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Craft brewery startups: Early stage IP considerations

published in McAfee & Taft tIPsheet | January 4, 2017

By Cliff Dougherty and Sasha Beling

By all accounts, as we head into 2017, the craft beer industry will continue to experience tremendous growth. This is due to primarily to increasing consumer demand. Also, favorable legislation in some states should help fuel the growth. For example, in Oklahoma, both Oklahoma Senate Bill 424 (allowing, e.g., the sale of higher-point beer to consumers on brewery premises) and State Question 792 (allowing, e.g., the sale of full-strength beer in grocery stores) were approved in 2016.

A defining characteristic of a craft brewery is innovation. From the overall ingredients used to make the beer, to the artistic label and marketing materials used to sell the beer, to the décor of the tap room used to serve the beer, creativity is of paramount importance. This creativity is embraced by craft beer consumers. In fact, a unique product and creative brand can be the most valuable assets of the company.

Although there is no limit on innovation, the budget available to a craft brewery startup is always limited. Of course, as with any business startup, it is essential for craft brewery startups to carefully prioritize how the budget is allocated.

Despite budget limitations, there are some early stage legal steps that any craft brewery startup should consider. These include creating a limited liability company or other entity for the business, making sure the company complies with all appropriate regulations, and taking steps to minimize the risk of intellectual property infringement. It is also important to make sure that the intellectual property created by the company can be protected. This article will touch on some key intellectual property considerations that should be on the list.

Minimize the risk of intellectual property infringement

One of the first steps of a craft brewery startup is to come up with a catchy company name and trademark. Specific product brands and label artwork soon follow. Also, special brewing equipment and techniques may be implemented. These steps are critical. But it’s equally critical to make sure that the corresponding intellectual property is available for use.

The initial step of minimizing the infringement risk seems obvious, but it cannot be emphasized enough to everyone involved in the process — not only employees, but advertising agencies and other consultants that are hired. DO NOT COPY. This should be put on a plaque that is hung over the door to the company break room. Whether it’s copyright infringement, trademark infringement, or some other type of intellectual property infringement, proof of actual copying usually carries the day for the plaintiff in an infringement action. If you really like someone else’s brand or artwork, admire it, but don’t copy it. You cannot trade off the goodwill that has been developed by someone else. That’s essentially the test for infringement. Do not assume that if it’s on the internet, it’s in the public domain. It’s probably not. Do not assume that your employees and consultants will know not to copy. If they do copy, the company will be liable for the infringement.

The next step is to get the needed legal opinions that the trademarks and other intellectual property that the company plans to use are available. For example, a legal opinion that the company name or primary brand is available is almost always necessary. Such an opinion needs to be by an attorney specializing in trademark law and based on a full trademark search (it must be well reasoned). It’s a “pay a little now or pay a lot later” kind of thing. For example, in this case, “pay a lot later” means having to change the company name or hang out in the courthouse a few years down the road. Trademark disputes between craft breweries are definitely on the rise. Although not as common, freedom to operate (with respect to patents) and other types of legal opinions may also be needed depending on the circumstances. An intellectual property attorney can help the company assess and prioritize the types of legal opinions that are needed.

Make sure the company owns its intellectual property

This step is fairly easy. PUT IT IN WRITING. If there is room for a second plaque, add this one as well. For example, if you hire an artist to create artwork, include a “work for hire” provision in the contract or have the artist sign a stand-alone “work for hire” agreement (an agreement that makes it clear that the company will own the copyright(s) in the artwork created). If one or more inventions may come out of work by a consultant (for example, a custom equipment manufacturer), make it clear in the consultant contract that the company will own the inventions and any other intellectual property created by the consultant. Address intellectual property ownership in all joint venture agreements. Have all employees, including owners and senior management, agree in writing that the company will own all intellectual property relating to the company’s business or within the scope of their employment. Having an intellectual property attorney draft or review your agreements can ensure that the necessary language is used.

Protect company trade secrets and proprietary information

If the company wants to keep its recipes, brewing techniques or other proprietary information secret (and it should), it must take active steps to keep the information secret. In other words, the company needs to have and carefully enforce a trade secret protection policy. As to recipes, keeping them secret may be the only way to protect them. Make sure that company employees understand the need to keep the information confidential (again, put it in writing). Employees will leave and go to work for competitors. Addressing confidential information in employment agreements and policies can go a long way in preventing former employees from misappropriating trade secrets. Restrict access to proprietary information to an “as-needed basis,” even among employees. For example, the company receptionist does not need access to detailed brewing techniques and beer recipes. Make sure that all independent contractors and anyone else who receives the proprietary information signs appropriate non-disclosure agreements. You get the point. You have to keep the cat in the bag.

Proactively protect other intellectual property

For example, even if initial sales will be limited to Oklahoma or a particular region, go ahead and register the company’s key trademarks in the U.S. Patent and Trademark Office. Registration can provide nationwide priority to the marks. Do not allow others to use your trademarks. As a trademark owner, you have a legal duty to police your trademarks. Also, consider registering the copyrights in key artwork in the U.S. Copyright Office. If the company develops a unique brewing process or some other invention, consider applying for a patent. Success brings knock-offs. Preventing knock-offs requires a solid intellectual property portfolio and enforcement strategy.

In summary, if you haven’t already, put consideration of these issues on your priority list for 2017, and toast in the new year (with a craft beer, of course) knowing that the company’s innovations will be safeguarded.