This article aims to present some fundamentals of patents for tech based startups. While a startup should be aware of other forms of intellectual property like copyright, industrial design rights, trademarks, plant variety rights, trade dress, and trade secrets, this article focuses on patents.
What is a patent?
A patent gives you the ability to exclude others from using the invention for a limited period of time. Hence, you get the ability to license the technology and decide how the invention can be used and by whom, during the period of exclusivity. This type of exclusivity needs to be carefully protected, and startups need a good coach who can help them navigate the complexity, including type of patent rights (utility patents, business method patents, and design patents), the procedure for patent applications and prosecution, the rights offered and the requirements in different patent jurisdictions, and most importantly the timing and content.
A patent application consists of several sections – abstract, specifications, drawings, and claims. The meat of the application is the ‘patent claims.’ A claim defines the skeleton around which the technology solution can be built – hence it should be looked as the bare minimum description of your invention that captures patentability requirements – namely novelty, usefulness, and non-obviousness.
Startups should actively sense changes with respect to policy and guideline with respect to IP. For example, US's new (very recent) patent guidelines for the first time declare software patents and business methods patentable, which is of serious significance to startups, they should be cautious from infringement point of view. The exclusivity from the patent office comes at a cost – the patent application with all relevant details is published – this allows others working in the same area to benefit from the current state of the art and continue to build upon it. Does that explain why Coca-Cola hasn’t patented the recipe for its most famous drinks?
Why startups should look to file patents
Patents are expensive and time-consuming, so startups need to understand the trade-off in filing for a patent versus exploring other types of IP or business protection. A patent provides its holder with a legal right to monopoly on use or sale of the invention in the country where the patent rights have been granted. This right can be leveraged to gain competitive advantage and exclusivity, and to avoid the risk of being exposed to assertions of IP infringements from third parties and competitors.
If you are wondering whether your technology is worthy of a patent, here is a quick checklist to guide you:
Novel – the method/material or combination aren’t already known. Also, you shouldn’t have already published or disclosed this in your marketing efforts.
Useful – the technology has commercial potential.
Competitive advantage – monopoly on this will put you ahead of your competitors.
Expansion – this could be used in other fields and applications.
Hide versus publish – it will be difficult to keep and protect this as a trade secret.
If your invention(s) meets one or more of these criteria you should seek legal advice to decide on a patent strategy. Patents can serve many mid-term to long-term goals for a technology company.
Patents as sword: Offensive IP strategy: Patents that are registered with view to enforce them to generate royalties or to exclude competitors is addressed as an offensive IP strategy. Many pharmaceutical companies use offensive patent portfolios to protect new drugs they bring to market to ensure market exclusivity for a time to gain return on their investment, establish market share, and earn profits. (Apple Inc. was able to exclude Samsung products from some markets through court injunctions, etc., as part of an offensive patent strategy.)
Patents as cash cow: collaborative, valuation, licensing opportunities: Patents could be used as revenue generating tools from licensing opportunities, generate increased valuation during funding and acquisition conversations, and could be used for collaborative opportunities. A robust patent portfolio could return 25X of investments in patents during acquisitions. While startups in many countries have typically shied away from patents, there is an increasing awareness of the value patents can bring both from the market and fund-raising perspectives. A ‘patent pending’ tag and a registered trademark for a product name would benefit a startup to attract investors, advertise, and to promote the brand early in the business cycle. Also, a unique product could command a premium market price, having a significant impact on the bottom line.
Patents as shield: Defensive IP strategy: Heard of nuclear deterrence? Well, the same thing might apply to patents in some cases. A lot of patent deals in high-tech spaces involve cross-licensing – where each party provides access to some of their patents in return for a similar license. Startups could build a patent portfolio with the intention of negotiating more favourable licensing terms and/or defending the company against patent infringement lawsuits.
(Google’s acquisition of Motorola Mobility for the latter’s patents surrounding Android mobile operating system was considered a defensive move, as it bought a struggling handset maker because of its highly valuable patents and technology in an area surrounding the Google Android operating system.)
When and where to file patents
A simple straightforward answer to when to consider IPR protection for a startup is “as early as possible.” Once a technology has been made public – directly (publication) or indirectly (for example, through marketing) it might no longer be defensible as a patent. Hence, businesses might be better served by filing a patent early during the lifecycle of the technology. Also, priority date of the application is an important aspect in determining novelty of the technology. A provisional patent application can be filed early on to lay claim to an early priority date, while keeping the upfront cost of drafting and filing a patent low.
Patents are location-restricted and the costs involved in having a broad geographical coverage for IP are very high. It is very important for startups to understand where their market lies and address those geographies for patent coverage. A PCT application is an important tool when deciding geographic coverage – it gives the applicant 30 months to choose what geographies he/she would like to pursue the patent. When making patent-related decisions, startups should keep in mind that a patent term is typically 20 years, and hence decisions should be made with a long term view of the technology and its commercial potential.
Your cheat sheet to patent terms
Coverage: Often startups find it difficult to strategise on patent coverage in terms of geography. Filing in multiple geographies without understanding the market is adverse and will cost the startup heavily. It is advisable for startups to consider the PCT route, which would give them a breather of 30 months from the priority date for additional filings in other geographies. By this time, a startup would also have a clear understanding of where their market is. Other geographic unions also provide broader patent coverage through a single filing channel, for example, EP for some countries in the European Union, ARIPO for Africa.
Public disclosure: Startups must be aware of the fact the any public disclosure of their idea, technology, and product in any form before the patent filing date can become prior art and may prevent you from obtaining a patent. Some countries have a grace period of up to one year but it is advisable to use that only as a last resort.
Patent laws: Startups must certainly be aware of legal aspects of patents at least in the geographies where they file patents, build the technology and sell their products. Countries vary both in scope, timing and enforcement of patents so it is crucial to have a good local advisor in each geography.
Non-disclosure agreement and confidentiality terms: Startups in early stage often disseminate information to third parties without properly defining terms of confidentiality and non-disclosure. This might affect the patentability in multiple ways.
Early filing and late filing: Startups should not look to file patents very early when their technology is just at a wish list stage nor delay the filing till the technology development is mature. Startups should identify optimal time to file patents when they can ascertain claims to the invention they have made.
Inventor versus applicant: Startups should understand who the inventor is and who would be the applicant for the patent. Necessary agreements should be executed with terms laid out clearly. In USA the inventor is the ‘first owner’ of the patent unless it is explicitly assigned to another agency, for example, the employing company or research institute. In a recent case, an American startup discovered this the hard way when the inventor was quitting, to join a competitor.
Patent term: Typically patent terms are defined by the respective jurisdictions. For instance the term of patent since priority date is 20 years in the US, provided the applicant offers to periodically pay the maintenance fee to renew the rights.
Startups should start thinking about their patent strategy early on. It can have a cascading effect on various seemingly unrelated aspects of their business including – budgeting, fund-raising, product launch, market entry and manufacturing tie-ups.