All in the Family: Common Intellectual Property Issues in Family-Owned Businesses
Lately, I’ve been thinking a lot about family-owned businesses, perhaps because this summer I spent a lot of time with my family, including on our family vacation this month. One of the things that I was most fascinated by when I started my firm and got to know many other owners of small law firms was the number of them who had family members working or helping out in some capacity in their businesses. In my firm, one of the other lawyers is my husband, Chuck Goodwin, and he also functions as our in-house IT department and website master. My marketing consultant, Emily Griesing of Bossible, is also the Marketing Manager for Griesing Law, the law firm founded and led by her mother (and one of my mentors) Fran Griesing. I have several friends whose spouses handle their books and one friend whose husband runs the entire administrative operation of her firm. And of course, several folks I know have family members as legal partners (sons, daughters, spouses, etc.).
Family-owned businesses have always interested me because they are recurring in my family. My maternal grandparents owned a hair salon and were equal partners in the business (which was very forward thinking at the time). My mom worked in the business growing up and, when I stayed with them, I also was expected to help out – sweeping, washing and putting away towels and capes, cleaning the brushes and combs, and, as I got older, handling the front desk – answering the phone, booking appointments and handling payment (all in cash or checks back then!). My grandparents lived above their salon, which also meant that work and home were completely intertwined.
In my legal practice, I’ve run into many family-owned businesses – businesses that are either still family owned or where the family sold the company, typically to private equity. This isn’t surprising. As commentators from the Yale School of Management have observed, “family-owned businesses (FOB) dominate [the US economy]. More than half of GDP in the United States comes from FOBs, which can be anything from sole proprietors to giants like Walmart. FOBs account for 60% of employment, 78% of new jobs, and 65% of total wages.” Forbes reports that family-owned businesses make up 80-90% of all businesses globally and 35% of the Fortune 500 are FOBs. Family-owned businesses have their drawbacks, the most notable is a lack of succession planning and difficulty in surviving transitions from one generation to the next.
So what are the common legal issues I’ve seen FOBs encounter? The biggest area that comes to mind is inadequate intellectual property (IP) protection – which shows up in several different ways. For example, since many smaller FOBs operate without a lot of formalities, they may not have the kinds of employment agreements, policies and other contracts in place that you expect in a business where people are operating at arms-length. When you consider that certain types of IP are initially owned by their inventor (patents) or creator (copyrights), the failure to have proper documentation and assignments in place can mean that the company doesn’t own the IP – or the ownership is murky. Even ownership and the ability to use the company’s brands can be in dispute, especially if the brand incorporates the family name. In the event of a falling out among family members involved in the business – perhaps each claims the IP and wants to go their separate ways – this can be a recipe for disaster.
Even if the family isn’t fighting amongst themselves, there are still IP issues to consider. For example, when a new generation wants to scale and professionalize the operations or the family is seeking outside investment or an exit, the failure to properly protect the business’ IP can be an impediment to growing the business and/or getting the deal done. For example, if, as is often the case, the FOB doesn’t have extensive legal counsel – especially counsel with IP experience – much of the IP in the business may be maintained as a trade secret, yet the necessary systems and protocols for properly protecting confidentiality may not be in place (or are inadequately documented for enforcement purposes). Furthermore, trademarks and copyrights may not be registered and no one may have considered patenting key inventions. Lastly, ownership of the company’s IP can be an issue, which fortunately can be addressed retroactively in this context. Even assuming that the IP can be properly secured, not having the IP properly identified and protected from the beginning also makes valuation of the business harder and may even lower the valuation if opportunities (such as for patenting) are missed.
In short, if you are in a family-owned business or work with such businesses (and chances are you do), it is essential to the long-term health of the business that you consider these IP protections, regardless of the long-term goals and plans for the company.