Thursday, April 25, 2013

Nail Down Your IP So You Can Sleep Soundly

As I was reading this article in The Minneapolis/St. Paul Business Journal, I was reminded again how a failure to button down intellectual property (IP) often leads to later problems. The article describes a lawsuit against My Pillow, Inc. and Steve Lindell, the Company’s CEO and founder, by investors in a predecessor company, Night Moves Minnesota. The plaintiffs claim that they own 42% of My Pillow because that’s what they were promised by Night Moves when they loaned it $70,000 in 2006.

I don’t know much about My Pillow, although I do recall meeting Mr. Lindell several years ago when he was looking for angel investments at a conference put on by RAIN Source Capital.  He seemed like a good guy and it seemed like an interesting product, although I can’t recall whether it seemed like a good investment at the time. I’m guessing some of the angels who turned him down may be wishing they got in on the business, now poised to generate almost $100 million in annual revenue from selling pillows! I haven’t slept on a My Pillow, but I understand it is different from the Sobakawa pillow, which a close friend once told me was so loud that it kept her awake at night. I may just have to get a pet pillow for the newest member of our family (see my recent post for more details).

Before all this talk of pillows puts you to sleep, let me get back to the issue at hand. Why would these investors in the prior company believe they own 42% of My Pillow? The lawsuit claims that they invested in and therefore own the intellectual property behind the pillow. Apparently, the patent was issued in Lindell’s name and never transferred to Night Moves and the trademark was originally registered by Night Moves and later transferred to the new company (allegedly without their consent).

These types of IP issues are common in early-stage ventures. Often, in an attempt to maintain control over technology, founder inventors will want to grant a “worldwide, perpetual, royalty free, transferable” license to the business, rather than assigning the IP outright. In my experience, savvy investors typically will not accept such a scenario and force an outright assignment before writing a check. They reason that any value in the IP, even if the enterprise fails, should be shared by the stakeholders, rather than having the IP revert to the inventor is so that s/he can monetize it.

It appears one key issue in the My Pillow litigation will be whether the investors knew the status of the IP ownership at the time of their investment. If they did, then they may be out of luck on the patent rights because the business didn’t own them. If they didn’t, I’m not sure it means that they own 42% of My Pillow, but they might have a claim relating to inadequate disclosure (something we lawyers call “securities fraud”). At a minimum, it is likely to cost a lot and cause plenty of distraction to figure it all out.

If everyone had focused on and dealt with these issues early, nobody would have to lose any sleep over them today...

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