Small Tech Companies Changing Their Strategies for Creating and Protecting Their Intellectual Property?

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Permalink Reply by Joshua R. Brown on June 4, 2009 at 6:41pm

Booker:

You have a good point. Everyone is looking for ways to cut costs right now and discretionary legal services are an obvious place to look. Some technologies do lend themselves well to trade secret protection, internal industrial processes for example. However, other technologies will be subject to adoption by others if they are not well protected. Although patent litigation is difficult and expensive, without a patent there is no possibility of protection at all. Moreover, start-up companies often need patents to garner investment or attention from larger companies.

The fact is that start-up companies do need to invest in technology and grow, even in the current climate. For this growth, patent protection is often needed. Even in fast moving, high-tech areas, a patent may be indicated to attract investment or pursue broad protection that may stand the test of time. If you are unsure that your investment will payoff in time, consider filing a provisional application. These applications are cheaper to file and can provide a placeholder for when investment comes in or the product begins to take off.

If you do decide to pursue patent protection, I think it makes sense to be frugal. Not cheap, but frugal. Make sure you are getting a broad, well-thought-out application for the money you are investing in legal services. To me, it does not make sense to file a U.S. patent application with 3 claims. The cost is same to file the first 20 claims. If you later decide not to pursue all of your claims, you can easily drop them during prosecution. Also, you might consider asking your patent firm for a discount. Everyone must adjust to the economic times, and that includes lawyers. If your patent firm is not willing to offer a reasonable rate, value billing, a volume discount, or other options, consider contacting another firm that may be more flexible.

Thanks for the provocative questions and good luck!

-Josh

Permalink Reply by James S. Parker on June 5, 2009 at 1:12pm

Booker, as you mentioned, now more than ever, it is important for a tech start-up company to have an intellectual property (IP) strategy that integrates with the company’s overall business strategy and stays within the company’s budgetary constraints.

As the value provided to the market by a tech start-up company is often derived largely from the application of the company’s technological innovations to solve problems for clients, pursuing patent protection for the technology, or implementing procedures to protect the technology via trade secret, can often be a sound investment. Ideally, a tech start-up company should have a person or team in the company that either has a background in IP or is able to dedicate sufficient time to understand at least the basics of IP protection and oversee the implementation of the company’s IP strategy. This person’s or team’s skill set should include the ability to identify the company’s IP, analyze whether or not to seek IP protection based on the costs involved as well as the potential rewards, and the capability to effectively interact with outside IP counsel.

With respect to the first question of whether tech start-ups should file fewer patents and rely more on proprietary methods and trade secrets, first, it is important to note that only proprietary methods and technology that cannot be reversed–engineered are viable candidates for being maintained as trade secrets. Of course, any time a proprietary method is a candidate to be kept as a trade secret, this option should be considered. The costs of implementing the procedures necessary to maintain the technology as a trade secret should be considered in making the determination. One of the most famous trade secrets is the CokeTM formula. If the CokeTM formula had been patented the patent would have expired long ago, but the trade secret continues to provide incredible value to the Coke Company.

For technologies that are reverse-engineerable, the decision then becomes to patent or not, and possibly whether to publish to prevent others from patenting the technology. It is important for tech start-up companies to keep in mind where the value of a patent comes from. A patent gives the company the right to exclude third parties from making, using, or selling the claimed invention. In this way, the patent owner can then (1) be the sole supplier of the patented method or apparatus; (2) the patent owner can license to third parties the right to make, use, and/or sell the patented method or apparatus; or (3) the patent owner may sell the patent, in order to benefit economically from the patent. Accordingly, an analysis should be done for the technology in question as to how much value such a patent right would bring to the company. There would likely be little value achieved by patenting the company’s method or apparatus if there exists alternative methods or apparatus for accomplishing the same outcome that are just as cost effective and available to the third parties. Alternatively, if the company has created, or otherwise acquired the rights to, a patentable method or apparatus that the market will pay a premium for with respect to competing third parties products, then patenting the method or apparatus could very likely be a sound investment.

With respect to the impact a company’s ability to obtain investment capital or a strategic partnership, I think such parties are looking for barriers to entering the company’s market that competitors of the company face and/or competitive advantages the company has over competitors, of which patents and trade secrets are barriers to entry that tech start-up companies are more likely to be able to achieve. As a member of a local angel investment fund, Emergent Growth Fund II, I would be hesitant to vote to invest in a tech start-up company that relied upon reverse-engineerable technology with respect to which patent protection was not being pursued. I believe that a future strategic partner would share a similar view.

With respect to the second question of what a tech start-up should do if the company is developing technology and displacing its own older technology faster than the patenting process, it is difficult to predict the shelf life of each technology within a company. In particular, it is difficult to predict the future commercial applicability of patentable technological advances. Accordingly, the tech start-up company’s decision makers should review each technology on a case-by-case basis in order to evaluate whether they believe the investment is justified, taking into account the expected life expectancy of the technology in the marketplace. Remember, initially the only monies invested are the costs for preparing and filing the patent application. If it later turns out the technology is no longer perceived to have sufficient value, the patent application can be allowed to go abandoned with no further costs.

With respect to the third question regarding the filing of fewer patent claims within an application, I don’t believe that filing fewer claims creates any benefit during an infringement action against a third party. Further, filing fewer claims increases the chance that the claims will not be allowed, or that the granted patent will be invalidated, as prior art can turn up during prosecution and preclude patentability of some of the claims and/or prior art can turn up after the patent issues and invalidate one or more of the claims in the issued patent. If a variety of scopes and permutation of features are achieved by a larger number of claims, then any new prior art that turns up during prosecution of the patent or after the patent issues is less likely to invalidate all of the claims. Filing an application with a higher number and variety of claims, as long as the limitations within the additional claims provided meaningful features with respect to the technology, is usually going to be the preferred option.

Last, with respect to the fourth question I do not believe that infringement of a tech start-up’s patent by a large company is inevitable. My experience is that large companies typically do not want to infringe a small company’s patent, specifically because of the uncertainty that exists with respect to the costs of an infringement suit and the accumulation of potential liability, as well as the concern for punitive damages liability that may attach if the large company is deemed a willful infringer by the courts. If your question is referring to the idea that the large company believes it can just go ahead and infringe because the tech start-up will not have the resources to litigate, the large company also has to consider the possibility that deeper pockets might eventually get involved on the side of the small company and that the potential damages for the infringing activity grows with time. It is important for the tech start-up to remember that the large company is going to try and design around the patent and try to reduce the chance that any activity is considered infringing, such that infringement of the patent is seldom black and white, but, rather, there is often uncertainty as to whether infringement exists. In this way, the tech start-up may believe there is infringement while the large company believes there is not.

If a tech start-up company believes that a large company is infringing the company’s patent, an infringement analysis should be performed, preferably with the assistance of an IP attorney, to determine whether infringement is occurring and what the issues are. If after such analysis, it appears that infringement is occurring, then the tech start-up company can then decide the best course of action, considering options such as requesting the large company stop the infringing activity, negotiating a license of the patent to the large company, or, if needed, initiating litigation to terminate the large company’s infringement and/or to seek appropriate damages.

Jim Parker

Permalink Reply by Booker Schmidt on June 5, 2009 at 3:39pm

I appreciate everyone’s in-depth and thoughtful comments on the IP questions I asked.

Since I posed my questions to this group, I had an opportunity to visit with Scott Wilber, the president of The Quantum World Corporation, a tech startup company that’s currently participating in the GTEC Program. The Quantum World Corporation has been involved as a plaintiff in patent infringement litigation in the federal court for the Eastern District of Texas since January 2007. When I presented my questions to Scott, one of his responses was, “You need more claims not less, ‘cause many claims get tossed out in litigation.” He also said each of your company’s claims need to be stated in simple-to-read language and cover a particular nuance of your technology. A single claim, thus, might be stated as 10 claims, each with a separate nuance. I thought Scott’s near-term experience with patent litigation was something to share.

Booker Schmidt