Patent Ownership and LLC Operating Agreement Ques

mger80's Avatarg8_badge

I am working with a law student (supervised by his professor) to help draft an operating agreement for a business a friend and I are starting. We filed a PPA mostly as a strategy to help legitimize and “safely” shop our idea, of course hoping that we will be able to pull of a patent when the time comes. I had been given advice in the past that when you have a co-inventor situation, each person owns 100% of the patent. So I was told that I should form an LLC and create an operating agreement that would include dividing the ownership of the PPA how we see fit. It sounded fairly simple. The law student admits he is out of his scope in dealing with patents, but in his research seemed to think that we would need to assign or license the PPA to the LLC in order to include it in the operating agreement. Does anyone know if this is the case? If it doesn’t have to be done this way, is there a benefit to assigning or licesning to the LLC? How would one do that with a PPA anyway? Would there need to be some sort of recording with the USPTO to assign it? I’m on a very small budget so I would like to avoid contacting my IP attorney if I can. Anyone have experience with this kind of situation?

posted February 23, 2011 06:33 (
| edit reply
)
Posting replies has been disabled
patentknowledge's Avatar

I think we are now friends. If you still can’t get a hold of me through this, I have secondary e-mail address that I use when I am concerned about spam that I would post on here.

posted March 02, 2011 13:38 (
| edit reply
)
mger80's Avatarg8_badge

Hi Joe,

I sent you a friend request. Can’t email you without being friends :)

posted March 02, 2011 12:18 (
| edit reply
)
mger80's Avatarg8_badge

Thanks again for the great info, Joe! And don’t worry about hi-jacking the thread. I’m learning from your discussion.

posted March 02, 2011 08:19 (
| edit reply
)
patentknowledge's Avatar

Sorry, don’t mean to hi-jack this thread from you Margaret…but,

@Sir Edward:
Could you point me to the applicable provisions you are talking about? (this is actually a project I’m working on)

From my research, 37 CFR 1.27 references 13 CFR 121.801-121.805 as the standards for determining small entity status (for patentees only…). These provisions appear to only reference size of corporation – with 500 employees. The OTHER provisions in 13 CFR reference when you are a small business for other purposes of the law (i.e. dealings with the SBA and government contracting and whatnot) – and in THOSE instances, revenue, or type of industry matter. However, they way I am reading this is those don’t apply to patentees seeking reduced fees.

Again, if you are reading those sections differently, I would love to hear why and if you could point to specific provisions, that would be even better.

Thanks for any info you provide.

@ Margaret: This probably goes way beyond what you are looking for…but if it ever comes down to it and you are real worried about this whole small/large entity thing, it seems that you can ask the SBA to make an official ruling on the size of your entity. So, there’s that.

posted March 01, 2011 22:35 (
| edit reply
)
mger80's Avatarg8_badge

Joe,

Thank you SO MUCH!! Exactly what I was looking for!

Sir Ed,

Thanks to you too. Ultimately, we would like to follow through with the NPA. But that depends on funding. So the current strategy is to find partners and/or license before the year is up. I guess we are open to all possibilities.

posted March 01, 2011 19:42 (
| edit reply
)
patentknowledge's Avatar

Hi Margaret,

I am a law student currently clerking at a firm. In doing some research I ran across this thread and thought I could provide some information (although, not technically legal advice, seeing as how I have not passed the bar).

As above, it is true that each inventor (the people listed on the patent) retains the right to independently enter into agreements with third parties (although I am unsure exactly how far this concept extends – i.e. if they enter an agreement, I think you may be entitled to part of the proceeds? Additionally, I am unsure if they can unilaterally enter into an exclusive arragement (thereby keeping you from exploiting the patent)).

Assigning the right to the patent (or PPA) to the LLC (or other corporate entity) essentially ends your PERSONAL attachment with the patent (you would no longer be able to commercially exploit the patent as an individual). Assuming you were the CEO of the LLC, however, you would retain control of the PPA through your CEO role. Both you and the other inventor would need to sign the assignment agreement to the LLC to ensure that the LLC retains sole control of the patent (so the other inventor can’t make decisions for his/her benefit at the expense of the LLC). If the LLC has any money assets – then you might be able to sell or license the PPA and extract money from the LLC that way (this would be advice from your CPA about tax implications and whatnot).

Further, giving the PPA to the LLC in some way (by sale, assignment, or license) will NOT restrict you from getting small entity status. Business are eligible for small entity status as long as they have fewer than 500 employees. So, you only give up small entity status benefits if you assign or license to a company with GREATER than 500 employees – NOT a company, generally. If you sell or assign the PPA or patent to a business that does NOT qualify for small entity status, then it will be THEIR duty to pay the large entity fees when they become due. If you choose to license, then YOU will still be responsible for the fees, and would then have to pay large entity fees (however, I would just, as a condition of the license, require the licensee to pay those fees, or at least re-imburse you).

These next comments may begin to go slightlybeyond my knowledge, but from my understanding:
Creating an LLC (if done properly) will limit your personal liability. For example, lets say you assign the patent to your company, and then the company begins to manufacture your product. After a year or so, a competing company finds out that your product infringes on one of their patents (and YES, you can infringe on someone else’s patent even if you have a patent on your product – if you do not understand this concept, then PLEASE speak with a knowlegeable lawyer – I could explain this as well…). When they sue your company, the only assets they can take would be what the LLC owns. If you had sold or licensed the patent to the LLC, then that money you PERSONALLY made from the sale or license would be safe from the competing company (as would your house and personal bank accounts, depending on the financing structure of the LLC – for example if you took out secured loans to fund the company and after the litigation the LLC is unable to finish financing those loans…then the bank that gave you the secured loan would want the collateral (i.e. your house) to make up for the loss).

Again, this is NOT legal advice that I would recommend you rely on. This is only information that I have gleaned from my experiences.

BUT, I hope that is has helped. If you have further questions, I would be happy to answer them (and if I can’t, I have 30 knowledgable attorneys around me, one of which likely knows the answer). If you want to get in contact, I would prefer you click on my profile and shoot me an e-mail rather than continue to post on here (as I am unsure whether I will check this again).

Regards,

posted March 01, 2011 13:15 (
| edit reply
)
mger80's Avatarg8_badge

Thanks Perry. The two of us are definitely co-inventors. I guess I am going to have to work with my attorney and a CPA. I got dropped by my law student today. His professor said the IP component made it too complicated for their scope of expertise, which is just general business. There goes my budget. :(

posted February 28, 2011 17:16 (
| edit reply
)
perrytheinventor's Avatar

In my experience I have found it to be vitally important for you to seek the advice of a patent attorney and a CPA while organizing the business structure. There are lots of working parts in the puzzle you are assembling. A good foundation will help everything move predictably ahead.

Also, one more thing. It is important to know if there really are co-inventors? The big question will be “Who contributed what” to the innovation. Not doing this correctly could put the patent in jeopardy as it is cause for the patent to be revoked. This is vitally important. Not all contributions make people a “co-inventor”. Just some thoughts.

If one of the people is NOT actually a co-inventor they can still own a part of the company. Just something to be mindful of.

All my best in your new venture.

perrytheinventor.com

posted February 28, 2011 15:42 (
| edit reply
)
mger80's Avatarg8_badge

Thanks Krissie,

I’m really not comfortable with the loan idea just yet. If I get enough interest from retailers or potential partners, then I would definitely look in to a loan. I’ve been having a great deal of difficulty in finding grants for which we qualify. Most of the green grants are for non-profit or for something specfic that has nothing to do with us. I’m still looking at grants for women though. Just haven’t uncovered anything legit at this point. Does anyone out there know of any??

posted February 27, 2011 14:24 (
| edit reply
)
junqdiva's Avatargold

Margaret, I don’t know if this would apply in your case (I don’t know the details of the ‘we’ in your business) but someone suggested to me that I try to find out about small business loans and grants for women…(a friend of mine is a grant writer for artists but she couldn’t help me because even though I’m an artist what I need money for is a set of tools I invented FOR artists)

posted February 26, 2011 08:15 (
| edit reply
)
mger80's Avatarg8_badge

I know what you’re saying Jane. My head is spinning. I thought filing for an LLC would be an easy thing (normally it is), but the IP and operating agreement with my co-inventor complicates it. Seems like every time I take action to get something going, I have to stop and figure out some legal issue. I’m starting to think I should go to law school :)

Basically, what I’m learning is that you can assign (sell) or license (rent) your PPA to your business (in this case an LLC). Not totally sure why I would want to do that, but I’ve heard that by licensing it to the LLC, I could collect royalties from my business. That’s intriguing. I’ve also heard that doing this would further help me to limit my personal liability.

I’ve also learned that I can file as a small entity if I don’t assign or license the PPA, thus cutting patent fees in half. However, my plan was to hopefully license or assign our idea to another company because at this point we still don’t have startup capital. But doing that would double the fees, although I believe they would make those adjustments after the assigment, which may not affect me. (Please feel free to correct me if I’m wrong anyone). What to do, what to do?? And I have to figure out how to avoid a lot of attorney involvement, as we currently have an extremeley tiny budget. Just when I thought I had a plan…sigh.

posted February 26, 2011 07:59 (
| edit reply
)
junqdiva's Avatargold

i’m with you Jane!!! Layman-eze please!!!!

posted February 26, 2011 03:32 (
| edit reply
)
imajane's Avatarname search

I understood the blah blah blah part. :-\

My brain cells go into spasm when I have to read stuff like that. I admit it.

Margaret, I would like to know what you find out. Once you figure it out, would you please re-phrase it in words that go together normally? ;-)

posted February 26, 2011 02:52 (
| edit reply
)
mger80's Avatarg8_badge

I was just checking out the fees at the USPTO. It appears another advantage of assigning the PPA to the LLC is that small entity fees are about half. Oops, upon further review I think I have that backwards. Looks like we can file as a small entity if we don’t assign or license. Am I reading that correctly??

http://www.uspto.gov/web/offices/pac/mpep/docum...

http://www.patent-ideas.com/USPTO-Fees/Small-Entity-Status-and-Large-Entity-Status.aspx

posted February 25, 2011 06:53 (
| edit reply
)
blinkjcs's Avatar

The link i provided explains this. Just because you have a patent does not give you the right to go make or sell because you could be infringing someone else’s patent, but you CAN prevent others from making and selling what you claimed. Also, I think the “best protection” is recording an assignment within 3 months at the PTO.

posted February 24, 2011 05:07 (
| edit reply
)
blinkjcs's Avatar

You clearly copied and pasted this information, which I find to be inaccurate, silly legal zoom. A patent grants only the right to exclude others from making,using, selling…etc. Here is some useful information from a reliable source. http://www.uspto.gov/web/offices/pac/doc/genera...

posted February 23, 2011 19:15 (
| edit reply
)
blinkjcs's Avatar

My thoughts are that you would want to have both inventors assign the PPA to the LLC and record at the PTO. This would make the PPA an asset of the LLC. The operating agreement addresses ownership in the LLC and profits and losses. Once you file a non provisional I would go thru the same process. Recording at the PTO puts the world on notice of the assignment, otherwise one of the inventors may sell the patent to bona fide purchaser for value.

*This is not legal advise.

posted February 23, 2011 17:06 (
| edit reply
)