Letters of Intent

Pankaj Raval (00:05)
Welcome back to Letters of Intent, the podcast for risk takers and deal makers. I'm Pankaj Raval founding partner of Carbon Law Group, located here in Los Angeles, but serving clients globally. Today, I am joined by our corporate attorney, Sahil Chaudry my co-host, you guys have all heard him many times before on this podcast, who leads our corporate practice here at Carbon Law Group.

Sahil (00:23)
Pankaj, it's been a huge year for innovation and controversy when it comes to AI. AI has transformed everything from art to biotech, but 2025 also brought a hard legal truth when it comes to patents and inventorship. Courts and patent offices across the globe doubled down saying only humans can be listed as inventors. So today we're asking, what does that mean for innovation and how should founders and creatives protect their ideas in the age of AI?

You know, this whole concept of inventorship is brand new when it comes to AI. It's an issue that's dominated the legal headlines all year. For people who haven't been following very closely, what have the courts said so far?

Pankaj Raval (01:04)
been a fascinating year. feel like AI, the topic, the discussions about AI have kind of reached a crescendo.

There probably is going to be even more talk in 2026 about what this means. I think we're still all trying to wrap our heads around it, right? There's probably a lot more questions and answers right now, but as we see in courts are slow to get to this, but they do get to this. They do address these issues and the law evolves, and that's what we're seeing today. In one of the IP stories of the year around the world, courts reaffirmed that only natural people, natural persons, not AI systems can be inventors under patent law.

is a huge implication because we're seeing how much art, how many developments that AI is producing, but still courts are maintaining that, like in Thaler versus Vidal, it's individuals, it's people that need to be authoring inventions for it to be protected under patent law and not the AI.

Sahil (01:53)
So basically AI can insist, but it can't invent. A human has to guide the process, providing direction, editing outputs, making judgment calls. That's the true inventor in the eyes of the law. okay, let's talk impact then. For startups and R &D companies that rely on AI to innovate, how big of a deal is this?

Pankaj Raval (02:13)
It's huge because now you have to kind go back.

and look at your whole process. You have to reevaluate the whole system, the whole process of building a patent portfolio. What is it going to take? What does that mean in terms of what is the AI involved? Many companies assumed if their AI designed a product, discovered a drug, wrote a piece of code, they could automatically protect it with patents, but the rulings have flipped this assumption. So if you can't clearly show there was a significant amount of human involvement here, your invention may not be patentable.

And that

means you're not gonna have IP protection, you're not gonna be able to create a moat around that product, people are gonna be able to copy it, which is what we're gonna be seeing. I read great tweet that my co-founder legal tech shared with me a while back, and he was saying Sam Altman came a tweet on X, I don't know if it's called tweet, I guess a message on X now, know what it's called anymore, X and X and on X.

Sahil (03:00)
And X on X. Yeah.

Pankaj Raval (03:06)
Stupid Elon, why did you have to change

Sahil (03:06)
Yeah. Yeah.

Pankaj Raval (03:08)
that? But he essentially said that we're entering the era of fast fashion for SaaS, which is so interesting because now we're seeing all these SaaS products being copied because generally speaking code in general doesn't have a patent protection. So now we're seeing so much copying out there. So the question is, what are you creating? Is it How much IP has been used? gonna be a lot of questions

a lot of probably office actions issued by the USPTO to understand what actually was human derived and what was AI.

Sahil (03:37)
So this just adds such an interesting layer when it comes to diligence. mean, we often tell our clients how valuable protecting your IP is because when it comes, you know,

You want to avoid any kinds of infringement claims. And also when it comes time to raise private equity or IPO, when you're raising capital, this is a core asset that you're selling. So not getting this right can, I feel I can poke a lot of holes in any kind of potential sale or exit. So let's get practical because a lot of our clients are going to be dealing with this problem. If I'm a founder using AI to develop products, what do I actually need to do to stay protected?

Pankaj Raval (04:12)
There's actually three big things you've to be thinking about as a founder.

as a business owner, trying to create an IP portfolio, trying to create a moat around your That is, first of all, document the human role. Be really clear about what the human did, the author did in the development of the product or IP software, whatever it might be, because that's gonna be really important to proof of human authorship.

list the humans on the patent. You can't be listing AI. Hopefully people aren't saying, also, ChatGBT created this, because that's not going to get you a patent. You need to make sure that there's a human listed on the patent and that human had a impact and of creating that IP. And lastly, update your contracts. Make sure your contractor agreements say that AI-assisted inventions belong to the company.

So if, you know, any contractors or employees are using AI to develop products you want to make sure that you know anything they use even if they're developing using AI, that is still part of the company so that means your invention assignment agreements may need to be updated means other contracts other Contractor agreements need to be updated because you want to make sure that anything they created even using AI is still owned by the company

Sahil (05:20)
So it sounds like we're saying, courts might not uphold the non-human elements of some kind of creation, but in your agreements, you wanna have that blanket umbrella style protection that's wrapping in all of the IP so that you can get as close to the line as possible of total ownership. ⁓ So I think that seems like a really critical point, and I hope.

Pankaj Raval (05:36)
Right.

Exactly.

Sahil (05:45)
our listeners are taking note that as you're developing your IP or you're working with third parties, any kind of AI assisted inventions need to be wrapped in. you know, I'm wondering now, we also saw a very similar theme in copyright this year. talked about patents up until now, but with copyrights, you know, let's say we're talking about a movie script.

no human author, then there's no protection. So the US Copyright Office has rejected AI created works that lacked any kind of meaningful human input. How far do you see that impact it comes to copyright?

And from the deal side, this creates a new layer of due diligence, right?

Pankaj Raval (06:23)
Yes, exactly. So, you know, when we're talking about deals, you know, because we law firm for deal makers and risk this is letters of intent. So, you know, we'd be remiss not to mention how this impacts a lot of the deals going buyers or investors are company that has a significant IP portfolio, they need to ask these questions about, okay, what is the amount of AI used to product? Because, it's fully AI developed,

one person who just used AI to develop the whole thing, it could be susceptible to being copied very easily and they won't be able to prevent that. So they need to think about of AI being used to develop this IP and is it something that they can really protect? Because if not, they need to factor that into their valuation or into their approach this company.

Sahil (07:06)
So add that to our due diligence list. AI compliance is now a critical part of due diligence for any kind of transaction. ⁓ And this applies to patents. This also applies to copyright. We saw the same rule. No human author, no protection. The US Copyright Office has rejected AI-created works that lacked meaningful human input.

Pankaj Raval (07:15)
Absolutely.

Absolutely, absolutely. Yeah, I reinforces the same principle in copyright as well. You know, we see so many images nowadays being created by You know by Grok, by ChatGPT. It's pretty amazing, you know, I mean I use it all the time too. I created my daughter's invite, you know for her birthday party with it, you know, we there's so many great use cases, but there's still cases to be resolved about you know,

it be infringing on other people's copyrights? AI was trained on other people's work. So to the extent that other people's work shows up in the works that you're creating, if it is for commercial use, you've got to be aware of that. you've got to be careful. think we touched that on that in prior using services like Firefly with Adobe or Envato, ones that actually have licensed work that they use to train the models. Because if not,

could be a risk for you also with your company. We still haven't seen how those, all those cases are going to play out, but there's definitely a risk there. We actually helped someone in the early days of, ChatGPT last year or a year before resolve a case where side alleged that they were copying, they essentially used their blogs and repurposed their blogs and my client repurposed their blogs. And it was all because, you know, AI had,

used some of the same language for that blog on my client's blog, but they didn't know, are risks you gotta take. I mean, this is a risk you do take when you're AI, but you've gotta be aware of those risks. So this exact same issue's gonna be coming up in copyright, and you gotta understand, okay, what's the level of human creativity here, and how much does that matter to the value of the work you're putting out?

Sahil (08:50)
So let's close with some practical advice for our listeners, founders, investors, creators who are navigating AI right now. What should they be doing? What's the checklist?

Pankaj Raval (08:59)
So here's the checklist for 2026. You gotta be aware that the world is changing fast and you gotta be ready for it. You wanna be on the offense and not on the defense because I'll tell you the defense is helping a lot of clients because they didn't take proper precautionary steps. That's why also we have a subscription agreement for a lot of clients that they're part of now, where they come to us ahead of time before these issues arise. It's our general counsel service agreement on our website. We can definitely share more about that.

to be making sure that they are looking at what is the level of human input in this intellectual property product or service. It's got to be human involvement. It's got to be human first developing it. Next is update your agreements. Make sure your agreements address the use of AI in the development of IP. Next is train your teams. Make sure your whole team is trained on the use of AI. I go over this with my team all the time. Not only just better prompting and how to prompt, but also

to record inventorship, to record authorship to make sure it's clear the human was involved the development of this IP. And lastly, is be transparent. Investors and will be asking about AI. So be ready with clear factual answers. Make sure it's all recorded, make sure it's all documented. that's the beauty about today is that there's a lot of easy, because of AI, the funny thing is there's a lot of easy ways to document things nowadays as well.

But make sure you're doing that and you're taking those extra steps because it could come up in the future where, especially in the sale of your company, when there is audit, there's gonna be questions about,

how much AI was used in the development of that IP, and that really matters in determining the value of your product or service.

Sahil (10:27)
And that determines the value of your product and service. And also when it comes time for the sale of your enterprise, add from the business side, treat your IP records like an asset because they are. We insist on this with all of our clients. You need to know that your trademarks, your copyrights, your patents, your IP are extremely valuable. It doesn't feel like that. People like to move very quickly at the initial stages of their business.

And it doesn't feel that valuable, but trust when you get to that point where you're ready for your exit, you are going to want to have your IP records locked in. because when you go to raise or sell those details or make your innovation. ownable and valuable. and so there you, yeah, there you have it. 2025 was the year the courts told us AI can assist, but it can't invent. Human authorship is still the tether to intellectual property. So

Pankaj Raval (11:04)
Absolutely.

Sahil (11:16)
For 2026, remember to protect your ideas, document your process, and keep humans in the loop.

Pankaj Raval (11:22)
Exactly, Sahil. Things are changing fast. AI, we thought the world was moving faster before. AI is only speeding fast we are moving.

There's this in the startup world that Mark Zuckerberg made popular, called move fast and break things. But you gotta be careful because if you are moving too fast and you break too much, you could be stepping on a landmine that could blow up your whole business.

Sahil (11:42)
So move fast and break things, but bring your general counsel with you. thank you all for joining us for this episode of Letters of Intent. We are here for you as you take your risks and make your deals. I'm Sahil Chaudry corporate attorney here at Carbon Law Group.

Pankaj Raval (11:47)
Yes, exactly.

And I'm Pankaj Raval, founder of Carbon Law Group and IP and corporate attorney as well. And we are here to help all businesses, whether you're just starting out or trying to scale up, we're here to help you from your mergers and acquisitions to to trying to figure out how to company to the next level. We're here to guide you along the way and we'd love to be a partner in that journey.

Thank you very much. Thanks, Sahil.