How to Make Passive Income Legally
Making money while you sleep may sound like a dream, but for many business owners, making passive income is their reality. One of the best ways to do it is by creating digital products.
As businesses continue to pivot into the digital future, these intangible products provide a source of revenue that requires little cost to launch, are easy to distribute, and can become wildly profitable in a short period of time.
Digital products like templates, online courses, organizers, planners, and ebooks can be created once and sold over and over again giving true meaning to work smarter, not harder to succeed.
But before you run to start creating your own profitable digital products, make sure you do it legally. There are three main ways to legally protect digital products (and your business):
when you are launching it, by using trademarks,
after you created it, with copyright, and
while you are selling it, by using digital product terms and conditions.
Although digital products are not tangible property, they are in fact property, and property is an asset in your business worth protecting. This is where the legal comes into play.
Protecting Your Digital Products with Trademarks
Before launching a digital product, you want to make sure that whatever you choose to name it does not infringe on another brand’s trademark. A trademark is something that a brand uses to identify its goods or services. It can be a word, slogan, logo (design), name of a course, product line name, business name, or other identifier used to distinguish their brand from someone else's. (15 U.S.C. § 1051). Some trademarks are registered with the United States Patent and Trademark Office (“USPTO”) and some are not. Registered trademarks have protection across the United States from brands using the same or even a similar name, while those that are not registered only have very limited rights.
To check for existing trademarks that are not registered, a google search is the best place to start. To search for registered trademarks or pending trademarks with the USPTO, a basic search tool is available on the USPTO website. This is not a foolproof method as it only gives you results with the exact spelling of the words you enter, but it is a great way to assess if there are any major red flags.
You can also see an example of how to do a basic free search here ⤵️
Although trademark registration gives the registrant ownership over their mark, a trademark holder does not have blanket ownership over the word(s) that they register. Instead they have protection for the word(s) (or design) they register in connection with the goods or services that they successfully apply for. This can help when performing the basic search because you do not have to ditch a name merely because it is already registered, you can click on the result to open up the record and see the description of the goods or services the trademark is registered for and make a determination as to how similar your goods or services are to theirs.
One thing to keep in mind is that when it comes to trademarks, the biggest consideration in making your determination on a name is: whether or not it is too similar to another trademark in that you think a consumer could be confused between yours and theirs. (15 U.S.C. § 1052). There are many factors that the trademark office (and courts) look at to determine if a trademark causes confusion to another, but two major ones are:
how similar the marks are, and
how similar the goods or services are.
For example, there is a brand “Dove” for chocolate and another brand “Dove” for deodorant. Although the names are identical, a consumer likely would not believe that the same owner was responsible for both because of how different the products are.
However, trademarks that are not identical have also been found to cause confusion, including:
Mr. Clean vs. Mr. Rust
Sunset Songs vs. Sunset Creative
Excel vs. Ima Excel 365: Tips in Ten
Kind Health Group vs. Kindskin
Zombie Braces vs. Zombie BBL
Aside from merely not infringing on someone else’s registered trademark, filing a trademark for your digital product will also give you protection against brands that come up with something too similar to your name. As you are probably starting to realize, it can be a confusing and lengthy process (you can learn more about it here) - and right now it takes about a year, so hiring an attorney provides the best chance for success. In fact, a study in the Stanford Technology Law Review found that when a trademark applicant was represented by an attorney they were 50% more likely to succeed with their application than when trying to DIY it.
The best way to start with a trademark is to have a consultation. Sometimes a consultation alone can save you thousands by identifying red flags in the name you are using or planning to use.
Protecting Your Creation with Copyright
Unlike trademarks, you do not have to wait an entire year for copyright protection. While trademarks are for protecting elements of your brand, copyright is protection over original works of authorship, which can include digital products like templates or an online course. Copyright protection attaches as soon as the work is “fixed in a tangible medium of expression.” 17 U. S. C. §102(a). This is basically a fancy way of saying once it is permanently recorded somewhere, for example, uploaded to the internet, the creator owns the copyright.
This gives the creator of a digital product protection from anyone else copying their product without permission, creating a derivative work from it, selling it, and more depending on what type of work it is that was created. Although these protections are automatically afforded when copyright attaches, in order to sue for copyright infringement of a United States work, the work must be registered with the United States Copyright Office. There are also additional benefits to registering a copyright before infringement occurs, including the potential to receive statutory damages and attorneys fees in an infringement lawsuit, if successful. (U.S. Copyright Office).
Whether or not you decide to obtain registration for your digital product, adding a copyright notice is always a good idea. This provides clear notice to anyone that sees it that you are the copyright holder.
To add a copyright notice to your digital product, add the following: “© [year the work was published] [name of the copyright holder].” Instead of the copyright symbol, you can also use the word Copyright. You can add this to places like the footer of your website, the bottom of the first page of a digital template, or to the welcome page for your online course.
Protecting Your Business with Digital Terms and Conditions
Adding terms and conditions for purchasers of digital products to agree to at checkout is a great layer of protection. Since sending a contract for every purchaser to sign isn’t feasible, using terms and conditions specifically created for digital products is the next best option. This is essentially a contract between the owner and purchaser but is delivered with the ease of a checkbox before completing an order.
To ensure that the purchaser is actually aware of the terms, an action should be completed on their part prior to purchase. The best way to do this is by having the purchaser simply check a box that states “I agree to the terms and conditions”. Include the terms either listed below the checkbox, linked to another page, or linked through a pop-up box. You can then rest a little easier knowing that there are certain terms that have been agreed upon.
Although implementing this type of contract is not a guarantee that nothing will go wrong, it does give the business selling digital products a contract to point to if an issue arises, and additional remedies that may not be available without it. While there are quite a few terms included in this contract, a few include:
Payment terms, authorizing the full amount of the product, even if a payment plan option is chosen;
Refund policy, as many digital products do not come with refunds due to the nature of receiving immediate access;
An intellectual property license, making it clear whether the purchaser will own the rights to the product or merely a license for a specific purpose - for example, an online course may license purchasers to use the product for educational purposes, but users do not have the right to sell it, share it, or create their own products from it;
Governing law, to ensure that if a dispute does arise, the business selling the digital product is not bound by the law of a purchaser 3000 miles away;
Product policies and/or access, to set any restrictions such as not sharing login information if that is applicable, where the product will be accessed and how, limits on the number of downloads, or any other relevant restrictions.
Although anyone can draft the terms and conditions they feel are most appropriate for their business, the best way to ensure the contract is actually conveying the protections you want it to is to either hire a lawyer licensed in the state where your business is located to draft one for you or use a lawyer drafted template that has been specifically drafted for digital products.
When it comes to making passive income, the potential to build it through digital products is enormous and only continues to grow. Focusing on protecting your digital assets early can prevent the passive income that’s made from being spent on legal fees down the line. Prioritizing trademarks, copyright, and digital terms and conditions can minimize the potential for legal issues to arise in the future and ensure your passive income stream flourishes instead of flops.
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