Entrepreneurship Without Legal Risks

Alejandra Garza – Partner at De Hoyos Koloffon

Starting a business is one of the most important decisions of our lives. It marks a new stage in the entrepreneur's life, one that will bring new achievements as well as new challenges.

However, it is common for these challenges to be discovered gradually as they arise. We shift from our role as entrepreneurs to that of firefighters (putting out fires), when most of these challenges could have been prevented—at least, those related to Intellectual Property.

One of the first steps usually taken in a new venture is branding. A marketing agency is hired to present brand proposals, the client accepts the one they like best... and operations begin. This is often done without having previously registered the trademark in question. A common scenario is that the marketing team itself performs a simple phonetic search—in the best of cases—to verify if an identical registered trademark to the proposal exists. However, phonetic identity is not the only determining factor in concluding whether the proposed brand is eligible for registration.

This type of challenge is one of the most common, if not the most common. Trademark registration is not considered a priority and is almost always postponed. However, "later" could lead to an infringement for unauthorized use or a rejection from the Mexican Institute of Industrial Property (IMPI), necessitating a complete rebranding of the business to avoid a fine (or a second one).

Financially, it is better to make the investment in trademark registration at the beginning than to incur the expense of defending against litigation later on.

Recommendation: As part of the branding process, it is necessary to work with a lawyer specializing in Intellectual Property to analyze the phonetic search and file the trademark registration. Keep in mind that the registration process takes approximately 6 (six) months, so the application should be started as soon as possible to begin operations with the trademark properly registered.

On the other hand, it is perfectly understandable that optimizing resources is a priority when starting a business. This is why companies often opt to use software licenses not acquired through traditional means, or they use shared licenses. This lack of proper licensing constitutes an undeniable Copyright infringement.

When a software company detects illegal use of one of its programs, it usually initiates legal action through the IMPI, requesting an inspection visit to check each and every computer and take an inventory of illegal uses, subsequently initiating a commercial infringement proceeding.

Acquiring a computer with pre-installed software does not exempt the owner from potential infringement. The "default" version on the computer is not necessarily the appropriate license for commercial or business use. It is therefore essential to review every computer used in the company and verify that it has the correct licenses to avoid future litigation.

Recommendation: Conduct continuous audits of computer equipment and installed software. Uninstall any program that lacks a proper license and acquire the appropriate licenses for the way the equipment is used.

The same is true for music used in some businesses. There is a common belief that having a membership to Spotify or Apple Music, for example, allows the music to be played freely in a commercial establishment. This is incorrect. Memberships for such platforms are for personal and private use, which means they do not authorize the public performance (or public communication) of musical works.

This is when Collective Management Organizations (CMOs) [(Sociedades de Gestión Colectiva - SGC)] take action. They visit the establishment to offer the purchase of commercial use licenses and to regularize the use and exploitation of the musical works.

If the CMO's outreach is ignored, they will initiate a conciliation proceeding (procedimiento de avenencia) before the National Institute of Copyright (INDAUTOR) to hold settlement talks. If the alleged infringer fails to attend, they will be liable for a fine from INDAUTOR. It must be noted that if the license is not acquired and the improper use of musical works continues, the CMOs can initiate a contentious infringement proceeding.

Recommendation: Avoid using musical works in commercial establishments without a license. If a CMO contacts you, it is important to take their inquiry seriously and consult with a lawyer specializing in Copyright.

Another common challenge for a startup is the lack of contracts. Whether to accelerate the start of operations, the delivery of orders, the hiring of personnel, or for any other reason, these essential documents are often put on the back burner. Unfortunately, this lack of contracts usually affects the entrepreneur the most.

The absence of an individual employment contract can lead to an unfavorable ruling (laudo) for the employer, as well as the significant loss of developments or works-for-hire regarding the ownership of intellectual property, and even leaks of confidential information.

We can list some basic contracts; however, this list should not be considered a definitive guide, as every action inside and outside the company can be a legal act requiring a specific contract. Every employee must sign, at minimum, an individual employment contract—which includes an intellectual property clause—and a confidentiality agreement. Any service provided or received must be formalized with a professional services agreement, which must also include intellectual property and confidentiality clauses.

Recommendation: Have a set of contracts properly drafted and reviewed by a lawyer specializing in civil or labor law, assisted by an Intellectual Property lawyer.

While the risk of being involved in legal proceedings is real, it is preferable to have the essential legal instruments in place—trademark registrations, licenses, patents, contracts—to mitigate this risk by investing from the outset and prior to beginning operations.