual property is being properly protected.
• Second, it is important for a firm to remain prepared to justify its
valuation in the event of a merger or acquisition.

Copyright © 2016 Pearson Education Ltd. 12-33

 Conducting an Intellectual Property Audit
2 of 2

• The Process of Conducting an Intellectual Property

Audit
– The first step is to develop an inventory of a firm’s existing
intellectual property. The inventory should include the
firm’s present registrations of patents, trademarks, and
copyrights.
– The second step is to identify works in progress to ensure
that they are being documented and protected in a
systematic, orderly manner.

Copyright © 2016 Pearson Education Ltd. 12-34