What is goodwill in business? Goodwill in the business context is the intangible value of a company that makes it worth more than the fair market value of its identifiable assets minus liabilities. In plain English, goodwill represents the premium paid for a business because of its brand reputation, customer loyalty, customer relationships, market position, and other advantages that do not appear as physical assets on a shelf or in a warehouse. In accounting, goodwill becomes a central consideration when one company buys another. If the company has good consumer recognition and other intangible value that is beyond the company’s net identifiable assets, the premium paid for the acquired company is the value of the goodwill. Under tax regulations, goodwill is tied to the expectancy of continued customer patronage, including reputation and business name value.
Goodwill in accounting is an intangible asset recorded in a business combination when an acquiring company pays a purchase price that exceeds the fair value or fair market value of the acquired business’s identifiable net assets. In other words, goodwill is not assigned to a specific machine, building, contract, copyright asset, patent, or other separately identifiable asset. Instead, goodwill represents the residual value left after the acquiring company identifies and values the acquired company’s assets and liabilities.
The shorthand formula for calculating goodwill is:
Goodwill = Purchase Price - (Fair Market Value of Assets - Fair Market Value of Liabilities).
Because assets minus liabilities equals net assets, goodwill represents the premium paid above the company’s net assets. More precisely, in an acquisition, the buyer first determines the fair value of the target company’s identifiable assets, including tangible assets and separately identifiable intangible assets, and then subtracts the fair value of the target company’s assumed liabilities. The result is the target company’s identifiable net assets. If the buyer pays more than that amount, the excess is recorded as goodwill on the acquiring company’s balance sheet.
Assume Company A acquires Company B for $10 million. Company B has tangible assets worth $6 million, identifiable intangible assets worth $2 million, and liabilities of $1 million. The net identifiable assets are $7 million. If the buyer pays $10 million, the goodwill value is $3 million.
That $3 million of excess value may reflect strong brand reputation, loyal customers, and proprietary systems. In mergers and business acquisitions, goodwill often constitutes a significant portion of the total deal price because goodwill captures the intangible value that makes a business worth more than its tangible assets alone.
Goodwill is an intangible asset, but it differs from other intangible assets. An intangible asset is identifiable when it is separable or arises from legal or contractual rights, such as separably valuable patent. Business goodwill is not recognized as a separate asset because it is not an identifiable thing that can be valuated separately from the business. This accounting treatment is important because goodwill is a residual accounting measure, not a separately traded asset. It appears on the balance sheet only because the acquisition price indicates that the business as a whole is worth more than the current market value of its identifiable assets after liabilities are deducted.
Patents, trademarks, copyrights, trade secrets, domain names, licenses, and some customer contracts can often be separately identified, valued, licensed, or sold. Goodwill cannot be bought or sold independently from the business because it reflects the overall business goodwill, brand equity, customer relationships, operating reputation, and competitive advantage of a going concern.
Business owners often use fair market value to mean what a willing buyer would pay in a fair market transaction. Accounting standards define fair value as the price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
That distinction matters. A company’s historical cost may differ from current market value, and the market value of assets may differ from book value on the company’s balance sheet. A buyer assessing business value will consider the present value of future cash flows, similar companies operating in the market, the current market value of assets and liabilities, and the acquired business’s expected net income.
Goodwill has no market for independent trading. Unlike a truck, a building, or a patent, goodwill usually cannot be sold alone. That makes valuing goodwill highly subjective and vulnerable to management over-optimism. A goodwill valuation may depend heavily on forecasts, discount rates, margin assumptions, and the income approach, which estimates the present value of future cash flows.
This is why goodwill is not the same as cash, inventory, or other readily marketable assets. It reflects business value, but it is also a residual accounting number: the premium paid after identifiable assets and liabilities have been valued.
When a company acquires another company, goodwill is recorded as an intangible asset on the acquiring company’s balance sheet, sometimes called the acquirer’s balance sheet, after the purchase price allocation. This increases reported assets and can affect financial metrics such as return on assets and return on equity. High goodwill relative to total assets can be a warning sign. Some investors deduct goodwill from reported assets when evaluating residual equity or tangible book value, especially if they believe management overpaid for acquisitions.
Goodwill is not just an accounting entry or an intangible asset recorded after a business acquisition. In the branding context, business goodwill is the public-facing value of a company’s reputation, customer loyalty, customer relationships, brand equity, and the trust the company previously enjoyed in the marketplace. A trademark is one of the features of that goodwill and a trademark registration is a primary legal tool used to protect that value.
The Lanham Act defines a trademark as any word, name, symbol, device, or combination used to identify and distinguish goods and indicate their source under 15 U.S.C. § 1127. That statutory definition is important because it shows that a trademark’s legal function is not merely decorative. A trademark connects products or services to a particular business source, and that source-identifying function is what allows the mark to carry brand reputation, customer confidence, and goodwill value.
The Supreme Court discussed this relationship in Hanover Star Milling Co. v. Metcalf, 240 U.S. 403 (1916). The dispute involved competing uses of the mark “Tea Rose” for flour. Allen & Wheeler had used the Tea Rose mark for flour as early as 1872 and later transferred its mills, machinery, stock, trademark, and goodwill to a successor corporation. Hanover Star Milling Company, however, had adopted the same Tea Rose mark in good faith in the southeastern United States, without knowledge of Allen & Wheeler’s use, and had built substantial local trade and advertising around the mark. In that southeastern territory, consumers understood “Tea Rose” to mean Hanover’s flour, not Allen & Wheeler’s flour. There was no real confusion between the separate uses of the Tea Rose mark.
The Supreme Court held that the separate use by these two companies was allowable because Hanover adopted the junior use of Tea Rose in good faith without knowledge of Allen and Wheeler's prior use, and there was no consumer confusion between the companies. Moreover, prohibiting Hanover's continued use of the Tea Rose mark would take Hanover’s trade and goodwill and confer it on Allen & Wheeler. This reasoning illustrates that a trademark identifies source of goods and services, and that a trademark is a symbol of the goodwill associated with the source. In other words, trademark law is grounded in protection of the goodwill of a trade or business. Because the junior use of the Tea Rose mark resulted in no confusion or harm to Allen and Wheeler, there was no violation of their trademark rights. A trademark protects the intangible value created when customers associate a name, logo, or brand with a particular company’s products, quality, and reputation. A trademark with no associated goodwill carries no substantial rights.
The Hanover case and many cases thereafter show that trademark rights and goodwill are interdependent. This is why, in an assignment or sale of a trademark, the goodwill value must be included in the transfer of the corresponding trademark.
A trademark is not just a word, logo, slogan, or brand name that can be separated from the business goodwill it represents. Under 15 U.S.C. § 1060(a)(1), a registered mark or pending trademark application is assignable only “with the good will of the business” in which the mark is used, or with the part of the goodwill connected with and symbolized by the mark. The statute also requires assignments to be in writing, and recordation with the USPTO can affect priority against later purchasers.
A trademark assignment divorced from goodwill is often called an assignment “in gross” and may be invalid. The rule exists because a trademark’s function is to identify a consistent commercial source and protect customer expectations. If a buyer acquires only the bare mark, without the customer relationships, brand reputation, product continuity, or business goodwill associated with that mark, consumers may be misled into believing the same business, quality, or source still stands behind the goods or services.
In Marshak v. Green, 746 F.2d 927 (2d Cir. 1984), the Second Circuit applied this principle in the context of a forced sale. David Rick managed and promoted musical groups using the registered trade name “VITO AND THE SALUTATIONS.” Larry Marshak, who held an unsatisfied money judgment against Rick, obtained an order directing the U.S. Marshal to attach and auction Rick’s interest in the trade name. Marshak bought the trade name at auction for $100. The Second Circuit reversed and set aside the sale. The court explained that a trade name or mark has no independent significance apart from the goodwill it symbolizes, and that a sale of a mark divorced from goodwill is an invalid assignment in gross. Because there was no continuity of management, musical quality, or entertainment services, allowing another group to use the name could confuse the public into believing it was seeing the original group associated with that goodwill.
In Premier Dental Products Co. v. Darby Dental Supply Co., 794 F.2d 850 (3d Cir. 1986), the Third Circuit reached the complementary result: an assignment can be valid where the goodwill connected with the mark actually transfers. ESPE, a foreign manufacturer, made IMPREGUM dental impression material. Premier was the exclusive U.S. distributor, had promoted the product in the United States for years, provided seminars and instructions, offered customer support, and was identified in the trade as the domestic source through which IMPREGUM was obtained. ESPE assigned the U.S. IMPREGUM trademark to Premier, together with the goodwill connected with the mark. When Darby Dental imported and sold European-market IMPREGUM products, Premier sued. Darby argued the assignment was essentially a sham because ESPE still manufactured the product. The Third Circuit rejected that argument and held that Premier owned the U.S. trademark because Premier had developed and possessed the domestic goodwill associated with IMPREGUM. The assignment was not merely a transfer of a right to sue, it transferred legal title to the goodwill Premier had used and developed.
Together, Marshak and Premier Dental show why goodwill must travel with a trademark assignment. In Marshak, the attempted sale failed because the buyer acquired only a bare trade name, not the business goodwill, customer recognition, continuity, or service quality that gave the name meaning. In Premier Dental, the assignment was upheld because the assignee already embodied the goodwill symbolized by the mark in the relevant U.S. market. The practical takeaway is that a trademark assignment or business purchase agreement should expressly transfer the goodwill connected with the trademark, and the transaction should preserve enough continuity in products, services, quality, customer relationships, or brand reputation to support that transfer.
Goodwill reflects the total premium paid for a previously successful company after accounting for identifiable assets. Intangible assets other than the goodwill, such as patents, trademarks, software, and trade names, may be separately identifiable and separately valued (e.g., through the monetary value of an intellectual property license). The key difference is that goodwill usually represents the broader expectation that customers will continue doing business with the company, while other intangible assets may be specific assets with their own measurable value, legal rights, or limited useful life.
The Supreme Court addressed this distinction in Newark Morning Ledger Co. v. United States, 507 U.S. 546 (1993). In that case, The Herald Company purchased Booth Newspapers and allocated part of the purchase price to an intangible asset called “paid subscribers,” which represented the estimated future profits from identified newspaper subscribers existing at the time of the acquisition. The IRS disallowed depreciation deductions for that asset, arguing that the subscriber relationships were indistinguishable from goodwill because they reflected the expectation of continued customer patronage. The Court held that a taxpayer may treat a customer-based intangible asset as separate from goodwill if the taxpayer proves that the asset has an ascertainable value and a limited useful life that can be estimated with reasonable accuracy. The Court emphasized that the question is not simply whether the asset resembles goodwill, but whether it can be valued and whether that value diminishes over time.
The facts in Newark Morning Ledger illustrate why the line between business goodwill and other intangible assets can be difficult. A newspaper’s paid subscriber base obviously relates to customer loyalty and brand reputation, concepts commonly associated with goodwill. But the taxpayer showed that the acquired subscribers were a finite group, that subscriptions would be canceled over a predictable period, and that the asset was not self-regenerating in the way general goodwill can be. Because the paid subscriber asset could be identified, valued, and shown to waste over time, it was separable from goodwill for the tax issue before the Court.
That reasoning helps explain the relationship between goodwill and other intangible assets in a business sale. A buyer and seller may allocate value among trademarks, customer relationships, technology, tangible assets, and goodwill. Trademarks and trade names may reflect brand equity; customer contracts may reflect predictable future cash flows; software or proprietary technology may create operational advantages; and physical assets may have their own market value. After those identifiable assets and net identifiable assets are valued, the value of goodwill captures what remains: reputation, loyalty, workforce continuity, expected synergies, going-concern value, and the competitive advantage the buyer expects to inherit.
For business owners, the practical lesson is that goodwill is often the residual category, but it is not a dumping ground for every intangible value. If an asset can be specifically identified, separately valued, and tied to a finite useful life or legal right, it may be treated as one of the company’s other intangible assets rather than as goodwill. If the value instead comes from the company’s overall reputation, customer loyalty, assembled business, market position, or expectation of repeat business, that value is more likely to be treated as goodwill.
Goodwill impairment occurs when the fair value of the acquired business, reporting unit, or cash-generating unit falls below its "carrying value", which refers to the book value of an asset or reporting unit as shown on the company’s financial statements. In the goodwill context, the carrying value is important because accounting rules compare that recorded balance sheet value against the current fair value or recoverable value of the business unit to determine whether goodwill is overstated.
Impairment can result from reduced cash flow, increased competition, adverse economic conditions, loss of key customers, declining brand equity, regulatory change, or a drop in the market value of the acquired business. If those conditions reduce the expected value of the acquired business, the goodwill value recorded after the acquisition may no longer be supportable. The impairment reduces the goodwill account on the balance sheet and is recorded as an impairment expense on the income statement.
When goodwill is impaired, the impairment expense is recorded as a loss on the income statement and reduces net income. For public companies, that reduction can negatively affect earnings per share and the company’s stock price, particularly if the write-down signals that an acquisition failed to produce the future cash flows expected at the time of the acquisition.
The write-down also reduces the goodwill account on the balance sheet. This does not mean the company has less cash that day. It means the carrying value of the acquired goodwill no longer appears supportable.
Under generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS), both public companies and private companies must evaluate goodwill reported on their financial statements and record impairments when the value of goodwill is no longer supported. This annual review helps prevent a goodwill account from remaining on the balance sheet at an inflated carrying value after an acquired business loses customers, market share, expected future cash flows, or brand reputation. For business owners, this matters because goodwill can increase reported assets, but it can also create later earnings volatility if the acquisition underperforms.
A related concept is negative goodwill, often described as a bargain purchase gain. Negative goodwill can occur when the purchase price paid for a target company is less than the fair value of the net assets acquired. In that situation, the acquiring company may recognize a gain because the buyer paid less than the identifiable net assets were worth.
Goodwill represents the premium a buyer pays above the fair market value of a company’s net assets. It is an intangible asset recorded on the acquiring company’s balance sheet, but it is not the same as a intellectual property asset or customer contract. Goodwill reflects brand reputation, customer loyalty, future cash flows, and the economic strength of an acquired business. The goodwill is closely tied to the company trademarks and branding because the trademarks are the symbols of that goodwill. The sale of a business comes with the value of goodwill.
If you need assistance with intellectual property matters, contact us for a free consultation.
© 2026 Sierra IP Law, PC. The information provided herein does not constitute legal advice, but merely conveys general information that may be beneficial to the public, and should not be viewed as a substitute for legal consultation in a particular case.
The Disney Moana copyright lawsuit refers to two related federal cases brought by Buck Woodall against The Walt Disney Co., Walt Disney Animation Studios, Buena Vista Home Entertainment, and others: Buck G. Woodall v. The Walt Disney Co., et al., No. 2:20-cv-03772 (Woodall I), and Buck G. Woodall v. The Walt Disney Co., et al., No. 2:25-cv-00273 (Woodall II). Woodall is the author of a written work that includes general story elements (e.g., teenage rebelliousness, a dangerous journey on a Polynesian island, and guidance by spiritual ancestors) that are allegedly similar to story elements in the Moana movies produced by Walt Disney Animation Studios. Woodall has twice sued the Disney defendants for copyright infringement and other related claims.
Moana is a Walt Disney Animation Studios film about an adventurous teenager from a fictional Polynesian island community who leaves home on a dangerous ocean journey to save her people. Disney’s official synopsis describes Moana as a teenager who, with help from the demigod Maui, sails out “to prove herself a master wayfinder and save her people.” The story draws on Polynesian voyaging traditions, ancestral identity, and mythic elements, including Maui, a tattooed demigod associated with a giant hook. Development of Moana was publicly underway by 2013, with directors Ron Clements and John Musker leading a film inspired by Polynesian culture and mythology. The film was released in November 2016 by the Walt Disney Company and is widely reported to have grossed well over $600 million worldwide.
Woodall’s Bucky story, as described in the Woodall I and related court filings, was different in several important respects. Woodall alleged that Bucky followed an ordinary teen or surfer boy who becomes involved in a dangerous voyage connected to a Polynesian island and the need to save his home. According to Woodall, both works involve teenagers who defy parental warnings, travel across Polynesian waters, learn about ancient Polynesian culture, navigate by the stars, encounter spiritual ancestors manifested through animals, and meet a tattooed demigod figure with a large hook.
Those alleged similarities were central to Woodall’s copyright infringement claims. At a high level, both stories involve a young protagonist, parental resistance, a dangerous journey, ocean voyaging, Polynesian cultural themes, ancestral guidance, and a demigod companion or guide. Woodall alleged that these parallels showed that Disney copied protected elements of his screenplay and related materials. Disney argued, however, that these were either general ideas, common mythic or cultural elements, scènes à faire, or independently created story features rather than protectable expression copied from Woodall’s work.
The differences were also important. Moana is set in an ancient or mythic Polynesian world and centers on Moana, the daughter of a chief, whose journey is tied to her destiny to be a future chief, wayfinding, and restoring balance for her people. Bucky, by contrast, was described as involving a modern-day American teenager who wants to learn how to surf. In other words, while the parties’ works allegedly share broad story elements, teenage rebellion, a dangerous voyage, Polynesian waters, spiritual ancestry, and a tattooed demigod, their protagonists, settings, motivations, and narrative framing differ in ways Disney argued defeated substantial similarity in protectable expression.
Woodall, a writer and Writers Guild member, alleged that he spent more than 15 years and over $500,000 developing a story and screenplay, variously titled Bucky, Bucky the Surfer Boy, and Bucky the Wave Warrior. According to court filings, Woodall's work included illustrations, character development, and a final draft script. Woodall alleged that both projects involve teenagers who defy parental orders and parental warnings to take a dangerous voyage across Polynesian waters to save their home, and several other similarities. Woodall asserted that both works feature spiritual ancestors manifested as animals and a tattooed demigod who shapes the main character’s path.
In Woodall I, the complaint asserted copyright infringement claims under 17 U.S.C. § 501, federal trade secret misappropriation under the DTSA, 18 U.S.C. § 1836, and state trade secret claims under the CUTSA, Cal. Civ. Code §§ 3426 et seq., along with fraud-based claims. Woodall II is narrower, limited to copyright claims centered on alleged further infringement arising from Moana 2.
To prevail on a copyright claim under 17 U.S.C. § 501, a plaintiff must prove ownership of a valid copyright and copying of protected expression. Where there is no direct evidence of copying, the plaintiff must show evidence that the defendants had access to the plaintiff’s work and that the accused work is substantially similar to protectable elements of that work. In practice, access plus probative similarity can support an inference of copying, but defendants can still rebut with coincidence, common source, or independent creation.
Judge Marshall’s analysis drew on several Ninth Circuit cases. In Rentmeester v. Nike, Inc., 883 F.3d 1111 (9th Cir. 2018), a photographer alleged that Nike copied his photograph of Michael Jordan in creating a later Jordan photograph and the “Jumpman” logo. The Ninth Circuit held that the photographer plausibly alleged ownership and copying in the factual sense because Nike had access to the photo, but the claim still failed because Nike did not copy enough protectable expression. The court emphasized that copyright did not protect the general idea of Jordan in a leaping pose. It protected only the photographer’s particular expressive choices, such as angle, timing, and composition.
In Loomis v. Cornish, 836 F.3d 991 (9th Cir. 2016), the plaintiff claimed that Jessie J’s song “Domino” copied a two-measure melody from his song “Bright Red Chords.” The Ninth Circuit affirmed summary judgment for the defendants because the plaintiff’s access theory was based largely on speculation, not admissible evidence showing that the songwriters had a reasonable opportunity to hear his work. That case is especially relevant to the Woodall dispute because it underscores that a plaintiff must show more than a bare possibility that creative material reached the alleged infringers.
In Funky Films, Inc. v. Time Warner Entertainment Co., 462 F.3d 1072 (9th Cir. 2006), the creators of a screenplay called The Funk Parlor alleged that HBO’s Six Feet Under copied their work. The court assumed access for purposes of the appeal but still affirmed summary judgment because the works were not substantially similar in protectable expression. Shared general concepts, such as a family-run funeral home, death, relationships, and business struggles, were too abstract to support infringement when the plots, characters, themes, mood, pace, dialogue, and sequence of events differed materially.
The court also applied the filtering principle illustrated by Satava v. Lowry, 323 F.3d 805 (9th Cir. 2003). There, one glass artist claimed copyright protection over lifelike glass-in-glass jellyfish sculptures. The Ninth Circuit reversed an injunction, holding that standard, stock, and natural elements, such as jellyfish tentacles, rounded bells, bright colors, vertical orientation, and clear glass, could not be monopolized. In other words, ideas, themes, and scènes à faire must be filtered out before comparing works for substantial similarity.
Applied to the Disney Moana copyright lawsuit, these cases meant that Woodall had to do more than identify shared high-level elements such as a Polynesian setting, a dangerous ocean voyage, an ordinary teen protagonist, ancestral spirits, or a tattooed demigod. Those features could support a narrative of similarity, but copyright infringement required evidence that Disney accessed Woodall’s work and copied protected expression rather than common ideas, cultural material, scènes à faire, coincidence, common sources, or independent creation.
On cross-motion practice under Federal Rule of Civil Procedure 56, District Judge Consuelo Marshall narrowed Woodall I substantially at the summary judgment stage. The court first held that Woodall owned the Bucky materials he registered with the Copyright Office, which meant his ownership theory survived. But most of the Woodall claims failed on timing. The court found that Woodall suspected alleged copying of Bucky by Moana by December 2016, and certainly by March 2017, yet did not file suit until April 2020. That timing barred his trade secret claims under 18 U.S.C. § 1836(d) and California Civil Code § 3426.6, and barred most copyright claims under the Copyright Act’s three-year limitations provision, 17 U.S.C. § 507(b). The court also granted Disney’s motion as to fraud-related claims and most copyright defendants, while denying summary judgment on access, substantial similarity, and independent creation for the narrow claim that remained.
The court referenced Warner Chappell Music, Inc. v. Nealy, 601 U.S. 366 (2024), because Woodall relied on it to argue that his copyright claim should not be time-barred. In Warner Chappell, music producer Sherman Nealy alleged copyright infringement going back about ten years but argued his claims were timely because he discovered the conduct less than three years before filing suit. The Supreme Court assumed, without deciding, that the discovery rule applied and held that a timely copyright plaintiff may recover damages for older acts of infringement. The Copyright Act does not create a separate three-year damages cap.
That distinction was decisive in Woodall I. Judge Marshall concluded that Warner Chappell did not save Woodall’s untimely claims because, unlike Nealy, Woodall had suspected the alleged infringement more than three years before he filed. The only copyright claim that survived was the claim tied to post-April 24, 2017 distribution of Moana by Buena Vista Home Entertainment, whose home video distribution allegedly continued into the limitations period. As a result, summary judgment reduced the case from broad claims against many Disney defendants to a narrow copyright infringement claim based on Buena Vista Home Entertainment’s later distribution activity.
The surviving copyright infringement issue turned on access. Woodall’s theory ran through Jenny Marchick, who was described as being connected through his family (his sister-in-law’s stepsister) and who had received plaintiff's works while working on the Disney lot. Judge Marshall held that this was enough to create a triable issue, because Marchick said she may have provided the Bucky material to someone at Disney TV Animation. But the Disney company's lawyers argued at trial that the Moana creators at Disney never saw Woodall’s screenplay. Also, Disney argued that the film was independently created through Disney’s ordinary processes, and was inspired by Polynesian people's proud history and folklore.
After a two-week trial, the jury found that Disney did not have access to Woodall’s materials. Because there was no access, Disney won automatically on the remaining copyright claim, and the jury never addressed the issue of whether the parties’ works were substantially similar. The court entered final judgment on March 13, 2025, in favor of all Disney defendants, with costs awarded.
Woodall filed Woodall II on January 10, 2025. The new complaint seeks damages, injunctions under 17 U.S.C. § 502, statutory damages under 17 U.S.C. § 504(c), fees under 17 U.S.C. § 505, and a share of gross revenue tied to alleged infringement resulting from Moana 2. The court stayed Woodall II on April 11, 2025, pending post-trial motions and any appeal in Woodall I. A Ninth Circuit appeal in Woodall I was opened on January 13, 2026.
The Moana copyright trial (Woodall I) underscores two practical points. First, broad story elements such as Polynesian culture, teen protagonists, a perilous ocean quest, fictional islands, great ocean voyagers, and general mythic elements (e.g., demigods, animal-spirit motifs, etc.) are treated as unprotectable concepts unless the plaintiff can tie them to concrete original expression. In the copyright infringement context, courts separate unprotectable ideas (such as commonly known information about cultures and general story elements) from protectable expression, such as the script and design of a hit film. Second, timing matters. Creators should immediately respond to suspected infringement to avoid being time-barred by a statute of limitations, eliminating what might otherwise be meritorious claims.
If you need assistance with copyright matters or other intellectual property matter, please contact our office for a consultation.
© 2026 Sierra IP Law, PC. The information provided herein does not constitute legal advice, but merely conveys general information that may be beneficial to the public, and should not be viewed as a substitute for legal consultation in a particular case.
Intellectual property licensing is a commonplace way for a business owner to monetize intellectual property. It allows for monetization of intellectual property assets without investing in new or further manufacturing or development, and without giving up ownership. In a typical licensing agreement, one party allows another party to use valuable intellectual property assets in exchange for fees, royalties, or other compensation, while the licensor retains ownership. Intellectual property licensing is particularly important in certain industries, such as software, pharmaceuticals, and fashion, where it helps companies share technology, use brands effectively, enter new markets, and generate revenue without building every product or sales channel themselves.
An intellectual property licensing agreement is a contract under which one party, the licensor, grants rights to another, the licensee. The IP licensing agreement defines the IP rights granted, whether the deal is exclusive or non-exclusive, what services or know-how are included, and the financial terms, such as royalties or other compensation tied to revenue or sales.
Licensing intellectual property spans multiple categories of intellectual property assets. For example, patent licensing allows a licensee to make, use, or sell a patented invention, with patent law expressly permitting exclusive rights in all or part of the United States under 35 U.S.C. § 261. Copyright licensing permits use, reproduction, distribution, or display of creative works, and exclusive licenses are treated as transfers of exclusive rights that must be in writing per 17 U.S.C. § 204(a). Trademark licensing allows a licensee to use brand names or logos to sell products or services, but requires the licensor to maintain quality control to protect the underlying intellectual property rights per 15 U.S.C. § 1055. Trade secret licensing allows access to confidential information, processes, or know-how, provided the agreement includes strict confidentiality provisions to preserve the value of those trade secrets.
Intellectual property licenses provide that the licensor retains ownership of the intellectual property while granting defined usage rights to the licensee, enabling both parties to align their business objectives and generate value through carefully negotiated license agreements.
IP licensing creates additional revenue streams for IP owners without direct manufacturing costs or the need to sell products themselves. The licensee often gets faster market access through established technology, trademarks, or development work. This can serve very different business objectives: a software company may want scale, a pharmaceutical company may want a commercialization partner, and a fashion brand may want controlled brand expansion. The revenue generated can also fund future innovation.
Licensing intellectual property can involve a wide range of intellectual property assets, including patents, trademarks, copyrights, and trade secrets, as well as related IP assets such as software, data, confidential information, and technical know-how. Intellectual property licensing terms may vary depending on the nature of the IP, and the business objectives of the licensor and licensee.
For example, patents typically involve licensing a patented invention for the right to make, use, or sell products or technology. These IP licensing arrangements often include detailed provisions regarding development, manufacturing, and commercialization responsibilities, particularly where the licensee is responsible for bringing a product to market. In industries such as pharmaceuticals, a pharmaceutical company may obtain exclusive rights within a specific geographic area to develop and sell products based on the patented technology, often in exchange for milestone payments and ongoing royalties.
Trademark licensing focuses on brand use and consumer-facing activities. A trademark IP licensing agreement typically grants the licensee the right to use trademarks in connection with specific goods or services, but requires strict quality control provisions to maintain the value of the brand. The licensor retains ownership and must monitor how the marks are used to ensure consistency and protect goodwill, particularly where the licensee is offering services or selling products under the licensed brand. Even though there is no statutory requirement that there be a written trademark license agreement, it is important to have a written agreement for trademark rights. Trademark rights may be lost if there are no written terms regarding quality control and auditing. A trademark licensing arrangement that does not have quality control provisions results in naked licensing, which can result in a loss of trademark rights.
Copyright licensing commonly applies to creative works, including software, media, and written content. In software licensing, for instance, the licensee is granted access to use the code subject to limitations on copying, modification, or distribution. These agreements may be structured as non-exclusive license arrangements allowing multiple parties to use the same work, or as exclusive licenses depending on the intended use and market strategy.
Trade secrets are licensed through carefully structured agreements that provide access to confidential information, processes, or formulas while imposing strict obligations on the receiving party. Because trade secrets derive their value from secrecy, these agreements must include robust confidentiality and use restrictions to ensure the licensee does not disclose or misuse the information. Trade secret protection is governed in part by federal law, including 18 U.S.C. § 1836(b), and requires ongoing diligence by the licensor to preserve the secrecy of the information.
In many cases, licensing intellectual property involves a combination of these rights. A single IP licensing agreement may include patents, trademarks, copyrighted materials, and trade secrets bundled together to support a broader commercial relationship, such as distributing technology, offering integrated services, or expanding into new markets.
Exclusive license grants provide the licensee with exclusive rights to use specified intellectual property within a defined field, market segment, or geographic area, often to the exclusion of even the licensor. In many intellectual property licensing structures, this level of exclusivity means the licensor retains ownership but agrees not to grant the same rights to other parties and, in some cases, may also agree not to compete directly within the licensed scope. This type of intellectual property licensing agreement is frequently used where the licensee is expected to make substantial investments in development, commercialization, or regulatory approval, such as in a patented invention licensed by a pharmaceutical company, because exclusivity helps justify the financial risk. Under patent law, such grants are expressly permitted under 35 U.S.C. § 261. In the copyright context, an exclusive license is treated as a transfer of ownership rights and must generally be in writing under 17 U.S.C. § 204(a).
By contrast, a non-exclusive license allows the licensor to grant the same intellectual property rights to multiple parties simultaneously. In a non-exclusive arrangement, the licensor retains ownership and broad flexibility to continue licensing the same IP assets to other licensees, making it a common approach for software, technology platforms, and standardized services where widespread adoption is a core business objective. For example, a software company may enter into non-exclusive IP licensing agreements with hundreds or thousands of business customers, each paying subscription fees to access the same platform. Similarly, a company that owns valuable patents covering a widely used technology standard may license those patents on a non-exclusive basis to multiple manufacturers so they can sell products compliant with that standard. In the trademark context, a brand owner might grant non-exclusive rights to multiple retailers to sell products under the same brand in different channels, provided quality control standards are maintained. Because multiple parties can access and use the same intellectual property, royalty rates and compensation structures may differ significantly from exclusive licenses, often favoring volume-based revenue generated across many licensees rather than a single high-value deal.
Sublicenses introduce an additional layer of complexity in IP licensing agreements. A sublicense permits the original licensee to grant some portion of its licensed rights to another party, but only if the original agreement expressly authorizes such downstream licensing. The scope of sublicensing rights is typically tightly controlled through contractual provisions governing territory, field of use, and financial terms, ensuring that the licensor retains control over how its intellectual property assets are disseminated. In many cases, sublicenses are critical for expanding into new markets or enabling distribution through multiple parties, particularly where the original licensee lacks the infrastructure to fully commercialize the IP on its own.
The distinctions between an intellectual property assignment and an exclusive license are subtle. At a fundamental level, an assignment transfers ownership of intellectual property rights, while an intellectual property licensing agreement grants limited rights to use the IP while the licensor retains ownership, even if all other rights are provided to the licensee during the term of the license.
In the patent context, the Supreme Court in Waterman v. Mackenzie, 138 U.S. 252 (1891), established the governing framework: an assignment exists only where the transfer conveys (i) the entire patent, (ii) an undivided share of the patent, or (iii) the exclusive rights in a defined geographic area. Any lesser transfer, such as granting rights limited by field of use, duration, or other restrictions, constitutes licensing intellectual property rather than a transfer of ownership. This distinction is codified in 35 U.S.C. § 261, which recognizes both assignment and the ability to grant exclusive license grants or non-exclusive license rights without transferring title. As a result, even an “exclusive” IP licensing agreement may leave the licensor as the legal owner of the patented invention, with the licensee holding contractual rights rather than full property interests.
Trademark law imposes additional constraints that further distinguish assignment from IP licensing. Under 15 U.S.C. § 1060(a)(1), a trademark assignment must include the associated goodwill of the business; otherwise, the transfer is invalid. This reflects the underlying policy that trademarks signify source and quality, not merely abstract IP assets. By contrast, trademark licensing, whether exclusive or non-exclusive, permits a licensee to use the mark while the licensor retains ownership, provided the licensor maintains adequate quality control. Failure to do so can result in abandonment of trademark rights through “naked licensing,” as recognized in FreecycleSunnyvale v. Freecycle Network, 626 F.3d 509 (9th Cir. 2010). Thus, in trademark-focused license agreements, the licensor’s ongoing obligations are a defining feature that distinguishes licensing from a complete assignment.
Copyright law also reinforces the separation between ownership and use rights in intellectual property licensing. Under 17 U.S.C. § 202, ownership of a copyright is distinct from ownership of the material object in which the work is embodied. Additionally, 17 U.S.C. § 101 defines an exclusive license as a transfer of one or more exclusive rights, but only to the extent expressly granted in the agreement. 17 U.S.C. § 204(a) requires that such transfers of ownership be in writing. Courts analyzing whether a transaction is a copyright assignment or merely a copyright licensing agreement focus on whether an exclusive right under the Copyright Act has been conveyed. See, e.g., Righthaven LLC v. Hoehn, 716 F.3d 1166 (9th Cir. 2013) (holding that a purported assignment that left the transferor with significant control and economic interests did not transfer ownership, but instead created a limited license). Thus, in copyright transactions, the scope of rights granted, and any retained interests by the licensor, determine whether the agreement effects a true assignment or remains within the realm of intellectual property licensing.
Intellectual property licenses, whether structured as exclusive licenses, non-exclusive licenses, or hybrid arrangements, generally involve granting rights rather than transferring ownership. The licensor can retain rights, continue exploiting the IP, or license it to multiple parties depending on the agreement’s exclusivity provisions. By contrast, an assignment typically transfers all substantial rights, leaving the assignor with no continuing interest except as contractually reserved.
Well-drafted intellectual property licensing agreements must precisely define the scope of the IP rights being granted, including what specific intellectual property assets, such as patents, trademarks, software, or trade secrets, are covered, how the technology or know-how may be used, and whether the licensee has rights to modify, develop, or create derivative works.
Exclusivity is another central provision. The agreement should clearly state whether the deal involves exclusive license grants, a non-exclusive license, or some hybrid structure. An exclusive arrangement may grant exclusive rights within a defined geographic area, market segment, or field of use. The defined geographic area determines where the licensee can sell products or provide services, while the term of the license agreement dictates how long the granted rights will last. These elements influence royalty rates, long-term business planning, and each party’s ability to enter new markets or pursue future licensing opportunities. Strong agreements also include detailed financial terms, specifying how royalties are calculated and paid. This may include a percentage of sales, fixed fees, milestone payments, or other forms of compensation tied to revenue generated. Clear definitions of “net sales,” payment timing, and audit mechanisms are essential to avoid disputes.
Quality control and performance obligations are particularly important in license agreements involving trademarks. The licensor retains ownership of the brand and must ensure consistent quality, often through product standards and ongoing oversight. Failure to maintain quality control can jeopardize intellectual property rights. Additional provisions should address reporting and audit rights, allowing the licensor to verify compliance and confirm accurate royalties. Reservation of rights clauses ensure the IP owner continues to retain rights not expressly granted, preserving flexibility for other deals or internal use. Assignment and sublicensing restrictions control whether the licensee can transfer its rights to another company or affiliate, which is critical for managing risk and maintaining control over the subject IP.
Ownership of improvements and derivative works is another frequently negotiated issue. The agreement should specify whether new development created during the relationship belongs to the licensor, the licensee, or is shared, as this can significantly affect future innovation and value.
Finally, liability, indemnification, and dispute resolution provisions allocate risk between the parties and establish how conflicts will be handled. These clauses define which party is responsible for infringement claims, regulatory compliance, or third-party disputes, and often include arbitration or litigation frameworks.
As a legal matter, certain forms of intellectual property licensing must meet statutory requirements. For example, in copyright law, an exclusive license is treated as a transfer of ownership and must generally be in writing and signed. Careful drafting of these provisions ensures the agreement aligns with applicable laws, protects both parties’ interests, and supports long-term business success.
Royalty rates depend on many factors, including exclusivity, technology maturity, market size, patent strength, geographic area, and expected sales. Financial terms may include royalties based on sales, a lump sum payment, milestone compensation, or a combination of those structures. For example, a pharmaceutical company licensing a patented invention and related know-how may negotiate different royalties for development milestones and commercial sales. One caution for patents: post-expiration royalty provisions are restricted under Kimble v. Marvel Entertainment, LLC, 576 U.S. 446 (2015), reaffirming Brulotte v. Thys Co., 379 U.S. 29 (1964).
Trademark licensing is a critical component of intellectual property licensing, but it comes with strict quality control obligations. Under 15 U.S.C. § 1055, a licensor must actively control the nature and quality of the goods or services offered by a licensee, and the trademark use by the licensee must be for the benefit the registrant. Otherwise, the trademark may be weakened or even abandoned. This means that any intellectual property licensing agreement or IP licensing agreement involving trademarks should include detailed provisions governing quality standards, inspection rights, and compliance obligations to protect the value of the IP assets.
For many business owners, trademark licensing also overlaps with franchise licensing. A licensing arrangement may be considered a franchise when the licensee is granted the right to use trademarks as part of a broader business system, receives significant control or assistance from the licensor, and pays required fees. These elements can trigger federal franchise laws under 16 C.F.R. Part 436. As a result, licensors must carefully evaluate whether their licensing intellectual property strategy creates franchise obligations. Proper structuring ensures the licensor retains ownership, maintains brand value, and continues generating revenue while managing legal risk and supporting long-term business objectives.
Best practices begin with due diligence by both licensor and licensee. Each side should verify ownership, chain of title, existing obligations, prior assignment issues, market conditions, and whether the IP actually supports the business plan. For patents, that includes checking whether inventors properly assigned rights, whether protection exists in the relevant markets, and whether third parties claim competing interests. Due diligence is often the difference between a strategic deal and a future liability problem.
A well-drafted agreement should say which party is responsible for maintenance, enforcement, insurance, indemnity, recordkeeping, and compliance. Reporting and audit provisions matter because they test the accuracy of royalty payments. Dispute resolution clauses also matter. Many IP license agreements require arbitration, and written arbitration provisions in commercial contracts are generally enforceable under 9 U.S.C. § 2. Clear provisions on obligations and liability help protect both sides long after the initial exchange is complete.
Not all intellectual property licensing occurs through privately negotiated license agreements between a single licensor and licensee. Open source and Creative Commons frameworks are widely used forms of IP licensing that allow broad public access to intellectual property assets, often by multiple parties simultaneously under standardized terms. These IP licensing agreements typically grant a non-exclusive license to use, modify, and distribute works, subject to conditions such as attribution, share-alike requirements, or limitations on commercial use.
Courts have made clear that these conditions are enforceable legal obligations. In Jacobsen v. Katzer, 535 F.3d 1373 (Fed. Cir. 2008), the Federal Circuit held that open source license terms constituted enforceable conditions of the copyright grant, not mere contractual covenants. The defendant’s failure to comply with attribution and notice requirements exceeded the scope of the license granted, resulting in copyright infringement rather than just breach of contract.
Intellectual property licensing is a powerful business tool. It helps IP owners retain rights, expand into new markets, and generate revenue from IP assets without surrendering ownership. The key is disciplined drafting and management. Define the rights granted, negotiate fair royalty terms, protect confidential information, monitor compliance, and match the agreement to real business objectives. IP licensing can create lasting value for both licensor and licensee.
If you need assistance with intellectual property licensing or other intellectual property matter, please contact our office for a consultation.
© 2026 Sierra IP Law, PC. The information provided herein does not constitute legal advice, but merely conveys general information that may be beneficial to the public, and should not be viewed as a substitute for legal consultation in a particular case.
In today’s knowledge-based economy, businesses must understand the value of intellectual property (IP). Intellectual property plays a central role in how businesses create and protect their value. Intellectual property refers to intangible assets that are legally protected, including patents, trademarks, copyrights, and trade secrets. IP is capable of generating substantial economic benefits. These intellectual property assets often represent a significant portion of a company’s overall business value. Thus, understanding the economic value of IP assets is critical for informed business strategy.
Moreover, valuing IP assets is required across a range of financial processes, including financial reporting, tax planning, and dispute resolution. Well-executed intellectual property management and valuation enables businesses to maximize the value of their IP assets and align their IP protection strategies with long-term success.
Intellectual property is legally protected, transferable, and capable of generating economic benefits and monetary value. Common forms of intellectual property rights include patents, trademarks, copyrights, and trade secrets, each of which can be owned, licensed, enforced, or incorporated into a company’s business model.
Under the Patent Act, a patent confers “the right to exclude others from making, using, offering for sale, or selling” the claimed invention under 35 U.S.C. § 154, thereby creating a legally enforceable exclusivity that drives future economic benefits and competitive advantage. Patents are also expressly treated as personal property that can be assigned or licensed, reinforcing their status as valuable IP assets within broader business assets. See 35 U.S.C. § 261.
Similarly, copyright law grants a bundle of exclusive rights, including reproduction, distribution, and public display under 17 U.S.C. § 106, that allow the owner to control and monetize creative works, forming the basis for future cash flows and licensing revenue. These exclusive rights make copyrights a central category of intellectual property assets with measurable economic value.
Trademark rights, governed primarily by the Lanham Act, protect brand identifiers such as names, logos, and slogans that distinguish goods or services in commerce. Federal trademark registration provides nationwide priority and evidentiary advantages, including prima facie evidence of validity and ownership under 15 U.S.C. § 1057(b). These rights enable a business to prevent confusingly similar uses under 15 U.S.C. § 1114, preserve goodwill, and maintain brand-driven future revenue potential, making trademarks particularly valuable intellectual property assets tied to customer recognition.
For trade secrets, the Defend Trade Secrets Act defines protectable information as that which “derives independent economic value… from not being generally known” and is subject to reasonable efforts to maintain secrecy under 18 U.S.C. § 1839(3). The statute also provides a federal civil cause of action for misappropriation under 18 U.S.C. § 1836, reinforcing that secrecy itself can create substantial IP value when it preserves a competitive advantage.
IP assets essentially derive their value from their intrinsic value (e.g., the improvements provided by an invention, the market value of a copyrighted work, etc.) in combination with the statutory framework that prevents others from using the IP asset. The legal rights provided by the statutory framework allow the owner of the IP asset to exclude competitors, and the capacity to produce future benefits through commercialization, licensing, or strategic deployment within a company’s operations.
IP assets can be independently identified, transferred, and monetized through structured commercial arrangements. IP can be licensed, sold, or pledged as collateral, enabling businesses to unlock economic benefits and create additional income streams. Moreover, strong IP portfolios may serve as signals of reduced risk and future revenue potential in financing and M&A contexts. Valuing intellectual property helps establish enhanced market value, collateral, and accurate financial assessments of a business.
Registered IP rights strengthen IP protection, reduce copying risk, and support economic growth because they provide legally enforceable exclusivity grounded in statute. For example, patents confer a right to exclude others from making, using, or selling the claimed invention under 35 U.S.C. § 154, while trademark registrations under 15 U.S.C. § 1057 provide nationwide priority and evidentiary presumptions of validity and ownership. Copyright law similarly grants exclusive rights to reproduce and distribute protected works under 17 U.S.C. § 106, and trade secrets are protected so long as they derive independent economic value from not being generally known under 18 U.S.C. § 1839(3). These intellectual property assets therefore provide the legal power to prevent third parties from using or exploiting protected subject matter, preserving future economic benefits and reinforcing a company’s competitive advantage. At the same time, because IP rights are enforceable in court and transferable, courts and regulators routinely require reliable intellectual property valuation methodologies to quantify their monetary value in disputes, transactions, and reporting contexts.
In the legal dispute context, courts often rely on the hypothetical negotiation framework set forth in Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970), which remains a foundational approach for determining reasonable royalty damages in patent litigation. This framework incorporates detailed financial analysis of expected future cash flows, established licensing practices, and comparable agreements to estimate the present value of the use of the IP. Similar reasoning applies in copyright litigation cases, where damages may include the fair market value of a license under 17 U.S.C. § 504. In trade secret litigation cases, courts may award a reasonable royalty based on the value of the misappropriated information. See University Computing Co. v. Lykes-Youngstown Corp., 504 F.2d 518 (5th Cir. 1974). These authorities underscore that valuing intellectual property in litigation is inherently tied to estimating the economic value of the rights at issue using recognized IP valuation methods.
Transfers of IP assets also have significant tax implications. For example, related entities that transfer intellectual property assets between them must determine objective arm’s-length pricing for those intangible transfers. These rules require the use of reliable valuation methods, often grounded in the income approach, market method, or other accepted financial processes, to ensure that intercompany transactions reflect what unrelated parties would have agreed to under comparable circumstances. Consequently, intellectual property valuation is integral to financial management, tax compliance, and broader business strategy, and must be carefully considered in the internal management of the business to properly account for IP assets, support financial statements, and avoid regulatory exposure.
IP value rises when legal protections are broad, durable, and enforceable, because those protections are what allow an owner to exclude competitors and capture economic benefits from intellectual property assets. For patents, the statutory right to exclude under 35 U.S.C. § 154, coupled with infringement liability under 35 U.S.C. § 271, directly underpins the ability of a patent holder to control use and monetize the invention over its remaining term, making scope, validity, and duration central to future revenue potential and future benefits.
Under the Lanham Act, federal trademark registration provides significant evidentiary advantages, and it can serve as conclusive evidence of validity and exclusive right to use in commerce, reinforcing brand-based competitive advantage and preventing damage to a brand.
Copyright law similarly grants exclusive rights to reproduce, distribute, and display works under 17 U.S.C. § 106, but enforcement generally requires copyright registration for U.S. works, making registration a practical prerequisite to realizing the monetary value of those rights. See 17 U.S.C. § 411. In Fourth Estate Pub. Benefit Corp. v. Wall-Street.com, LLC, 586 U.S. 296 (2019), the Supreme Court confirmed that registration, not merely application, is required before suit.
For trade secrets, the Defend Trade Secrets Act defines protectable information as that which derives independent economic value from not being generally known and is subject to reasonable efforts to maintain secrecy under 18 U.S.C. § 1839(3). This statutory definition ties economic value directly to secrecy itself, if confidentiality is lost, so too is the asset’s value. Courts consistently emphasize this connection, recognizing that the value of a trade secret lies in its ability to provide a competitive advantage through exclusivity.
More broadly, these legal frameworks allow intellectual property rights to be enforced in court, enabling licensing, assignment, and other commercial arrangements based on exclusivity. As a result, the strength, scope, and enforceability of those rights directly influence whether an IP owner can extract economic value, gain market advantage, and ultimately realize the full value of intellectual property over time. Intellectual property creates value in a business through these legal mechanisms.
Intellectual property valuation is the process of determining the monetary value of intellectual property assets based on their ability to generate future economic benefits, such as future cash flows, licensing revenue, or strategic competitive advantage. For business owners, valuing IP assets is essential for financial reporting, negotiating licensing deals, securing financing, supporting mergers and acquisitions, and guiding internal management decisions about how to deploy and protect IP rights.
The valuation process requires gathering information about the asset’s legal strength, market demand, commercial use, and role in the company’s business model, along with broader financial analysis of expected future income and risk. Because intellectual property assets are intangible assets, their quantifiable value must be inferred through structured financial processes rather than direct observation.
The primary methods for valuing intellectual property are the income method, market method, and cost method. The income approach estimates the present value of expected cash flows or royalties attributable to the IP. The market method compares the asset to comparable IP or similar assets in a well-established market, while the cost method considers the historical cost or replacement cost of creating the asset.
Choosing the appropriate valuation method depends on factors such as the valuation date, the asset’s legal protections, availability of market comparables, and the purpose of the valuation: i.e., whether for a transaction, litigation, tax planning, or strategic planning. No single valuation method fits every situation. Accurate IP valuation requires selecting the approach that best captures the asset’s future revenue potential and overall contribution to the company’s assets, ensuring that the resulting valuation reflects real-world economic benefits provided by the company's IP, rather than theoretical assumptions.
The income approach is the most commonly used method for revenue-producing IP assets. It estimates present value from future cash flows, positive cash flows, cost savings, or an expected income stream. This approach makes sense when the asset already helps the company generate revenue or has clear future revenue potential. In licensing and damages settings, determining royalty rates often starts with the hypothetical negotiation framework from the Georgia-Pacific Corp. approach.
The market approach values intellectual property by comparing the subject asset to comparable IP, similar assets, or real-world transactions such as licenses, assignments, or sales in a well established market. This method is grounded in supply-and-demand principles and asks what buyers have actually paid for comparable rights under similar conditions. It is particularly useful for trademarks, software, and other intellectual property based businesses where there is tangible evidence of prior deals, including royalty rates or purchase prices. However, applying the market approach can be challenging because many IP assets have unique or novel characteristics, and reliable public data is often limited. Differences in industry, geography, exclusivity, and field of use can also affect comparability. Despite these limitations, when appropriate comparables exist, the market approach can provide reliable benchmarks and help establish approximate values grounded in real commercial activity.
The cost method is an IP valuation method used when an IP asset essentially lacks a proven income stream. This valuation method estimates the monetary value of intellectual property assets by calculating what it would cost to recreate, replace, or design around the asset, including historical cost, development time, prosecution expense, and technical risk. As part of the broader valuation process, it helps establish approximate values where market data or future cash flows are uncertain. The cost approach is commonly applied to early-stage patents, copyrights, and trade secrets that have not yet demonstrated future economic benefits. However, proper valuation requires recognizing that cost does not always equal fair value. An asset may have low development cost but high economic value, or significant investment but limited economic benefits if it fails to generate revenue.
The valuation process requires gathering license agreements, sales records, margins, market studies, prosecution files, chain-of-title documents, and commercialization evidence. Because IP is less visible than other business assets, proper valuation depends on tangible evidence: contracts, customer demand, renewal history, legal scope, and adoption data. The valuation process also asks what cash flows are actually attributable to the IP, rather than to goodwill, other intangible assets, or ordinary operating functions.
Several factors move the value of intellectual property up or down, including remaining enforceable term, claim scope, validity risk, infringement risk, market size, substitutability, brand strength, and scalability. Licensing history is particularly important, often providing a practical benchmark for determining value and assessing damages. For example, in patent cases royalty expectations must respect legal limits on duration. In Kimble v. Marvel Entertainment, LLC, 576 U.S. 446 (2015), the Court confirmed that royalties generally cannot extend beyond patent expiration, directly impacting discounted cash-flow models and reinforcing that the value of intellectual property is tied to enforceability and duration of rights.
A formal intellectual property valuation is critical whenever a business must determine the fair value or monetary value of its intellectual property assets for strategic, legal, or financial purposes. In practice, IP valuation is most commonly needed before major licensing deals, mergers, acquisitions, fundraising, or other commercial arrangements based on IP, where parties must agree on the economic value of IP assets and projected future cash flows. It is also essential for financial reporting, tax compliance, and other various financial processes.
Beyond transactions, valuing intellectual property is often required in legal disputes, including infringement or damages analyses, where courts expect a proper valuation supported by reliable financial analysis and expert testimony under Federal Rule of Evidence 702 and Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993). Businesses also rely on accurate IP valuation for internal management, portfolio optimization, and assessing future economic benefits tied to their intellectual property rights.
The value of intellectual property is found in its ability to create revenue, sustain a competitive advantage, and contribute meaningfully to a company’s overall economic value. Intellectual property assets are not merely abstract rights, they are valuable assets that can produce revenue and a competitive advantage in the marketplace. Additionally, IP valuation and analysis can be a key component of business strategy, informing decisions about commercialization, enforcement, and investment in particular IP assets. Businesses that manage their intellectual property assets are better positioned to capitalize on their innovations, mitigate risk, and maximize the long-term value of their intellectual property.
If you need assistance with an intellectual property matter, please contact our office for a consultation.
© 2026 Sierra IP Law, PC. The information provided herein does not constitute legal advice, but merely conveys general information that may be beneficial to the public, and should not be viewed as a substitute for legal consultation in a particular case.
Trade secret misappropriation can cause significant damage to a company. Under federal law, the Defend Trade Secrets Act (DTSA), enacted in 2016, creates a federal civil cause of action allowing a trade secret owner to bring trade secret misappropriation claims in federal court for the unlawful acquisition, disclosure, or use of a company’s trade secrets, including through improper means such as theft, breach of confidentiality, or unauthorized access under 18 U.S.C. § 1836. The DTSA operates alongside the Uniform Trade Secrets Act (UTSA), which has been adopted in most jurisdictions and provides a parallel framework under state laws for addressing trade secrets misappropriated through improper use or disclosure. We discuss herein the requirements and legal standards for trade secret misappropriation claims.
Trade secrets may include formulas, processes, software code, pricing, manufacturing methods, customer lists, referral lists, and other secret information or proprietary information. Under federal trade secret law, the Defend Trade Secrets Act (DTSA) defines a trade secret broadly to include financial and business information, and technical data, provided that the information “derives independent economic value” from not being generally known and is not readily ascertainable through proper means under 18 U.S.C. § 1839(3). Courts applying this statute have emphasized that the trade secret owner must do more than simply label information as confidential; the company must take reasonable steps under the circumstances to maintain secrecy, such as restricting access and using nondisclosure agreements. For example, courts have held that failure to implement meaningful safeguards can defeat trade secret claims because the information is not truly secret within the meaning of the statute.
Similarly, the Uniform Trade Secrets Act, which has been adopted across most U.S. jurisdictions, defines trade secrets in nearly identical terms, requiring that the information have independent economic value and be subject to reasonable efforts to maintain its secrecy. The DTSA does not displace state laws such as the Uniform Trade Secrets Act (UTSA), so trade secret claims are often pursued in federal and state courts together or in parallel. As of 2024 the UTSA had been adopted in 48 states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands.
Courts interpreting the UTSA have repeatedly held that information that is readily ascertainable through proper means, such as public sources or reverse engineering, does not qualify for protection, even if the company considers it sensitive. At the same time, courts recognize that materials like customer lists or pricing data may qualify as trade secrets where they reflect compiled, non-public business information that competitors could not easily duplicate. In practice, whether information qualifies as a trade secret often turns on the specific circumstances, including how the information was developed, who had access to it, and what steps the trade secret holder took to maintain its secrecy.
The Economic Espionage Act of 1996 establishes federal law criminal liability for trade secret misappropriation involving theft, improper use, or disclosure of a company’s trade secrets, particularly where the conduct benefits foreign entities or foreign governments or involves commercial advantage. Under 18 U.S.C. §§ 1831 and 1832, it is a crime to knowingly steal, acquire, or disclose trade secrets without authorization, including through improper means such as theft, breach of confidentiality, or espionage, where the information derives independent economic value and is used in interstate or foreign commerce.
Section 1831 specifically targets economic espionage intended to benefit foreign entities, while § 1832 addresses commercial trade secret misappropriation for private economic gain. Courts interpreting these provisions have emphasized that the statute applies broadly to confidential business information, including proprietary information, customer lists, and technical data that maintain secrecy and are not readily ascertainable. For example, in United States v. Chung, 659 F.3d 815 (9th Cir. 2011), the court upheld a conviction under 18 U.S.C. § 1831 where a defendant acquired sensitive aerospace trade secrets over many years and retained them with the intent to benefit the Chinese government, finding sufficient evidence that the information had economic value and was subject to reasonable efforts to maintain secrecy.
Similarly, in United States v. Aleynikov, 676 F.3d 71 (2d Cir. 2012), the court addressed the scope of 18 U.S.C. § 1832 in a case involving alleged theft of proprietary source code for high frequency trading, ultimately reversing the conviction based on the statutory requirement that the trade secret be “related to or included in a product that is produced for or placed in interstate or foreign commerce,” illustrating the importance of statutory elements in trade secret cases.
In United States v. Nosal, 844 F.3d 1024 (9th Cir. 2016), the defendant conspired with former employees to access and download confidential data from his former employer’s database after his credentials were revoked. The Ninth Circuit upheld criminal liability under the Economic Espionage Act, reinforcing that unauthorized access and misuse of proprietary information constitutes trade secret misappropriation under federal law.
The Economic Espionage Act also provides for significant civil and criminal penalties, including fines, imprisonment, and forfeiture, reinforcing that trade secret misappropriation can constitute both a civil offense and a federal crime. These provisions operate alongside the Defend Trade Secrets Act, which provides a federal civil cause of action for trade secret misappropriation claims under 18 U.S.C. § 1836, allowing trade secret owners to pursue remedies in federal court while criminal enforcement proceeds under the Economic Espionage Act.
Not all confidential business information qualifies as a trade secret. The information must derive independent economic value because competitors or other persons cannot readily obtain it. A core requirement of a trade secret is whether the information derives independent economic value from not being generally known or readily ascertainable and whether the company took reasonable efforts to protect trade secrets and maintain secrecy. See 18 U.S.C. § 1839(3). In Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470 (1974), the Supreme Court held that trade secrets are protectable intellectual property where secrecy provides economic value. Similarly, in InteliClear, LLC v. ETC Global Holdings, Inc., 978 F.3d 653 (9th Cir. 2020), the court held that plaintiffs must identify specific secret information and demonstrate that it derives independent economic value from its secrecy, reinforcing that generalized or publicly available business information does not qualify as protected trade secrets.
In practice, trade secret misappropriation often arises when a defendant acquires knowledge of proprietary information under circumstances giving rise to a duty to maintain secrecy, such as through nondisclosure agreements or employment relationships, and then engages in improper use or disclosure without express or implied consent. These principles are captured in the statutory framework under both federal law and state laws, which recognize that the unlawful acquisition and use of trade secrets, whether through employee misconduct, breach, or theft, can give rise to significant civil and criminal penalties, including injunctive relief and damages.
Trade secret misappropriation generally arises in two ways: (1) acquisition of a trade secret by improper means, or (2) disclosure or use of trade secrets without express or implied consent where the defendant knew or had reason to know that the information was acquired through improper means or under circumstances giving rise to a duty to maintain secrecy. This framework is codified in both federal law under the DTSA and under UTSA, which together form the backbone of modern trade secret law.
Under these statutes, “improper means” is broadly defined to include theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, and electronic espionage under 18 U.S.C. § 1839(6). Courts routinely apply this definition in trade secret cases involving employee misconduct or competitive intelligence gathering. For example, in E.I. duPont deNemours & Co. v. Christopher, 431 F.2d 1012 (5th Cir. 1970), the defendant used aerial photography to capture confidential plant construction details. The court held that even though the information was technically visible from the air, the conduct constituted improper means because it circumvented reasonable efforts to maintain secrecy, illustrating that misappropriation can occur even without physical trespass.
Importantly, not all acquisition or use of valuable business information constitutes misappropriation. The DTSA and UTSA expressly exclude lawful methods such as reverse engineering, independent derivation, or acquisition through proper means. This distinction was emphasized in Kewanee Oil Co., the Supreme Court recognized that competitors are free to discover trade secrets through legitimate means, even if the result is identical to the trade secret holder’s proprietary information.
Courts also frequently address situations involving breach of confidentiality obligations. In BladeRoom Group Ltd. v. Emerson Electric Co., 331 F. Supp. 3d 977 (N.D. Cal. 2018), the defendant allegedly obtained confidential data during a partnership and later used it to develop competing technology. The court allowed trade secret misappropriation claims to proceed, finding that acquisition and subsequent use under circumstances involving a duty of confidentiality satisfied the statutory definition of misappropriation.
As a practical matter, trade secret misappropriation often occurs when employees or business partners acquire knowledge of a company’s trade secrets through authorized access but later engage in improper use or disclosure. Courts analyze whether the defendant’s conduct violated confidentiality obligations, exceeded authorized access, or involved deceptive practices. These “circumstances giving rise” to a duty to maintain secrecy are central to many trade secret claims and frequently determine whether the conduct crosses the line into actionable misappropriation.
A classic trade secret misappropriation scenario arises when an employee departs and takes sensitive information, such as customer lists, pricing data, or source code, to a competitor. Both the DTSA and the USTA authorize courts to grant injunctive relief for actual or threatened misuse, but require evidence of improper use or threatened disclosure, not mere possession of knowledge. In PepsiCo, Inc. v. Redmond, 54 F.3d 1262 (7th Cir. 1995), a former executive joined a competitor with detailed strategic plans. The court held that inevitable disclosure of trade secrets justified an injunction based on likely misuse. However, courts generally reject restraints based solely on knowledge without evidence of threatened misappropriation. Accordingly, businesses should protect trade secrets through nondisclosure agreements, access controls, and disciplined offboarding, rather than relying primarily on non compete agreements.
In trade secret misappropriation claims under the Defend Trade Secrets Act and the Uniform Trade Secrets Act, plaintiffs must identify trade secrets with particularity, showing the information derives independent economic value from not being generally known and was subject to reasonable efforts to maintain secrecy. Courts require more than vague descriptions of business information or general know-how. In InteliClear, LLC, the court held that plaintiffs must clearly delineate the alleged trade secrets, rejecting conclusory “catchall” descriptions. Similarly, in Oakwood Labs. LLC v. Thanoo, 999 F.3d 892 (3d Cir. 2021), the court held that a complaint must plausibly allege both the existence of protectable trade secrets and specific acts of misappropriation, including acquisition by improper means or improper use or disclosure.
Plaintiffs must also prove the defendant acquired, disclosed, or used the trade secrets without consent under circumstances giving rise to a duty of secrecy under 18 U.S.C. § 1839(5). These standards apply in both federal court and under parallel state laws governing trade secret litigation.
Common defenses in trade secret misappropriation claims focus on whether the information qualifies as protected under trade secret law. Under the UTSA and the DTSA, defendants argue the information was generally known, readily ascertainable, independently developed, or obtained through reverse engineering or other proper means. As discussed above, the Supreme Court in Kewanee Oil Co. held that reverse engineering and independent discovery are lawful and defeat misappropriation. Defendants also assert disclosure occurred with express or implied consent or that plaintiffs failed to take reasonable steps to maintain secrecy. Courts routinely reject vague claims, as in InteliClear, LLC, which required specific identification of trade secrets. Additionally, UTSA implementation by individual states may preempt duplicative tort claims like tortious interference, limiting recovery to statutory or contractual theories.
Trade secret litigation under the Defend Trade Secrets Act provides robust remedies, including injunctive relief, actual-loss damages, unjust-enrichment damages, and a reasonable royalty where misappropriated trade secrets cannot be otherwise quantified under 18 U.S.C. § 1836(b)(3)(A). The Uniform Trade Secrets Act has similar provisions. Courts may award exemplary damages up to twice the damages amount and attorneys’ fees for willful and malicious misappropriation, reflecting the seriousness of trade secret claims under 18 U.S.C. § 1836(b)(3)(C)-(D). The DTSA also authorizes ex parte seizure in extraordinary circumstances to prevent dissemination of a company’s trade secrets under 18 U.S.C. § 1836(b)(2).
In PPG Industries Inc. v. Jiangsu Tie Mao Glass Co. Ltd., 47 F.4th 156 (3d Cir. 2022), the defendant, a competitor, used improperly acquired proprietary information to accelerate product development; the court held that damages could include avoided research-and-development costs as a measure of unjust enrichment. Similarly, courts applying Federal Rule of Civil Procedure 65 routinely grant injunctions to prevent ongoing disclosure or use, emphasizing that trade secret misappropriation remedies aim both to compensate the trade secret owner and to prevent further competitive harm.
In trade secret litigation, courts actively balance disclosure obligations with the need to protect trade secrets and other confidential business information. Federal Rule of Civil Procedure 26(c)(1)(G) authorizes courts to issue protective orders limiting access, requiring sealed filings, or permitting in camera proceedings to prevent disclosure of a company’s trade secrets. Similarly, the Defend Trade Secrets Act requires courts to “preserve the confidentiality of trade secrets” during litigation under 18 U.S.C. § 1835. The Uniform Trade Secrets Act provides similar protections.
Courts routinely enforce these safeguards. In In re Remington Arms Co., 952 F.2d 1029 (8th Cir. 1991), the court held that protective orders restricting disclosure of proprietary information were appropriate to prevent competitive harm. Courts will implement procedural mechanisms to maintain secrecy while allowing plaintiffs to pursue trade secret misappropriation claims without forfeiting protection.
To defend trade secrets, a company must show it took reasonable efforts to maintain secrecy, as required under the DTSA and the UTSA, both of which define trade secrets as information deriving independent economic value from not being generally known and subject to protection measures. Courts consistently enforce this requirement. In InteliClear, the court held that failure to clearly identify and protect alleged trade secrets can defeat claims. Practically, this means protections such as limiting access and using confidentiality nondisclosure agreements should be implemented and diligently enforced.
Also, under the Defend Trade Secrets Act, employers must provide DTSA whistleblower immunity notices in agreements governing confidential information. Courts have enforced this strictly, and failure to comply with 18 U.S.C. § 1833(b) can preclude recovery of exemplary damages and attorneys’ fees in a suit against a current or former employee, even where trade secret misappropriation is otherwise proven.
If you believe trade secrets have been misappropriated, act immediately to secure devices, preserve evidence, and cut off access, as courts routinely consider early conduct when evaluating injunctive relief under Federal Rule of Civil Procedure 65. The DTSA allows a trade secret owner to file a federal civil action and seek emergency relief, including injunctions and, in extraordinary circumstances, ex parte seizure of property to recover misappropriated trade secrets. See 18 U.S.C. § 1836(b). For example, in Henry Schein, Inc. v. Cook, 191 F. Supp. 3d 1072 (N.D. Cal. 2016), the court granted a preliminary injunction where a former employee retained and threatened to use confidential customer data, emphasizing the risk of ongoing disclosure.
In more serious cases involving theft, foreign entities, or coordinated improper use, criminal referral to the US Department of Justice through the local US Attorney's office may be appropriate under the Economic Espionage Act, which imposes fines and imprisonment for trade secret misappropriation involving interstate or foreign commerce. Delay can undermine trade secret claims, as courts require proof of what was acquired, how it was disclosed, and whether misuse is continuing.
Trade secret misappropriation presents a substantial legal and business risk to any company that relies on confidential or proprietary information. Assets such as customer lists, pricing strategies, technical processes, and other sensitive business information may qualify as trade secrets, but only where the trade secret holder can demonstrate that the information derives independent economic value from not being generally known and that reasonable steps were taken to maintain its secrecy. When these elements are satisfied, both federal and state laws, including the DTSA and the UTSA, provide robust remedies, including injunctive relief, damages, and, in some cases, enhanced penalties. However, where a company fails to adequately protect its information, courts may find that the material is readily ascertainable or insufficiently safeguarded, leaving it vulnerable to lawful use by competitors. Proactive protection and enforcement are therefore essential to preserving a company’s competitive advantage.
If you need assistance with trade secret matters or other intellectual property matters, please contact our office for a consultation.
© 2026 Sierra IP Law, PC. The information provided herein does not constitute legal advice, but merely conveys general information that may be beneficial to the public, and should not be viewed as a substitute for legal consultation in a particular case.
AI for patents is no longer a niche topic. Artificial intelligence, machine learning, neural networks, large language models, and other AI technology (generally referred to as "AI") are changing how practitioners search prior art, analyze data, prepare patent applications, and manage patent prosecution. But the question remains of whether AI is an effective and lawful tool for patent work. In the U.S. patent system, the key issues surrounding the use of AI in connection with patents are inventorship, patent eligibility, disclosure, claim quality, and security.
This is a new era for patents, but AI is not a game changer by itself. It is a tool that can improve efficiency, productivity, and patent intelligence in software, electronics, medical imaging, life sciences, and other fields. The United States Patent and Trademark Office (USPTO) says patent examiners have already conducted more than 1.3 million searches using AI tools, including patent searches that surface foreign prior art from over 60 countries, and the office’s ASAP! pilot system is testing automated pre-examination search notices. That shows how seriously the USPTO is treating AI-assisted analysis.
AI can be used as a tool for developing and refining an invention that was conceived by a human inventor. If the subject matter of a patent application is purely AI output, it is not a patentable invention under US patent law. The USPTO’s current guidance (USPTO Inventorship Guidance for AI-Assisted Inventions) makes clear that AI systems, including generative AI, are treated as instruments used by human inventors, not inventors themselves. The guidance emphasizes that there is no separate legal standard for AI-assisted inventions and that traditional inventorship law still applies, meaning only natural persons can be named as inventors and must have conceived the claimed invention.
In practice, that means AI may provide services, analyze data, and generate ideas, but it does not become an inventor. AI can help move inventors from a rough idea to a more specific solution. But patent law still asks who conceived the claimed invention, not who generated the first draft or suggestion. The human contribution remains the controlling factor.
Under current U.S. law, the answer remains no, AI cannot be an inventor. Title 35 defines an “inventor” as an “individual,” and courts have interpreted that term to mean a natural person. In Thaler v. Vidal, 43 F.4th 1207 (Fed. Cir. 2022), the applicant, Stephen Thaler, filed patent applications naming an artificial intelligence system (DABUS) as the sole inventor of two inventions: a "neural flame" and a "fractal container". The United States Patent and Trademark Office rejected the applications for failing to identify a human inventor, and the Federal Circuit affirmed. The court held that the statutory language of 35 U.S.C. § 100(f), which defines an inventor as an “individual,” unambiguously requires a human being. Because no natural person was named, the applications were defective and could not proceed.
Consistent with that holding, the USPTO’s revised 2025 guidance confirms that artificial intelligence, including generative AI, cannot be listed as an inventor or joint inventor in patent applications, even where AI systems play a significant role in generating ideas or assisting with the invention process. As a result, any patent application that identifies an AI system instead of a human inventor risks rejection or other corrective action under 35 U.S.C. §§ 100 and 115. In addition, each named inventor must properly execute or support an oath or declaration under 37 C.F.R. § 1.63, affirming their role in the conception of the claimed invention. This remains a core legal principle in the patent system: regardless of advances in artificial intelligence, inventorship, and the associated rights and obligations, must trace back to a human individual before a patent application can be validly filed.
The current rule in the patent system remains the traditional conception test, even in the age of artificial intelligence. The United States Patent and Trademark Office’s 2025 revised guidance confirms that there is no separate or modified legal standard for AI-assisted inventions. The key question is still whether a human inventor formed a “definite and permanent idea of the complete and operative invention,” which is the longstanding definition of conception in patent law.
If a human uses generative AI or large language models as tools, the analysis focuses on whether that individual exercised enough technical expertise and control over the process to form the invention. The AI system may assist with data processing, patent drafting, or generating options, but it cannot supply the required inventive contribution under current law.
This principle is illustrated by Burroughs Wellcome Co. v. Barr Laboratories, Inc., 40 F.3d 1223 (Fed. Cir. 1994), where the court held that conception requires a specific, settled idea, not just a general research plan or wish. In that case, the inventors identified AZT as a treatment for HIV based on prior research and testing, and the court found they had achieved conception because they could describe the invention with sufficient detail. Applied to AI technology, this means that simply prompting a system or reviewing outputs from machine learning or neural networks is not enough, there must be human intellectual contribution that rises to the level of a complete invention.
Where multiple humans collaborate, whether directly or through AI-assisted workflows, joint inventorship is governed by 35 U.S.C. § 116 and clarified by Pannu v. Iolab Corp., 155 F.3d 1344 (Fed. Cir. 1998). In Pannu, the court held that a joint inventor must (1) contribute in some significant manner to the conception of the invention, (2) make a contribution that is not insignificant in quality, and (3) do more than merely explain well-known concepts or follow instructions. The case involved intraocular lens technology, where one contributor’s role was evaluated to determine whether it rose above routine assistance. The court emphasized that joint inventorship requires meaningful participation in the inventive concept, not just execution or support.
Together, these authorities reinforce a consistent rule across AI-related inventions, software, life sciences, and other fields: inventorship turns on human contribution to conception of the novel elements of the invention, not on who operated the tools. Whether using an artificial neural network, a computer program, or other AI tools, the named inventors must have the knowledge, ability, and involvement necessary to articulate the invention with particularity in the patent application, including its patent claims and detailed descriptions.
Often yes, but AI for patents operates within the same legal framework as any other technology. AI-related inventions and AI-related patents must satisfy patent eligibility under 35 U.S.C. § 101, novelty under 35 U.S.C. § 102, non-obviousness under 35 U.S.C. § 103, and written description and enablement under 35 U.S.C. § 112. These requirements apply regardless of whether the invention involves artificial intelligence, machine learning, neural networks, or other advanced software tools.
Patent eligibility under § 101 is often the most contested issue for AI-related inventions. The Alice Corp. v. CLS Bank International, 573 U.S. 208 (2014) decision remains central. In Alice, the patents claimed a computerized scheme for mitigating settlement risk using a third-party intermediary. The Supreme Court of the United States held that merely implementing an abstract idea (intermediated settlement) on a generic computer does not make it patentable. The Court established the now-familiar two-step test: (1) determine whether the claims are directed to an abstract idea, and if so, (2) determine whether the claims include an “inventive concept” sufficient to transform the abstract idea into patent-eligible subject matter. This framework frequently applies to AI-related patents, especially where claims resemble data processing, prediction models, or algorithmic outputs performed on conventional computing systems.
That said, not all AI inventions are treated as abstract. Courts and the patent office have recognized that claims directed to specific technological improvements, rather than generalized data analysis, may satisfy § 101. For example, in Enfish, LLC v. Microsoft Corp., 822 F.3d 1327 (Fed. Cir. 2016), the Federal Circuit upheld claims directed to a self-referential database structure because they improved the way computers operate, rather than simply using computers as tools. Similarly, in McRO, Inc. v. Bandai Namco Games America Inc., 837 F.3d 1299 (Fed. Cir. 2016), the Federal Circuit found claims patent-eligible where they used specific rules to automate lip synchronization in animation, improving a technical process rather than claiming a broad abstract idea.
Consistent with these cases, the United States Patent and Trademark Office has issued guidance clarifying how examiners should evaluate AI technology. The USPTO’s 2024 subject matter eligibility guidance update explains that AI-related inventions are more likely to be patentable when the claims recite a specific improvement to computer functionality or another technical field, such as medical imaging, signal processing, or specialized hardware implementations of an artificial neural network.
In practice, this means that AI-related inventions framed as concrete technological solutions, rather than generalized data manipulation or mathematical concepts, stand a stronger chance of obtaining patent protection.
The best use of AI for patents is not replacing a patent attorney but improving early analysis. AI tools can use semantic search, natural language processing (NLP), and machine learning to review prior art, compare an invention disclosure to the field, identify related patents, and map competitive landscapes much faster than manual work alone. AI can assist as a patent drafting tool, but is generally not effective for single-prompt, one-shot drafting. It can be helpful in drafting certain sections (e.g., background sections) with effective prompting, but it is not a substitute for a professional patent drafter. AI is a valuable support tool for patent attorneys and patent practitioners handling repetitive tasks, but it cannot handle all patent tasks and matters.
AI can also help in patent prosecution, including office action responses. USPTO guidance recognizes that tools may be used to draft responses, but the signer still must review the paper, verify the facts, check citations, and ensure the arguments are warranted by law. Patent practitioners also remain subject to 37 C.F.R. § 11.303 and cannot make false statements of fact or law. That matters because office action responses can affect claim scope, estoppel, validity, and later enforcement. A polished AI draft with a bad citation can result in significant issues in the application and potential disciplinary action for the practitioner.
The biggest pitfalls are predictable: hallucinated prior art, incorrect case citations, overbroad claims, unsupported limitations, and invented technical detail. Under 37 C.F.R. § 1.56, people involved in filing and prosecution owe the patent office a duty of candor and good faith. Under 37 C.F.R. § 11.18, anyone presenting a paper certifies that the factual and legal contentions have evidentiary support after a reasonable inquiry. The USPTO specifically warns that parties cannot simply assume that output by an AI system is accurate. Specifications and drawings prepared with AI may not meet § 112 compliance. Before an application prepared using an AI tool is filed, the draft should be thoroughly reviewed for accuracy, completeness, and compliance with the disclosure requirements of 35 U.S.C. § 112.
Security is a concern when using AI for patents, particularly when handling unpublished inventions, patent applications, and sensitive intellectual property. If users input confidential invention disclosures into poorly governed AI tools, they risk unintended access, data leakage, or even loss of patent protection. The United States Patent and Trademark Office has expressly warned that some artificial intelligence systems may retain user inputs, use them to train models, or share them with third parties, raising serious concerns under 37 C.F.R. § 11.106, which imposes strict confidentiality obligations on patent practitioners.
In response, several AI companies have developed platforms specifically tailored for patent drafting, patent prosecution, and patent intelligence workflows with an emphasis on security. For example, DeepIP markets its system as offering highest security standards, including end-to-end encryption, strict data segregation, and controlled access environments. It also emphasizes seamless integration with tools like Microsoft Word while maintaining isolated processing pipelines to prevent cross-client data exposure.
Similarly, Solve Intelligence promotes secure collaboration features for drafting and office action responses, with safeguards designed to ensure that user data is not reused for model training without authorization. Rowan Patents and IP Author also highlight security-focused architectures, including sandboxed environments, jurisdiction-specific data handling, and compliance with standards such as SOC 2 and GDPR, features that are increasingly expected when dealing with global patent portfolios across various fields like life sciences, medical imaging, and software.
Inventors and patent attorneys should conduct careful diligence before using any AI system. This includes reviewing how the platform handles data retention, who has access to the data, whether the system uses inputs for training purposes, and what contractual support is provided in the event of a breach.
Conclusion
Inventors and patent practitioners will be using AI for patents more as the technology develops. AI can improve efficiency in invention development, prior art review, patent drafting, and patent prosecution. However, the law still requires human inventors, human responsibility, and human review. AI is not a replacement for inventors or patent attorneys. It is a tool that improves efficiency and reduces some of the tedious aspects of innovation and patent drafting.
If you have a patent matter or other intellectual property matter with which you need assistance, contact for a consultation.
© 2026 Sierra IP Law, PC. The information provided herein does not constitute legal advice, but merely conveys general information that may be beneficial to the public, and should not be viewed as a substitute for legal consultation in a particular case.
As of January 2, 2024, the United States Patent and Trademark Office (USPTO) is accepting applications for the newly created design patent practitioner bar. The design patent practitioner bar is a new form of patent agent license to practice before the USPTO in design patent applications. This new registration system under 35 U.S.C. § 2(b)(2)(D) and 37 C.F.R. Part 11 provides a new area of patent practice that allows for specialists in visual and graphic arts to provide their skills to clients. The agency says the new design patent bar is meant to open the USPTO’s doors more broadly, bring more people into the innovation ecosystem, and improve the robustness and reliability in the specific area of design patents.
A design patent protects the ornamental design of an article of manufacture (examples include clothing, vehicle designs, electronic device designs, beverage containers, etc.), not the way the item works. See 35 U.S.C. § 171. In other words, design patent law is concerned with how a product looks, not how it functions, making it especially important in industries driven by industrial design, graphic design, and other applied arts.
The leading design patent cases clarify how courts evaluate ornamental appearance. In Gorham Co. v. White, 81 U.S. 511 (1871), the Supreme Court considered competing designs for silverware handles. The accused products were not identical, but the Court held that infringement exists if, in the eyes of an ordinary observer, the two designs are substantially the same such that the resemblance would deceive a purchaser into buying one thinking it was the other. This case established the foundational “ordinary observer” test that still governs design patent matters today.
More than a century later, the Federal Circuit reaffirmed and refined that standard in Egyptian Goddess, Inc. v. Swisa, Inc., 543 F.3d 665 (Fed. Cir. 2008) (en banc). That case involved competing nail buffer designs used in the beauty industry. The court rejected earlier, more rigid point of novelty test and confirmed that the ordinary observer test, viewing the design as a whole in light of prior art, is the proper framework for determining infringement in design patent infringement cases. The decision emphasized that small differences do not avoid infringement if the overall visual impression remains substantially the same.
The above cases underscore a practical point: a design patent practitioner focuses on protecting the overall visual impression of a product. That role is distinct from a utility patent practitioner handling a utility patent, which protects how an invention works rather than how it looks.
Before this final rule, there was effectively only one patent bar for practice in patent matters before the Office. The USPTO published Representation of Others in Design Patent Matters Before the United States Patent and Trademark Office, 88 Fed. Reg. 78644 (Nov. 16, 2023), creating a separate design patent bar effective January 2, 2024 for practice in design patent proceedings only. In the rulemaking, supporters argued that this separate design patent practitioner pathway could improve design patent practitioner quality, enlarge the pool of qualified practitioners, and aid design patent prosecution, while opponents warned that a divided bar could create confusion and increase the costs of identifying appropriate counsel.
Applicants do not need a law degree to qualify for the new design patent bar. Instead, the USPTO requires a bachelor’s, master’s, or doctorate of philosophy from an accredited college or university in fields such as industrial design, product design, architecture, applied arts, graphic design, fine art, studio arts, or art teacher education, or an equivalent degree. The agency expressly tied these admission criteria to the backgrounds of those in the visual arts and design field, and noted that the same design-centered degrees are used when hiring design patent examiners. That means individuals seeking registration may qualify without the scientific and technical qualifications usually associated with the traditional patent bar.
The process is straightforward in concept, even if the paperwork matters. Applicants must submit a complete USPTO Office of Enrollment and Discipline (OED) application, official transcripts, and fees; pass a registration examination on patent legal process and procedure; and undergo a moral character evaluation. The USPTO chose the current registration examination rather than creating a separate design patent practitioner bar exam, explaining that design bar applicants still need the rules-and-procedure knowledge tested by the current registration exam. Once admitted, they receive a registration number and may begin practicing in design patent matters.
Under 37 C.F.R. § 11.6(d), a lawyer admitted through this pathway is a design patent attorney, and a non-lawyer is a design patent agent. That is different from a registered patent attorney or registered patent agent admitted under 37 C.F.R. § 11.6(a)-(c), who may practice in all patent matters. In practical terms, a business that needs help with design filings only may hire a design patent practitioner, while a company with utility patents, plant patents, and design patent work may need a full patent lawyer with the broader licensing and registration.
The USPTO’s rules define practice before the Office in design patent matters broadly. Under 37 C.F.R. § 11.5(b)(2), a design patent practitioner may prepare and prosecute a design patent application, advise a client about filing strategy, draft the specification or claim, respond to Office communications, and handle petitions, appeals, and other design patent proceedings before the Patent Trial and Appeal Board (PTAB). The rule also permits work reasonably incident to prosecution, including certain assignment drafting and advice about alternative protection under state law. This is patent-side practice at the USPTO, but not trademark office practice, which is separately defined by USPTO rules.
The most important limit is also the easiest one to miss. Under 37 C.F.R. § 1.32(a)(1), an attorney or agent registered under § 11.6(d) may take action and file applications and other documents only in design patent applications, design patent matters, or design patent proceedings. The MPEP states that such a practitioner cannot sign papers in a utility or plant application. The competence rule, 37 C.F.R. § 11.101, still applies, so practitioners must properly explain those practice limitations to clients. That is one reason the USPTO took seriously comments about malpractice, public confusion, and other ethical concerns raised during rulemaking.
The USPTO built disclosure rules into daily practice. Rule 37 C.F.R. § 1.4(d) requires design patent practitioners to indicate design patent practitioner status by placing the word “design” adjacent to a handwritten, S-signature, or electronic signature when signing USPTO documents. The Office also said these practitioners will receive a particular registration number series to distinguish them from full patent practitioners. For a company reviewing correspondence, that labeling helps confirm whether the signer is authorized only in design patent matters.
Design patent prosecution turns on the visuals. Under 37 C.F.R. §§ 1.152 and 1.153 and MPEP Chapter 1500 of the Manual of Patent Examining Procedure, a design application has a single patent claim, and the drawing or photograph is the entire visual disclosure of that claim. The rules require enough views to disclose appearance completely, and design filings often rise or fall on details such as broken lines, straight-line shading, stippling, and specialized surface shading. For businesses in graphic design, industrial design, packaging, furniture, or other applied arts, that specialized drafting work is exactly where a strong design patent practitioner adds value.
If you are hiring a practitioner to assist with design patents, do not rely on practitioner and law firm marketing. The USPTO’s OED register distinguishes practitioners authorized in all patent matters from those admitted in design patent matters only. The OED Register can be searched for any particular practitioner, including admitted design patent practitioners. It also distinguishes registered patent attorneys, registered patent agents, registered design patent attorneys, registered design patent agents, and individuals granted limited recognition. The Office will not recommend counsel, so potential design patent applicants should verify whether the professional can handle only design filings or broader patent matters as well.
One of the policy arguments for allowing design patent practitioners was broader access. Commenters expressed that the rule could help more under-represented groups practice design patent law and assist more under-represented inventors in acquiring patents. Additionally, for companies or creators seeking lower-cost professional services, the USPTO’s Patent Pro Bono Program matches volunteer patent attorneys and patent agents with financially under-resourced inventors and small businesses. Programs like Volunteer Lawyers for the Arts (VLA) also provide assistance to artists, creators, and independent inventors interested in a design patent or utility patent.
The new design patent practitioner pathway is a limited, separate registration system for practice in USPTO design patent proceedings, created by the USPTO to align with design-focused educational backgrounds. The registration requires the same current registration exam, moral character review, and competence obligations that govern other patent practitioners. Thus, these new practitioners are held to the same procedural, professional, and moral standards as other registered practitioners.
If you need assistance with design patent matters or other intellectual property matters, please contact our office for a consultation.
© 2026 Sierra IP Law, PC. The information provided herein does not constitute legal advice, but merely conveys general information that may be beneficial to the public, and should not be viewed as a substitute for legal consultation in a particular case.
Reverse engineering is a common method of working backward from a physical object, computer hardware, software, or other technology to discover its functionality, components, and hidden design information. Businesses use reverse engineering to analyze a competitor’s product, recover lost data, recreate obsolete parts, build compatible accessories, and develop a next generation or competing product. However, it is not always lawful to copy or borrow from a competitor's product. We explore in this article whether and when reverse engineering crosses the line into misuse of trade secret or other intellectual property rights.
Reverse engineering (or back engineering) is the process of studying a previously made device, system, or code base to determine how it works and what it contains. In law, the concept usually means starting with the finished article and learning its internal design, structure, or operation from the article itself rather than from leaked drawings or other confidential information.
The reverse engineering process usually has three steps: information extraction, modeling, and review. For hardware, that may involve disassembling a product, scanning it with coordinate measuring machines, laser scanners, or structured-light tools, then converting the scan into digital models in computer aided design software. For software, static analysis examines a program without running it, while dynamic analysis observes it in operation. Engineers may use disassemblers and decompilers to inspect assembly language, data structures, and sometimes recover a higher-level view of lost source code.
Reverse engineering speeds research and development, shortens prototyping, and reduces cost and waste by repairing existing parts instead of replacing whole systems. It is used in aerospace and automotive work to scan parts and create digital replicas, in medical-device work to create custom implants and prosthetics, in classic-car restoration to recreate parts, and in failure analysis to determine why a machine failed and improve its functionality. It also helps companies analyze existing designs, improve ergonomics, create compatible accessories, repurpose obsolete objects, build a digital twin, or regain lost designs for long-discontinued products and product-legacy archives.
Under the Defend Trade Secrets Act, a trade secret is information that derives value from not being generally known and not being readily ascertainable through proper means, so long as the owner used reasonable secrecy measures. See 18 U.S.C. § 1839(3). Critically, the DTSA defines improper means to include theft, bribery, misrepresentation, breach of duty, and espionage, but it expressly says improper means “does not include reverse engineering, independent derivation, or any other lawful means of acquisition” under 18 U.S.C. §§ 1839(3),(6). State trade secret law generally follows the same Uniform Trade Secrets Act model. In other words, reverse engineering a lawfully acquired product on the market is not an improper means of acquiring product design and information under U.S. trade secret law, even when the product embodies valuable trade secrets.
The Supreme Court’s decision in Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470 (1974), reinforces this principle. There, former employees left Kewanee and began using knowledge related to crystal-growing processes. The Court found that state trade secret protection does not conflict with federal patent law. The court explained that trade secret law protects against breaches of confidence and improper means, but does not prevent competitors from discovering the same information through legitimate reverse engineering techniques or independent development. In other words, even where valuable trade secrets exist, others remain free to use reverse engineering on a lawfully obtained product to discover its underlying design information.
Similarly, in Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141 (1989), the Supreme Court struck down a Florida statute that prohibited duplicating unpatented boat hull designs using a direct molding process. A competitor had copied a hull design from an existing boat, effectively working backward from a physical object to create a similar product. The Court held that the state law improperly granted patent-like exclusive rights to unpatented designs and conflicted with federal patent law, which allows copying of publicly available products. The Court emphasized that once a product is placed on the market, competitors may lawfully engage in analyzing products, including through reverse engineering, unless they employ improper means.
These authorities establish the baseline rule: performing reverse engineering on a lawfully acquired competitor’s product is often generally legal, even where the product embodies proprietary information or valuable trade secrets, so long as the reverse engineering process relies on proper means rather than conduct that would constitute misappropriation.
The core issue in determining the propriety of reverse engineering is how you gain access. Buying a product on the open market and analyzing it is ordinarily proper means under trade secret law. By contrast, using theft, deception, breach of a confidentiality agreement, or industrial espionage constitutes improper means.
In E.I. duPont deNemours & Co. v. Christopher, 431 F.2d 1012 (5th Cir. 1970), the defendants hired a pilot to take aerial photographs of DuPont’s methanol plant while it was still under construction and not yet enclosed. DuPont had taken reasonable steps to maintain secrecy from ground-level observation, but had not covered the facility from above. The Fifth Circuit held that this conduct constituted improper means, reasoning that although the information was visible from the air, the use of aerial surveillance to obtain proprietary information that was not otherwise readily ascertainable through normal inspection went beyond acceptable competitive practices.
Similarly, in Compulife Software Inc. v. Newman, 959 F.3d 1288 (11th Cir. 2020), the defendants accessed publicly available insurance quote data through the plaintiff’s website. While individual, manual queries by a human user could be considered proper means, the defendants deployed automated bots to extract massive volumes of data at a scale that ordinary users could not replicate. The Eleventh Circuit held that this type of automated scraping could qualify as improper means and enabled the collection of data in a manner inconsistent with normal access.
These cases illustrate that reverse engineering itself is not the problem. Rather, liability arises when performing reverse engineering involves such means as deception, circumvention, or automated overreach that enable a party to access confidential information or secret information in ways that go beyond legitimate market acquisition. In those circumstances, the conduct may constitute misappropriation, even if the end goal is to analyze a product or develop a competing design.
A marketed product does not automatically lose trade secret protection simply because it is sold to the public. The key inquiry under trade secret law remains whether the alleged secret is still not readily ascertainable through proper means, such as lawful reverse engineering of a publicly available product.
The Federal Circuit’s decision in ams-OSRAM USA Inc. v. Renesas Electronics America, Inc., 133 F.4th 1337 (Fed. Cir. 2025) illustrates how this principle operates in practice. In that case, the dispute involved semiconductor technology used in ambient light sensors embedded in consumer electronics. The plaintiff argued that certain design features and proprietary information within its chips constituted protectable trade secrets, while the defendant contended that those features could be discovered through standard reverse engineering techniques applied to chips available on the market. The court held that the relevant question was not whether the defendant had actually completed the reverse engineering process, but whether the information could have been obtained through proper means, i.e., by analyzing a lawfully acquired product using routine and straightforward engineering methods. Because the information was susceptible to such analysis, it was deemed readily ascertainable, and therefore not entitled to ongoing trade secret protection.
This reasoning aligns with longstanding Supreme Court precedent. In Bonito Boats (discussed above), the invalidated statute effectively barred reverse engineering of a physical object. The Supreme Court emphasized that once a product is placed into the public domain without patent protection, competitors are generally free to study and copy it using proper means, including working backward from the product itself.
These cases underscore an important limitation: the original manufacturer may gain a competitive advantage from secrecy at the outset, but once a product enters the market, that advantage can erode if competitors can lawfully gain access to the underlying design information through reverse engineering techniques. In practical terms, if a competitor’s product can be disassembled, analyzed, and understood using standard industry methods without resorting to improper means, then the information may no longer qualify as a protected trade secret, even if the reverse engineering process requires technical skill or detailed analysis.
Even when trade secret law permits reverse engineering, patent law may still matter. A patent gives the owner exclusive rights to exclude others from making, using, selling, offering to sell, or importing the claimed invention. So you may be free to study a product to determine how it works, but selling a reverse engineered product that falls within valid patent claims can still infringe. That is why a business can win the trade secret issue and still face legal action under patent law. See 35 U.S.C. § 271.
With proprietary software, engineers often lack access to the original source code, which leads them to use reverse engineering techniques, including disassembly into assembly language and analysis of data structures, to understand unprotected functional elements and enable interoperability. Courts have repeatedly addressed whether this type of analyzing and intermediate copying is permissible.
In Sega Enters. Ltd. v. Accolade, Inc., 977 F.2d 1510 (9th Cir. 1992), Accolade sought to develop video games compatible with Sega’s Genesis console. Because Sega’s interface specifications were not publicly available, Accolade disassembled Sega’s object code to identify the interface requirements. Sega brought legal action, arguing that this copying infringed copyright. The Ninth Circuit court held that Accolade’s intermediate copying constituted fair use because it was necessary to access unprotected functional elements and achieve interoperability with the console. The court emphasized that where disassembly is the only way to gain access to functional requirements, such use can be justified.
Similarly, in Sony Computer Entertainment, Inc. v. Connectix Corp., 203 F.3d 596 (9th Cir. 2000), Connectix created a PlayStation emulator that allowed Sony games to run on personal computers. To do so, Connectix engaged in extensive reverse engineering of Sony’s BIOS, including temporary copying during development. Sony argued this was infringing, but the Ninth Circuit again held that the reverse engineering was fair use. The court found that Connectix’s work was transformative because it produced a new platform and enhanced functionality, and that the intermediate copying was necessary to understand the system’s operation.
Congress has also provided limited statutory support for this type of activity. Under 17 U.S.C. § 1201(f), circumvention of technological protection measures is permitted when undertaken for the sole purpose of identifying and analyzing elements necessary to achieve interoperability of independently created software. Section 1201(j) similarly permits certain acts of reverse engineering for good-faith security testing, with authorization from the owner or operator of the computer system. These provisions reflect a recognition that performing reverse engineering can be essential to innovation, competition, and security, particularly where developers seek to create a similar product or compatible system.
At the same time, the boundaries remain contested. Reverse engineering of software may still implicate contract restrictions, licensing terms, or anti-circumvention rules, and improper use of proprietary information can still constitute misappropriation. As technology continues to evolve, especially with increasingly complex platforms and AI systems, the legality of reverse engineering software for interoperability remains an active and closely watched area of law.
Software disputes involving the reverse engineering of software often turn as much on contract law as on intellectual property law. Courts have repeatedly emphasized that how a party obtains access to software, data, or a system, and what restrictions govern that access, can determine whether performing reverse engineering remains lawful or crosses into improper means.
In Bowers v. Baystate Technologies, Inc., 320 F.3d 1317 (Fed. Cir. 2003), the dispute arose from competing computer aided design (CAD) programs. The defendant purchased the plaintiff’s software, which was distributed under a shrinkwrap license expressly prohibiting reverse engineering techniques, including decompilation. The defendant nevertheless analyzed the software to develop a competing product. The Federal Circuit held that the shrinkwrap agreement was enforceable and that violating the anti-reverse engineering clause constituted a breach of contract, even if federal copyright law might otherwise permit certain reverse engineering activities. The court reasoned that private parties can contractually waive rights that might otherwise exist under federal law. The key takeaway for businesses is that even if reverse engineering might be generally legal under trade secret law, contractual restrictions can independently prohibit it and create exposure to legal action.
By contrast, Aqua Connect, Inc. v. Code Rebel, LLC, No. CV 11-5764 RSWL (C.D. Cal. Nov. 5, 2012), addressed whether violating a license agreement automatically transforms reverse engineering into improper means under California’s Uniform Trade Secrets Act. In that case, the plaintiff alleged that the defendant improperly accessed and analyzed its remote desktop software to develop a competing product. Although the plaintiff pointed to end-user license agreement (EULA) restrictions, the court held that a mere breach of contract, standing alone, does not necessarily constitute improper means sufficient to support a trade secret misappropriation claim. In other words, while the defendant’s conduct might support a contract claim, it did not automatically establish that the defendant used prohibited or deceptive means to gain access to protected confidential information under trade secret law.
These cases illustrate a critical distinction: contractual restrictions can limit the ability to use reverse engineering, but not every contract breach rises to the level of trade secret misappropriation. That distinction becomes especially important in modern disputes involving online platforms and automated access. Courts have increasingly found that large-scale scraping using bots or circumvention of technical barriers may constitute improper means, particularly where access controls are bypassed or the method of analyzing data would not be feasible through ordinary means.
For businesses analyzing a competitor’s product, proprietary software, or online systems, the practical guidance is straightforward: before performing reverse engineering, carefully review all applicable licenses, clickwrap agreements, and terms of use. The legality of your method, your tools, and how you access the system can be just as important as the underlying engineering analysis itself.
On the hardware side, businesses commonly analyze printed circuit boards, electronic components, microprocessors, and other components when original files are missing. The workflow usually runs from scan capture to post-processing to CAD modeling, with quality checks against original specifications. Reverse engineering is used to create digital records, analyze existing products, recover missing design information, and preserve design intent for later development. That is especially valuable when a company wants to revive discontinued products, secure spare-part supply, or understand how a competitor’s product was assembled.
Reverse engineering is also central to cybersecurity. Security teams use reverse engineering, including decompilers, disassemblers, and other automated tools, to analyze software, identify buffer overflows, authentication flaws, malware behavior, and architectural weaknesses in code. This reverse engineering process often involves both static and dynamic analysis to better understand functionality, data structures, and potential vulnerabilities. At the same time, attackers use the same reverse engineering techniques to expose secret information, uncover proprietary algorithms, and exploit weaknesses in proprietary software systems.
Courts have increasingly addressed when such conduct crosses into improper means under trade secret law. For example, in Compulife Software Inc. (discussed above), the defendants use of automated bots to scrape large volumes of insurance quote data from a competitor’s website was far beyond what a human user could access. The use of bots to systematically extract data could constitute improper means and support a claim for misappropriation under the Defend Trade Secrets Act and Uniform Trade Secrets Act.
The legal risks become even more pronounced where access is obtained through deception or circumvention of safeguards. In United States v. Nosal, 844 F.3d 1024 (9th Cir. 2016), the Ninth Circuit held that using another person’s login credentials to gain access to protected systems after authorization had been revoked could violate federal law, highlighting how credential misuse can transform otherwise lawful analyzing or reverse engineering into unlawful conduct.
These principles are now being tested in the AI context. In OpenEvidence Inc. v. Pathway Medical, Inc., No. 1:24-cv-10471 (D. Mass. filed 2024), the plaintiff claimed that a competitor used stolen credentials and prompt-injection attacks to extract system prompts and other proprietary information from an AI platform. The allegations focus on whether such conduct constitutes improper means to obtain confidential information, rather than lawful reverse engineering of a publicly available system. While the case remains pending, it reflects a broader trend: as AI systems become more complex, companies are increasingly attempting to determine how models operate internally, raising difficult questions about whether extracting hidden prompts, weights, or outputs is permissible reverse engineering or unlawful acquisition of valuable trade secrets.
Reverse engineering for cybersecurity, such as vulnerability testing, malware analysis, and development of more secure systems, is legitimate when conducted through proper means. But using deception, bypassing authentication controls, or exploiting access mechanisms to obtain proprietary information can quickly shift the analysis and trigger legal action under trade secret, computer access, or contract law.
Reverse engineering of a lawfully acquired product is lawful, and it is a legitimate tool to analyze technology, improve existing designs, recover lost knowledge, secure software, and create better products. But reverse engineering is unlawful if you rely on deception, insider leaks, bot scraping, stolen credentials, or you violate binding anti-reverse-engineering clauses or patent rights. Companies can still defend trade secrets, but they do so through reasonable secrecy measures, contracts, patents, and technical controls, but not by pursuing parties engaged in post-sale reverse engineering analyses of a product in the marketplace.
If you have inquiries regarding the legality of a reverse engineering project, trade secret matters, or other intellectual property matters, contact our office for a consultation.
© 2026 Sierra IP Law, PC. The information provided herein does not constitute legal advice, but merely conveys general information that may be beneficial to the public, and should not be viewed as a substitute for legal consultation in a particular case.
Copyright litigation refers to the legal process of enforcing one’s rights in creative works through lawsuits in federal court to address unauthorized use of copyrighted works (“copyright infringement”). A copyright owner can sue in federal civil court to stop the alleged infringement and recover damages, if they have gone through the copyright registration process for the infringed work. The copyright litigation process is time-consuming and expensive, but it is a necessary process for protecting valuable creative works like music, literature, visual arts, and other works that include creative expression. We discuss herein copyright litigation, covering what acts qualify as infringement, how lawsuits are pursued, common related claims, defenses to copyright claims (e.g., fair use), and remedies available to the copyright owner.
Copyright is a form of intellectual property (IP) that protects original creative works. It covers a broad range of works, including literature (blog posts, novels, movie scripts, etc.), music (sound recordings and written compositions), visual arts (photos, paintings, illustrations), motion pictures and other audiovisual works, theatrical works, and even architecture. If you or your business create content in any medium, that content may be protected under U.S. copyright law.
Owning a copyright gives the creator (or copyright owner) a bundle of exclusive rights in the work. Under the Copyright Act, these rights include: (1) reproducing the work (making copies); (2) creating derivative works based on it (e.g. adaptations or sequels); (3) distributing copies of the work to the public; (4) publicly performing the work; and (5) publicly displaying the work. In 1995, a sixth right was added for sound recordings: the exclusive right to perform the recording via digital audio transmission. In essence, only the copyright owner (or those they authorize) may exercise these rights. If someone else does any of these without permission, it likely infringes the copyright.
It is also important to understand what copyright does not protect. Copyright safeguards the expression of ideas, but not the underlying ideas or facts themselves. It does not cover names, logos, slogans, or brand names; those are typically protected by trademark law. Similarly, functional inventions or processes are covered by patents, not copyright. Content created by the U.S. government or in the public domain is not protected by copyright. This means, for example, that while a novel or software code you wrote is protected, a general idea for a marketing strategy or a common symbol is not. Understanding these boundaries will help you recognize what falls under “copyright issues” and what might be outside copyright’s scope.
Copyright infringement occurs when someone violates one of the copyright owner’s exclusive rights without authorization. In practical terms, this means using a protected work in a way reserved for the owner, such as copying text or images from a website, distributing music or videos without a license, publicly displaying someone’s photo or artwork, or creating an unauthorized derivative like a knock-off design, all without the copyright owner’s permission. Even well-meaning businesses can inadvertently commit infringement by using content found online or hiring a contractor who uses “borrowed” material. If that happens, your company could be sued and potentially held liable for damages.
To succeed in a copyright infringement lawsuit, the plaintiff (copyright owner) must prove two key elements. First, the plaintiff must show ownership of a valid copyright in the work. This typically involves demonstrating that the work is original and fixed in a tangible form (written, recorded, saved digitally, etc.). Second, the plaintiff must prove that the defendant infringed, i.e., that the defendant copied protected expression from the plaintiff’s work without permission. Often, direct evidence of copying is unavailable, so courts look for substantial similarities between the plaintiff’s work and the defendant’s work, plus evidence that the defendant had access to the original, since independent creation of the same content would not infringe.
In straightforward cases, infringement can be shown by a defendant’s unauthorized use. For example, selling pirated copies of a book or software is clear-cut infringement. In more complex cases, such as when only a portion of a work, courts will filter out unprotected elements, such as general ideas or common scenes, and ask whether the defendant took enough original expression to constitute improper appropriation. If only the general idea or concept was similar, it may not be infringement, but if the particular expression was copied, the court may find infringement. For example, in Twentieth Century-Fox Film Corp. v. MCA, Inc., 715 F.2d 1327 (9th Cir. 1983), the Ninth Circuit held that summary judgment was improper where Fox alleged that Universal’s Battlestar: Galactica copied protected expression from Star Wars. Fox claimed that the television series appropriated numerous specific expressive similarities from the film, including plot elements, character relationships, settings, and sequences. The Ninth Circuit concluded that the similarities raised genuine issues of material fact as to whether defendants copied only the unprotectable idea of a space fantasy adventure or instead copied protectable expression, making the issue one for trial.
It is worth noting that intent is not required for civil infringement liability, even unintentional or unaware copying can infringe. However, willfulness (knowing infringement) can increase the penalties, as discussed below. The bottom line is that if your business uses content created by someone else, whether it’s text, images, music, software code, or architectural plans, you should ensure you have the right to do so, or you risk a potential infringement claim.
Copyright protection exists automatically as soon as an original work is fixed in a tangible medium, and registration is not required to own a copyright. However, U.S. law requires a copyright to be registered with the U.S. Copyright Office before the copyright owner can file an infringement lawsuit in federal court. In other words, while unregistered works are still protected, you cannot sue over an unregistered U.S. work until you obtain a copyright registration certificate, a rule recently affirmed by the Supreme Court. This makes registration an essential step if you need to enforce your rights and provides many benefits. The registration process involves depositing a copy of the work with the Copyright Office and paying a filing fee, after which the Office issues a certificate of registration. Fortunately, the registration process can be done online and is relatively inexpensive compared to litigation costs.
Beyond being a legal prerequisite to sue, registration comes with additional benefits in litigation. Most importantly, if you registered your work before an infringement began or within 3 months of the first publication of the work, you are eligible to seek statutory damages and attorney’s fees from an infringer. Statutory damages are set amounts of money per work infringed, defined by statute, which the plaintiff can elect instead of proving actual damages. This means even if you cannot quantify your loss, the court can award between $750 and $30,000 per infringed work without requiring detailed proof. If the infringement was willful, the court can increase statutory damages up to $150,000 per work as a punishment. Additionally, the Copyright Act gives courts discretion to order the losing party to pay the prevailing party’s attorney's fees. Together, the availability of statutory damages and fee-shifting gives registered copyright holders significant leverage. The risk of having to pay hefty damages and the other side’s legal bills often pressures defendants into settlement. Conversely, if you never registered your work before the infringement, you will be limited to actual damages and the infringer’s profits and cannot recover attorney's fees, which may make a case less economically feasible to pursue. The takeaway for businesses is clear: if you have valuable original content (e.g., software, writings, designs, etc.), register it early to preserve your full range of remedies in case of litigation. The Copyright Office’s public records also put others on notice of your claims, which can help deter infringement in the first place.
Copyright litigation is generally a federal matter. Copyright is governed by federal statute (Title 17 of the U.S. Code), so lawsuits must be brought in federal court. In fact, federal courts have exclusive jurisdiction over copyright claims, meaning state courts usually cannot hear copyright infringement cases. Many copyright suits arise in industry centers like California and New York. For example, the Ninth Circuit, which is the federal appeals court covering the West Coast, and the Second Circuit, which is the federal appeals court covering New York, are widely regarded as two of the most important jurisdictions for copyright law developments. This is no surprise, as California’s entertainment and software industries and New York’s publishing and media industries generate a large share of U.S. copyright disputes. However, a lawsuit may be filed in any federal district that has a connection to the dispute, typically where the defendant resides or where the infringement took place. For instance, if an infringing product was distributed nationwide, the plaintiff might have a choice of forums. The choice of venue can sometimes impact how the law is interpreted, since different circuits have slightly different precedents, but the core copyright principles are federal and thus similar across jurisdictions.
Timing is another important consideration. Copyright claims are subject to a statute of limitations. In the U.S., the Copyright Act provides that a civil action must be commenced “within three years after the claim accrued” under 17 U.S.C. § 507(b). In some copyright cases, courts apply an injury rule, under which a claim accrues when the infringing act occurs. In other cases, courts have applied a discovery rule, under which a claim accrues when the plaintiff discovers, or reasonably should have discovered, the infringement.
The Supreme Court has stated that it has not definitively resolved whether the Copyright Act always incorporates a discovery rule, but in Warner Chappell Music, Inc. v. Nealy, 601 U.S. 366 (2024), it addressed the question of whether damages dating back more than three years are available where the claim is timely under the discovery rule. In Nealy, the plaintiff alleged that music rights had been exploited without authorization for many years, but he claimed he did not discover the alleged infringement until much later. The defendants argued that even if the suit was timely under a discovery-based accrual rule, the plaintiff still could not recover damages for infringements occurring more than three years before the complaint was filed. The Supreme Court rejected that separate three-year damages cap. Assuming the claim is timely under the applicable accrual rule, the Court held that the Copyright Act does not impose an additional bar that automatically limits recovery to only the three years immediately preceding suit.
Business owners who suspect their work is being infringed should act diligently and seek legal advice promptly, rather than “sleep on their rights.” On the flip side, if your business is accused of infringement long after the fact, the statute of limitations could be a defense. For instance, if a plaintiff knew of an unauthorized use for over three years and did nothing, their claim might be time-barred.
It is also worth noting that not every potential defendant can be sued in copyright. Thanks to the Eleventh Amendment and principles of state sovereign immunity, state government entities and state universities, agencies, etc. are generally immune from copyright infringement suits. In 2020, the U.S. Supreme Court unanimously held that Congress’s attempt to allow copyright suits against states, the Copyright Remedy Clarification Act, was unconstitutional, and therefore states cannot be sued for copyright infringement without their consent. This means if, say, a public university or state government office infringes your work, your remedies may be limited, unless Congress crafts a new valid law. Private parties and corporations, however, have no such immunity and can be sued for infringement like anyone else. Additionally, foreign defendants can be sued in U.S. courts for acts of infringement that have sufficient connection to the United States, though jurisdictional and enforcement issues can arise in international cases. In any event, it is crucial to file in the proper court and within the allowed timeframe to ensure your copyright claims are heard.
A copyright lawsuit follows the same general trajectory as other civil litigation, but there are some features particular to IP cases. Typically, the process begins with the copyright owner (plaintiff) sending a cease and desist letter or takedown notice to the alleged infringer. If the dispute isn’t resolved informally, the plaintiff files a complaint in federal court. The pleadings stage will frame the claims and defenses. For example, a complaint might allege that “the defendant reproduced and distributed the plaintiff’s software without authorization, infringing the plaintiff’s exclusive rights under 17 U.S.C. §106,” and the defendant’s answer may deny the allegations and possibly raise defenses, like fair use or invalidity of the copyright.
After pleadings, the case enters discovery, where each side exchanges information and evidence. This can involve document production, such as sales records of an allegedly infringing product, or proof of the plaintiff’s ownership and registration; depositions of witnesses; and expert reports. Copyright cases often require expert testimony, especially on issues like substantial similarity of music or code, or to calculate damages. For instance, an expert might opine on the portion of the defendant’s profits attributable to the infringement. Copyright litigation can be complex and costly, even when the monetary stakes of the infringement seem limited because of the need for expert analysis, extensive evidence gathering, and other factors.
It is common for either party to file a summary judgment motion after discovery. In a summary judgment motion, a party argues that there are no genuine disputes of material fact for a jury to decide, and that they are entitled to judgment as a matter of law. For example, an accused infringer might move for summary judgment that the works are not substantially similar, or that the use is protected by fair use, thus no trial is needed. Courts in some circuits have been willing to decide lack of substantial similarity as a matter of law and dismiss cases early if the works are clearly different. In other circuits, courts are more cautious, often finding that as long as there is some similarity, the question of substantial similarity should go to a jury, making summary judgment for the defense harder to obtain. If the case is not resolved on motions, it will proceed to a trial, where a judge or jury will determine whether infringement occurred and what damages or relief should be granted.
Throughout this process, parties will often discuss settlement. The reality is that full trials are relatively rare in copyright cases. Many disputes end before reaching the verdict stage. One reason is that litigation can be expensive and time-consuming, costing hundreds of thousands of dollars if the process is taken through trial to a verdict. Cases can take a year or more to resolve, imposing distractions and legal fees on both sides.
Recognizing this, Congress recently created an alternative forum called the Copyright Claims Board (CCB) as part of the 2020 CASE Act. The CCB is a small-claims tribunal within the Copyright Office that provides a voluntary alternative to federal court for smaller disputes. It can hear claims of up to $30,000 in damages, using a streamlined process without extensive discovery or in-person hearings. The CCB cannot issue injunctions, though it can order an infringer to stop if both parties agree, but it offers a lower-cost path to resolve minor infringements. Business owners with a relatively small copyright claim may consider the CCB as an option to avoid the full federal litigation process. However, both parties must voluntarily participate. A respondent can opt out, forcing the claimant to go to federal court. For larger or more complex cases, traditional federal litigation remains the main avenue.
Copyright litigation often doesn’t exist in a vacuum. In many cases, a plaintiff will assert multiple intellectual property claims in the same lawsuit. For instance, if someone is selling bootleg copies of a motion picture, the movie studio might sue for copyright infringement and for trademark infringement if the bootleg uses the studio’s logos or the movie’s branded characters to market the product. Copyright is just one segment of IP; other types include patents, trade secrets, and trademarks. It is not uncommon for a dispute to touch on more than one area. A classic example is when a business believes a competitor stole its creative content and is engaging in misleading practices in the marketplace. The competitor’s actions might violate copyright law and also constitute trademark infringement or unfair competition under broader business tort principles.
U.S. law allows plaintiffs to bundle such related claims in one suit. Unfair competition is a particularly common add-on claim in IP lawsuits. Unfair competition law, at its core, aims to prevent deceptive or unethical business practices that aren’t specifically covered by other IP laws. As one firm explains, unfair competition claims are often included alongside trademark and copyright infringement claims to address misconduct that falls outside the precise scope of those laws. For example, if a former employee takes your company’s confidential client list and creative marketing content, you might sue them for trade secret misappropriation for stealing secret information and for copyright infringement for copying original text or graphics, and also add an unfair competition claim for the overall unethical scheme. Unfair competition can encompass things like passing off one’s goods as another’s, false advertising, idea theft in certain circumstances, and other misrepresentations in commerce. Note that some unfair competition claims may be preempted by the Copyright Act if they don’t involve an extra element beyond copying the work, but many claims can coexist with a copyright claim.
Trademark infringement is another claim that frequently overlaps with copyright disputes. Trademarks protect names, logos, and identifiers of source, such as character names, brand logos, or band names. If an alleged infringer is not only copying your content but also using your brand name or logo, you would pursue trademark claims under the Lanham Act in addition to copyright. In fact, a single unauthorized venture can trigger several IP claims. Imagine someone screens your company’s film without permission and uses your characters’ images and movie title to advertise the event. Such a situation involves copyright infringement (the unauthorized public performance of the film) and trademark infringement (unauthorized use of protected names in advertising). A copyright plaintiff could also file for trademark infringement if the infringed property has branded aspects used in commerce, such as character names or logos.
Finally, breach of contract or other civil claims might be present. For example, if the parties had a license agreement or employee agreement and one party exceeded their permissions, a breach of contract claim would accompany the copyright claim. In summary, parties in IP disputes often cast a wide net: plaintiffs often assert claims for copyright infringement alongside trademark infringement, unfair competition, breach of contract, and more in the same lawsuit. As a business owner, it’s useful to recognize that an infringement scenario may implicate multiple legal issues. Conversely, if your business is accused of infringement, be aware the plaintiff might allege related wrongdoing, like claiming your marketing amounted to false advertising or that you breached some implied agreement. These overlapping claims increase the stakes of litigation, but sometimes also present additional defenses. Each type of claim has its own elements and defenses, so consult with an IP attorney to navigate the multi-faceted dispute.
The rise of the internet and digital media has brought special challenges to copyright enforcement. When infringement happens online, such as users uploading music, videos, or images to websites or social media without permission, the question arises: who is liable, the user or the platform hosting the content or both? In the late 1990s, to foster growth of internet services, Congress passed the Digital Millennium Copyright Act (DMCA), which includes provisions that create a safe harbor for online service providers. See 17 U.S.C. §512. In short, the DMCA safe harbor protects internet platforms from monetary liability for copyright infringement committed by their users, as long as the service meets certain conditions. These conditions include: (1) the service provider must not have actual knowledge of the infringing material on its system and not be “willfully blind” to obvious infringement; (2) if the provider becomes aware of infringement, for example, via a proper takedown notice from a copyright holder, it must act expeditiously to remove or disable access to the infringing material; and (3) the provider must not receive a direct financial benefit from the infringement in cases where it has the right and ability to control the activity. In practice, compliance often means having a registered DMCA agent, a published takedown policy, and promptly removing content when a valid notice is received.
For example, imagine your company runs a video-sharing website. One of your users uploads a popular song or movie without authorization. Under the DMCA, if you swiftly take down that content once you are notified, your company would likely be shielded from liability for that user’s post if you were not aware of it beforehand. Generalized knowledge that “there’s probably some infringement on our platform” is not enough to lose safe harbor; the courts require knowledge of specific infringing material. The Second Circuit emphasized this in Viacom Int’l, Inc. v. YouTube, Inc., 676 F.3d 19 (2d Cir. 2012). In that case, media company plaintiffs claimed that YouTube hosted thousands of unauthorized clips of television shows and other copyrighted programming uploaded by users. Plaintiff Viacom argued that YouTube was generally aware that infringing material was widespread on its platform. The U.S. District Court granted summary judgment in YouTube’s favor, finding that YouTube fell within the DMCA safe harbor for all the claims asserted by the plaintiffs regarding the alleged copyright infringement on its platform. The court noted that YouTube had a robust notice-and-takedown system and that placing the burden on content owners to notify platforms of infringing material “makes sense, as the infringing works in suit may be a small fraction of millions of works” on the platform. In other words, an internet service with millions of user uploads cannot realistically screen everything for licenses or fair use, so the law shifts the policing burden to copyright owners – they send notices of specific infringing material, and the service must respond quickly.
The Second Circuit held, however, that generalized awareness of infringement on a platform is not enough to disqualify a service provider from DMCA safe-harbor protection; instead, the provider must have actual knowledge or “red flag” awareness of specific infringing material. As long as the service provider does not have actual or “red flag” knowledge of a particular infringement and is not inducing users to infringe, it can avoid being held liable for the infringements of its users.
For business owners, the DMCA safe harbor is crucial if your business model involves user content. By registering an agent with the Copyright Office and implementing DMCA-compliant policies, you can significantly reduce the risk of copyright liability from user posts. However, note that the safe harbor will not protect you if your own company is directly posting infringing content, nor if you encourage or induce infringement. In Metro-Goldwyn-Mayer Studios Inc. v. Grokster, Ltd., 545 U.S. 913 (2005), the Supreme Court held that distributors of peer-to-peer file-sharing software could be liable for induced copyright infringement where the services were marketed to former Napster users, the companies promoted the software as a way to obtain copyrighted music and movies for free, and their business model depended on high-volume infringing use by users. The Court explained that a party that distributes a product “with the object of promoting its use to infringe copyright” may be liable for the resulting third-party infringement.
Also, the DMCA safe harbor does not categorically bar injunctive relief. Section 512 limits monetary relief for qualifying service providers, but it expressly preserves certain forms of injunctive and other equitable relief under subsection (j), including orders directed at restraining access to infringing material or accounts involved in repeat infringement.
In summary, the DMCA provides powerful protections for online services, but compliance and a neutral stance are key. If your business is the one whose content is being infringed online, the DMCA also provides a tool for you as a copyright holder: you can send takedown notices to platforms hosting infringing copies of your work, and they are obligated to remove the material or potentially lose their immunity.
Being accused of copyright infringement does not automatically mean you will be held liable. There are several defenses and exceptions to infringement in copyright law. The most well-known is fair use. Codified in Section 107 of the Copyright Act, fair use permits certain uses of copyrighted material without permission if the use is considered socially beneficial or unlikely to harm the copyright owner’s market. Fair use is a somewhat flexible doctrine, evaluated case-by-case by weighing four statutory factors:
Courts ask why and how you used the work. Uses for criticism, comment, news reporting, teaching, scholarship or research are explicitly mentioned as examples of favored purposes. Nonprofit or educational uses are more likely fair than purely commercial ones. Transformative uses, those that add new meaning or message to the original, rather than just republishing it, also weigh in favor of fair use, as recent court decisions have emphasized. For example, a parody song that mocks the original is transformative, whereas simply using a song as background music in a commercial is not.
This factor looks at the type of work used. Using factual or informational works is more likely to be fair use than using highly creative works (e.g., songs or novels), since creative works sit at the core of copyright. Also, using unpublished works is viewed less favorably because the law favors the author's or owner's right to control the first publication.
Here, the court considers both the quantity and the quality of what was taken. Using a small, necessary excerpt of a work may be fair, but using the “heart” of the work might weigh against fair use. There is no strict rule on amount. For example, copying 200 words from a 300-page book could be fair, whereas copying 30 seconds of a 3-minute song might not be, if those 30 seconds are the hook of the song.
Perhaps the most important factor, this looks at whether the secondary use harms the existing or potential market for the original work. If the use acts as a substitute for the original, it will likely weigh against fair use. For example, if people watch your summary of a movie instead of buying the movie, this factor will weigh against a finding of fair use. If the use is in a different market and doesn’t usurp demand (e.g., a few lines of a song in a historical documentary), this factor can favor fair use.
No single factor is determinative; courts balance them together. Fair use is famously unpredictable, which can be frustrating. However, some categories of use have generally been upheld as fair use: quoting text for a book review or academic commentary, parodying a popular work, using a short clip or still image in a news report, or creating a search engine thumbnail image index. On the other hand, uses that simply save the user the cost or effort of purchasing the original, such as sharing full copies of music, movies, or software, are routinely found not to be fair use. A recent Supreme Court decision in 2023, Andy Warhol Foundation for the Visual Arts, Inc. v. Goldsmith, 598 U.S. 508 (2023), underscored that even transformative intent does not guarantee fair use. In that case, photographer Lynn Goldsmith took a 1981 photograph of Prince, and Vanity Fair initially licensed the photograph for use as an artist reference. Andy Warhol later created a series of Prince images based on that photograph, and after Prince’s death, the Warhol Foundation licensed one of those images to Condé Nast for a magazine cover. The Supreme Court held, in the context of that commercial magazine licensing, that the first fair-use factor did not favor fair use because the secondary use shared substantially the same commercial purpose as Goldsmith’s original photograph. The Court emphasized that each challenged use must be examined in its specific context. The key for businesses is that they should not assume a use is fair simply because credit was given or because the use was not highly profitable. Fair use is a legal defense that would ultimately be decided by a judge or jury if litigated. When in doubt, seek a license or consult counsel, especially for any commercial use of someone else’s content.
Aside from fair use, other defenses and exceptions exist. One is consent or license. If you actually had permission or an implied license to use the work, then there is no infringement. For example, if a photographer licensed you an image for your website, you can defend an infringement claim by showing that license. Invalid copyright is another defense: the defendant might argue the plaintiff’s work is not protected. For example, the defendant may argue that the work is too factual or not original. In some cases, defendants claim independent creation. Another defense is de minimis use, which means the copying was so minor as to be trivial. Courts sometimes accept this when the copied portion is extremely small or unrecognizable in the defendant’s work. First Sale doctrine permits resale of lawfully made copies, which is not exactly a defense to making copies but allows, say, reselling purchased books or DVDs without infringement. There are also specific statutory exceptions for things like library archiving, some educational performances, and others that likely won’t apply to most business contexts.
If your business is accused of infringement, it’s important to evaluate these defenses. Sometimes a strong fair use argument or proof of a license can lead the other side to drop the case or result in a quick win on summary judgment. On the flip side, if you are the plaintiff, be prepared that the defendant may invoke fair use or other defenses. Many high-profile cases have turned on the fair use analysis, which can be somewhat subjective. Ultimately, fair use and other defenses are highly fact-specific. Courts will consider the nuances of your situation, which is why getting legal advice on the strength of a fair use position is wise before banking on it.
If a copyright infringement claim is proven, the focus shifts to remedies: what the court will award or order to right the wrong. Copyright law provides both injunctive relief (an order to stop the infringement) and monetary damages to compensate the owner and/or disgorge the infringer’s gains.
Injunctive relief is often the first thing a copyright owner seeks. Because every unauthorized copy or distribution is a new violation of the exclusive rights, ongoing infringement can cause harm that money alone cannot fix. It can devalue the work, harm the market, or damage the creator’s control over their creation. A court can issue a preliminary injunction early in the case to halt the activity while the case is pending and a permanent injunction after a final judgment to prohibit the defendant from infringing the work in the future.
To get a permanent injunction, a plaintiff must satisfy the traditional equity test, including demonstrating irreparable harm if the infringement were to continue. In the past, courts often presumed irreparable harm from copyright infringement, but after the Supreme Court’s decision in eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388 (2006), courts require actual evidence of irreparable harm rather than applying any automatic presumption. For example, in Perfect 10, Inc. v. Google, Inc., 653 F.3d 976 (9th Cir. 2011), the plaintiff, an adult entertainment publisher and owner of copyrighted photographs, sued Google over its display of thumbnail versions of Perfect 10’s images in Google Image Search and its linking to third-party websites that displayed allegedly infringing full-size copies. The Ninth Circuit court affirmed the denial of injunctive relief, holding that Perfect 10 had not met its burden to show irreparable harm caused by Google’s conduct. In many straightforward cases, however, it is not hard to show that an unlicensed use undermines your exclusive rights in a way that money cannot fully repair, especially if the infringement is continuous or threatens your market.
Courts commonly grant injunctions to stop infringing activities once liability is established, preventing further unauthorized distribution or display of the copyrighted material. An injunction might order the destruction or impounding of infringing goods, the removal of infringing content from websites, or other steps to cease the violation. For business owners, this means that if you lose an infringement case, you will likely be legally barred from any further use of the work. Violating an injunction can lead to contempt of court. If you’re the plaintiff, an injunction is a powerful tool to regain control over your work and avoid future infringement by that defendant.
U.S. copyright law offers two main types of damages: actual damages plus any of the infringer’s profits, or statutory damages. The plaintiff typically must choose one or the other. Actual damages aim to compensate the copyright owner for the losses suffered due to the infringement. This could include lost sales, lost licensing fees, or diminution of the work’s value. In addition, the plaintiff can seek to recover the profits the defendant earned from the infringement, to the extent those profits are not already counted in the actual damages. The law only permits disgorging profits attributable to the infringement. The plaintiff has to show a causal link. For instance, if a defendant’s advertisement used your photo, you might claim the ad helped generate sales, and seek those profits. Once the plaintiff shows the gross revenue the defendant made from the infringing activity, the burden shifts to the defendant to prove which portions of that revenue were not due to the infringing material. In some cases, this actual damages route can yield large awards, especially if the infringement involved a hit product or was widespread. However, calculating and proving actual damages can be complicated and often requires financial experts.
Statutory damages, on the other hand, are often a more straightforward option, if the work was registered in time. Statutory damages do not require proving any specific loss or profit. The Copyright Act provides a range of $750 to $30,000 per infringed work for ordinary infringements, “as the court considers just.” The judge or jury can decide an amount in that range based on the circumstances (e.g. how egregious or willful the infringement was, the need to deter, etc.). If the infringement is found to be willful, the maximum per-work statutory award can go up to $150,000. Conversely, if the infringer proves they were not aware and had no reason to know they were infringing (an “innocent infringer”), the minimum can drop to $200 per work.
In practice, courts have broad discretion within these ranges. Statutory damages serve both compensatory and deterrent purposes. Even if an infringement caused little measurable harm, the court might award a significant sum to penalize the behavior and deter others. For example, in cases against small businesses or individuals who use images without a license, courts still frequently award at least the minimum or more, to reinforce that infringing is more expensive than simply licensing the content. Some copyright holders, particularly music publishers and photographers, are known for suing over relatively minor infringements precisely because statutory damages and attorney's fees make it economically viable to do so. As a defendant, you should be aware that even if the actual harm was minimal, you could face a statutory damages award of several thousands of dollars per work. And if multiple works were infringed (e.g., 10 songs or 50 photos), the damages can multiply quickly.
In addition to damages, the court may order the losing party to pay the prevailing party’s attorney’s fees and court costs, under 17 U.S.C. §505, but such an award is discretionary, not automatic. The statute expressly provides that “the court in its discretion may” award costs and “a reasonable attorney’s fee to the prevailing party.”
The Supreme Court has made clear that this discretion applies equally to prevailing plaintiffs and prevailing defendants. In Fogerty v. Fantasy, Inc., 510 U.S. 517 (1994), the Court rejected the idea that prevailing copyright plaintiffs should ordinarily recover fees while prevailing defendants should face a higher bar. Instead, courts must treat both sides alike and decide fee requests based on equitable considerations, not a one-sided presumption.
The Supreme Court later clarified how courts should exercise that discretion in Kirtsaeng v. John Wiley & Sons, Inc., 579 U.S. 197 (2016).The Supreme Court stated that “substantial weight” should be given to the objective reasonableness of the losing parties position, whether it be plaintiff's asserted claims and the defendant's defenses. Those circumstances may include factors such as frivolousness, motivation, compensation, and deterrence. In other words, objective reasonableness is important, but it is not controlling, and there is no strong presumption that fees will be awarded simply because one side prevailed.
As a practical matter, this means a business that wins a copyright case may recover attorney’s fees, but should not assume that fees will automatically be awarded. Likewise, a party with a weak, unreasonable, or strategically abusive position faces a greater risk that the court will shift fees under § 505.
Finally, for truly egregious cases, criminal penalties may apply. While ordinary infringement is a civil matter, willful infringement done for commercial advantage or private financial gain can lead to criminal charges by the Department of Justice. Typically, criminal copyright infringement involves large-scale piracy: e.g. a bootleg DVD ring, or an operator of a pirate software website. Criminal infringement can result in fines and even imprisonment. For example, willfully infringing copyrights (e.g., distributing copies worth over $2,500) can be punishable by up to 5 years in prison and $250,000 in fines for a first offense. And each act can count as a separate offense.
The DOJ must prove willfulness, meaning knowledge that the act was infringing, and usually some level of distribution or profit motive. For instance, someone who knowingly uploads a movie to the internet for free, right before the studio’s release, thus harming the commercial value, could be charged on the theory they intended to harm the market for commercial gain of others. In sum, criminal enforcement is relatively rare and typically not a risk for inadvertent infringement by a small business, but it underscores the seriousness with which large-scale, intentional infringement is viewed.
Most copyright disputes involving businesses are resolved out of court, often through negotiated settlements. Litigation is expensive and unpredictable, so both sides frequently have an incentive to reach a deal. A settlement might involve the defendant stopping the infringing use and perhaps paying a license fee or damages, or even a favorable settlement permitting some continued use under agreed conditions. For example, in Viacom International Inc. v. Cablevision Systems Corp., No. 1:11-cv-04265 (S.D.N.Y. filed June 23, 2011), Viacom sued Cablevision after Cablevision launched its “Optimum App,” which allowed cable subscribers to stream live television programming, including Viacom channels, to iPads within their homes over Cablevision’s cable system. Viacom alleged that this feature exceeded Cablevision’s contractual rights and asserted claims for breach of contract, copyright infringement, trademark infringement, and unfair competition.
The case ended in a settlement that allowed Cablevision’s service to continue with certain limitations rather than being shut down outright. Reports at the time explained that the settlement permitted cable subscribers to view content on additional in-home screens, including tablets, reflecting a negotiated business solution instead of a merits ruling by the court. This illustrates how a creative settlement can resolve IP disputes without a winner-take-all court judgment.
If your business is accused of infringement, you should address it immediately. Don’t ignore cease-and-desist letters or DMCA takedown notices. Often, there is room to resolve the issue amicably, perhaps by promptly removing the content, paying a retroactive license fee, or entering a new license going forward. An early consultation with a copyright attorney can help you evaluate the claim’s validity and negotiate from a position of knowledge. As one law firm advises, if you receive an infringement notice or demand, you should consider contacting an attorney familiar with copyright litigation promptly to assess your potential exposure and options. Sometimes a quick response and willingness to cure the problem can prevent a full-blown lawsuit. If a lawsuit is filed, settlement can still occur at any stage, even after judgment, though earlier is usually better to control costs.
On the proactive side, businesses should implement preventive measures to avoid infringing others’ copyrights in the first place. Train your employees and content creators about copyright rules. For instance, employees can be trained to use stock images with proper licenses, writing original copy or verifying that any source material is public domain or licensed, and being cautious with music or footage in marketing materials. Employers should establish appropriate internal policies. For example, legal or managerial approval should be required before using third-party content in any project. These steps can significantly reduce the risk of accidental infringement. The ultimate goal is never to be accused in the first place, and measures like employee training and clear procedures can help protect your company from copyright litigation. Also, if your business relies on user-generated content, have a DMCA policy and content moderation practices to swiftly address complaints. This not only helps with safe harbor protection but also shows good faith.
Lastly, remember that competent legal counsel is invaluable in navigating complex copyright matters. Copyright law has many nuances and evolving case law. An experienced attorney can assist clients in both enforcing their rights and defending against claims. They can also help negotiate licenses or settlements that avoid litigation entirely. Speaking with a lawyer who has litigated copyright disputes can help manage the risk and expense of a potential lawsuit. In other words, a bit of legal guidance up front can save you from costly lessons later.
Copyright litigation involves a myriad of legal and practical issues, but understanding the basics can help business owners avoid infringement and deal effectively with infringement claims if they do arise. We have seen that copyright law grants creators exclusive rights and provides strong remedies to enforce those rights, from injunctions stopping infringing activities to hefty statutory damages against violators.
When disputes do arise, remember that early resolution is often preferable. Litigation in federal court is a serious undertaking with high stakes. By being proactive and informed, and by consulting legal professionals when needed, you can significantly reduce the risk of copyright issues derailing your business. Every business should treat copyright matters with the importance they deserve. If you need assistance with a copyright infringement issue or other intellectual property matter, contact our office for a consultation.
© 2026 Sierra IP Law, PC. The information provided herein does not constitute legal advice, but merely conveys general information that may be beneficial to the public, and should not be viewed as a substitute for legal consultation in a particular case.
When a company develops valuable technology, processes, or business information, one of the most important considerations is how to protect it. Both trade secret protection and patent protection are powerful tools for protecting intellectual property, but their applicability and benefits vary for different kinds of innovations. Understanding how each form of IP protection works helps business owners determine the best strategy for protecting technology, methods, or other commercially valuable information. The choice between trade secret vs patent protection can significantly affect your competitive advantage, your intellectual property rights, and the long-term value of your business. We explain herein the key differences between trade secrets and patents, the legal framework behind them, and how to determine which option may be right for your business.
A trade secret is confidential information that derives economic value from not being generally known and is subject to reasonable efforts to maintain secrecy. Trade secret law is primarily governed by the Defend Trade Secrets Act at the federal level, 18 U.S.C. § 1836, and the Uniform Trade Secrets Act at the state level, which has been adopted in many states.
Under these laws, information qualifies as a trade secret if it:
Trade secrets can protect a wide range of information, including: manufacturing processes, proprietary technology, algorithms, customer lists, chemical formulas, and pricing and business strategies. Because trade secrets can protect commercially valuable information that is not publicly known, they can cover a broader range of information than just patentable inventions.
Patent protection grants the inventor exclusive rights to an invention for a limited period. Under 35 U.S.C. § 154, utility patents generally provide protection for 20 years from the filing date of the patent application, although certain adjustments may apply. During that period, the patent owner receives the legal right to stop others from making, using, selling, offering to sell, or importing the patented invention without permission.
To obtain a utility patent, an inventor must submit a patent application to the United States Patent and Trademark Office (USPTO). The patent application is then placed in the examination system for assignment to a patent examiner. There is a significant backlog of patent applications with the USPTO, and assignment to an examiner will take several months. Once the application is assigned, the examiner will conduct a search of the prior art (relevant public information that was available before the application was filed) and examine the application to determine whether it meets the statutory requirements of an invention.
Here is a general overview of the steps of the patent application process:
The applicant must provide a detailed written description of the invention. The patent specification must explain the invention clearly enough that a person skilled in the relevant field could understand and practice the invention without undue experimentation. This disclosure requirement is set out in 35 U.S.C. § 112 and is a central requirement of a patent application because it ensures that the public receives the technical knowledge contributed by the inventor. That is what is provided by the inventor in exchange for the patent protection provided to the inventor. This is the quid pro quo of the US patent system.
After the application is filed, the examiner evaluates whether the invention satisfies several statutory requirements for a United States patent, including:
If the examiner finds issues with the patent application, the USPTO issues an office action explaining the objections or rejections. The applicant then has an opportunity to respond by amending claims or presenting legal arguments. Multiple rounds of examination may occur before the application is allowed or finally rejected.
The patent process can be time consuming and often takes several years from the initial filing date to issuance. Successful patent applications can cost many thousands of dollars when attorney fees, government application fees, and examination expenses are included. In addition, once a patent is granted, the patent owner must pay periodic maintenance fees to keep the patent protection in force.
One of the most important factors in choosing between trade secret and patent protection is disclosure. A patent application requires the inventor to disclose the invention to the United States Patent and Trademark Office (USPTO), describing the technology, method, or process in enough detail that others skilled in the field can understand and practice it. Once a patent is granted, the invention becomes publicly disclosed, if it is not early disclosed in the application phase. By contrast, a trade secret depends on keeping valuable information secret. Businesses must take reasonable steps, such as using nondisclosure agreements and limiting access, to maintain trade secret protection and preserve the competitive advantage created by confidential information.
To obtain a United States patent, an inventor must disclose the invention to the public through a patent application filed with the United States Patent and Trademark Office. The application typically becomes publicly disclosed about 18 months after the effective filing date. See 35 U.S.C. § 122(b).
This means the patent process requires inventors to reveal how their technology, method, or process works in detail. The disclosure must be sufficient for someone skilled in the relevant field to understand and practice the patented invention. See 35 U.S.C. § 112(a). Once the patent is granted, the information remains public permanently.
In contrast, trade secrets are kept confidential rather than publicly disclosed. Trade secret protection depends on maintaining trade secrets and ensuring the information is not publicly disclosed or readily available to the public or competitors. To preserve trade secret status, a company must take reasonable steps to protect the secret, such as limiting access to the information, using nondisclosure agreements, and implementing security policies designed to maintain the information secret. These measures help ensure the information is not readily ascertainable through proper means. If the secret becomes public through disclosure or loss of confidentiality, the trade secret status is lost and the information generally cannot regain trade secret protection.
Another major factor in selecting trade secret vs patent protection is how long the protection lasts and how that affects a company’s long-term intellectual property rights and competitive advantage.
Under 35 U.S.C. § 154, patent protection lasts about 20 years from the filing date for most utility patents. The clock generally runs from the effective filing date of the patent application filed with the United States Patent and Trademark Office. Once that period expires, the patented invention enters the public domain, meaning competitors are free to make and sell the technology without permission from the patent owner.
During the life of the patent, however, the owner receives powerful patent rights. A granted patent provides exclusive rights to prevent others from making, using, selling, or importing the invention.
Patent owners must also pay maintenance fees under 35 U.S.C. § 41(b) to keep the patent in force. If those fees are not paid at required intervals, the patent may lapse before the full term expires.
By contrast, trade secret protection lasts indefinitely as long as the information remains confidential and the company takes reasonable steps and reasonable effort to maintain secrecy. See 18 U.S.C. § 1839(3). These steps may include limiting access, using nondisclosure agreements, and carefully maintaining trade secrets within the business.
The famous Coca Cola formula is a classic example. The company chose secret protection instead of pursuing a patent, allowing the formula to maintain trade secret status for more than a century while continuing to deliver a lasting competitive advantage.
Unlike patents, trade secrets do not require a formal patent application process or approval from a government agency. There are no filing forms, application fees, or patent examination procedures involved. Instead, a company obtains trade secret rights automatically under trade secret law if the information qualifies as a trade secret and the company takes steps to keep it confidential.
In general, a company establishes trade secret protection by doing two things:
This approach reflects the definition of a trade secret under federal law, which requires that the information derive economic value from not being generally known and that the owner make reasonable efforts to maintain its secrecy under 18 U.S.C. § 1839(3).
Because trade secret protection lasts only as long as the information remains secret, businesses must actively manage trade secrets confidentiality. If the information becomes publicly disclosed, or is no longer treated as confidential, the trade secret status may be lost.
Common methods for maintaining trade secrets and demonstrating reasonable steps to protect confidential business information include:
Courts evaluating whether a company has valid trade secret rights often focus on whether the company made a reasonable effort to keep the information secret. In Rockwell Graphic Systems, Inc. v. DEV Industries, 925 F.2d 174 (7th Cir. 1991), the court explained that absolute secrecy is not required, but a business must demonstrate that it took practical steps to preserve the confidentiality of the information.
Another major consideration in choosing between trade secret and patent is whether competitors can reverse engineer your product. Under trade secret law, competitors may legally obtain information through proper means, including reverse engineering. Courts have repeatedly recognized that reverse engineering is a lawful way to learn how a product works. For example, the Supreme Court explained that discovery of a trade secret by “fair and honest means,” including reverse engineering of a publicly available product, is perfectly legal assuming there are no applicable patent rights. Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 476 (1974).
This means a competitor may purchase a product on the open market, analyze its technology, and develop a competing product without violating trade secret rights, so long as they do not rely on improper means such as theft or breach of confidentiality. Because of this rule, if an invention can be easily reverse engineered, patent protection is often the stronger strategy for protecting technology. Trade secrets are generally more effective when the underlying method, process, or technical information cannot be readily discovered from the finished product.
Another key difference between patents and trade secrets involves independent discovery by competitors. A patent gives the patent owner enforceable patent rights that can be used to prevent competitors from making, using, or selling the patented invention during the patent term. This is true even if competitors independently invent the same technology or method without copying the original invention. In other words, independent development does not avoid infringement when valid patent protection exists.
By contrast, trade secret protection does not create a monopoly over information. If competitors independently develop the same information secret, process, or technology, they are generally free to use it in their business.
Courts recognize liability under trade secret law only when a trade secret is obtained through improper means, such as theft, espionage, or breach of nondisclosure agreements or other confidentiality obligations. See 18 U.S.C. § 1839(6). If a competitor discovers the information through lawful research and independent development, using it is typically perfectly legal.
In some situations, trade secret protection may be the better strategy for protecting intellectual property, particularly when the value of the technology comes from keeping the information secret rather than publicly disclosing it. For example, trade secret protection may be preferable when the invention secret can realistically be kept confidential within the company. If the information can be restricted to a limited group of employees and partners and safeguarded through reasonable steps such as nondisclosure agreements, access controls, and internal policies, maintaining trade secret status may be a practical approach.
Trade secret protection may also make sense when the technology or process is not easily reverse engineered. If competitors cannot readily analyze a competing product to determine how it works, keeping the method or technical information confidential may provide long-term secret protection. This is particularly common with manufacturing techniques, algorithms, and internal business processes.
Another factor is product lifespan. If the product has a short market life or operates in a fast-moving competitive landscape, the lengthy and time consuming patent process may not align with business goals. In these situations, the cost of preparing a patent application, paying application fees, and waiting for approval may outweigh the benefit of patent protection.
Trade secrets can also protect valuable information that may not qualify as patentable inventions under patent law. Many forms of technology, business know-how, and proprietary process improvements may not meet the legal requirements for patentable subject matter, or they may be difficult to describe in a way that satisfies the disclosure rules of the patent application process. In those situations, trade secret protection can still provide meaningful intellectual property protection. For example, a company may protect proprietary data, internal methods, formulas, algorithms, pricing strategies, and customer lists as a trade secret, as long as the information is not readily ascertainable and the company takes reasonable steps to maintain its secrecy.
In other situations, it may be better to seek patent protection or pursue patent protection rather than rely on trade secret protection. The decision often depends on how the invention will be used in the marketplace and whether competitors could realistically discover the technology on their own. Patent protection may be advantageous when:
When a product or method can be easily analyzed by competitors, maintaining the invention secret may be unrealistic. In those situations, a patent application may provide stronger intellectual property protection because the resulting patent gives the patent owner enforceable patent rights against competing businesses that attempt to commercialize the same technology or process.
Once a patent is granted, the patent owner gains legally enforceable rights that can prevent competitors from manufacturing, using, importing, or selling a competing product based on the patented invention during the patent term.
The choice between trade secret vs patent protection is one of the most important decisions for businesses developing new technology. Trade secrets and patents are mutually exclusive pathways with distinct pros and cons. Patents provide a government-granted monopoly that typically lasts 20 years from the filing date, but they require significant costs and public disclosure of the invention. Trade secrets, on the other hand, protect confidential information indefinitely as long as the company takes reasonable steps to maintain secrecy. However, they do not prevent competitors from independently developing the same technology or obtaining it through proper means such as reverse engineering.
Choosing the right form of IP protection can determine whether you extract the highest value from an innovation. An understanding of both patent and trade secret fundamentals is needed. Because the best strategy depends on the nature of the invention, the technology, and the business environment, it is recommended that you consult an intellectual property attorney when deciding how to protect valuable innovations.
If you need assistance in protecting your new innovation or need assistance with other intellectual property matters, please contact our office for a consultation.
© 2026 Sierra IP Law, PC. The information provided herein does not constitute legal advice, but merely conveys general information that may be beneficial to the public, and should not be viewed as a substitute for legal consultation in a particular case.
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