Startups in Hungary / Protection of Business Secrets – Better now, than never!
Startup companies are for this day and age what mergers & acquisitions were for the ‘90s. They became a hot topic for business, popular media, and even private conversations. The keywords of M&As included terms such as “White Knights”, “Golden Parachutes”, “Saturday Night Special”, “Killer bees”, “Godfather offer”, “Poison Pills”, and the (in)famous “Pac-Man”… These expressions were used mostly in first world countries and have become outdated. In the context of startups, focus has shifted to “IP Rights”, “Branding”, “Patents&Trademarks”, “Copyright”, even “Copyleft”(!), and the ever immortal, ever convincing buzzword “Knowhow”.
Without exception, these terms are related to the issue of how one can protect a business concept against being copied by well-funded competitors before the right-holder could consolidate its position in a market. This issue is even more exciting if one takes into account that content and quality are not the only relevant factors in our world of “Lifestyle” – the means of offering and presenting a product or service are also of utmost importance, as well as the positioning of the product or service in the best possible market segment.
Several startups fail to get adequate protection
To get a sound understanding of this matter, one needs to have some background information. According to a Hungarian research, only five of the TOP 10 Hungarian startups have a legally sound trademark portfolio – and this is only the tip of the iceberg! The patents and other legal protections and mechanisms are also worth mentioning, as it seems to be reasonable to assume that startups are far from making use of such mechanisms and solutions with optimal efficiency. First of all, one needs to understand what components of a startup company are eligible for legal protection: the name of the product or service used in commerce (known as “Brand” or “Brandname”), the appearance of the product (title, slogan, tune or the combinations thereof), and the invention itself – if there is an actual invention, that is. In theory, specialized knowledge, unique processes, and the business secrets of the company are also eligible for legal protection as the qualify as “knowhow”.
Brand name and appearance can be protected as a trademark.
The concept of trademark protection is based on hundreds of years of legal tradition with its roots going back to the middle ages and its common features having been developed by the 19th century. Trademarks can be registered (as simple words, composition of words, sentence, images, combination of words and images as figurative words, or a particular writing of words). Music, and even a frangrances may also be registered. There are two things to bear in mind when registering a trademark: 1) The mark to be registered must have a distinctive force and must be uniquely identifiable. General items in the public domain – e.g. the colour red for red wine – may not be registered. 2) The trademark may not be similar to an already registered trademark. Compliance with this criterion is not checked by the trademark office – the holders of registered trademarks need to play an active role here and need to object to the registration of the new trademark.
Fight for your rights against imitators
Startups need to take care of their own trademarks and need to fight against imitators. A most common tool of this fight is trademark monitoring, a service provided by attorneys and other professional service providers. Hungarian trademarks are reviewed and registered by the Hungarian Intellectual Property Office (www.gov.hu). The former name of the Office – Hungarian Patent Office – may have contributed to the Babylonian confusion…
Businesses wishing to extend their operations from Hungary to other EU countries may also have the protection of their brands extended to other countries. This can be done within the EU by applying for the registration of a community trademark – “EU trademark” may be a more accurate description for this solution. The cost of the procedure is EUR 900, which is a reasonably moderate price, considering that the community trademark provides legal protection within the territory of 28 EU Member States. The competent agency is the Alicante-based Office for Harmonization in the Internal Market (Trade marks and designs). Unfortunately, applications may be filed online (oami.europa.eu), so the attorneys actually filing the applications cannot charge any travel fee as part of the filing process…
The other solution – which may be used in addition to having a community trademark – is known is the international trademark system known as the Madrid System. The Madrid System is recommended to undertakings that wish to enter markets outside the EU – such as the USA, Japan, China, or Russia. One should bear in mind that the trademark – while its territory is extended – remains a national (or EU) trademark, meaning that it does not become an international trademark, even within the Madrid System. The Madrid System is managed by an organisation with the beautiful name Organisation mondiale de la propriété intellectuelle (OMPI, www.wipo.int) having its seat in Geneva.
Patents follow a different logic than trademarks
The protection afforded to an invention through a patent follows a different logic than trademarks: For patents, one needs to show the competent patent office in a scientific manner that the invention is actually something new. This is done usually by presenting – often endless – research results, examinations, designs, drawings etc., and is far more expensive than a trademark application. This deters many companies from filing patent applications. The development of an invention takes a lot of time and money – and the same is true for the patenting process. However, patents provide effective protection against imitators, because the technical details are proven and clear in any dispute. In Hungary, patent applications are to be filed with the Hungarian Intellectual Property Office, while EU level (or even broader) patent protection is to be sought before the München-based European Patent Office (www.epo.org), with branch offices in Rijswijk (close to Den Haag), Berlin, and Vienna, and a contact office in Brussels.
It is true for both trademarks and patents that registration does not guarantee the absence of imitators. These solutions focus rather on the legal consequences of violating a trademark or patent. The law is rather strict: The infringer must give account of its revenues to the rightholder, and most of the proceeds are to be paid to the rightholder as damages.
The other remedies usually afforded to the victims of intellectual property violations – such as the declaration of violation by a court, press statements, and other damages – are also available. The violation of intellectual property rights also has a criminal aspect to it, as such violations constitute crimes actually.
“Knowhow” is the least protected
The protection of knowhow is both the “cheapest” (being free) and the weakest. According to the new Civil Civil Code, knowhow (or “protected knowledge” in Hungarian legal terminology) is afforded the same protection as business secrets. It covers “technical, economic, and other practical knowledge of value held in a form enabling identification, including accumulated skills and experience and any combination thereof” – any questions? But seriously: Knowhow means unique professional knowledge of material value. In case of violation, the rightholder may demand the infringer to cease the violating activity, to publish a press statement, and/or to provide compensation for the damages. On the other hand, the infringer can easily claim that he acquired the knowhow from “other sources”, thereby escaping liability. According to ancient wisdom, the most efficient means of protecting one’s knowhow is to “Keep it in a strongbox!”
Dr. Csongor Buzády, LLM (Berlin)
The author is a licensed corporate finance and capital markets lawyer. Budlegal is representing both sides, i.e. business angels and startup entrepreneurs, in the course of providing legal advise related to startups.