Post written by
Russell W. Binns, Jr
Russell is CEO of AST (Allied Security Trust), a member-based patent holding company
Founders who want to start a company face daunting odds. There are a lot of statistics, but the consensus is that 90% of startups fail within three to five years. See e.g. Ron Berman, et al., Startup Genome Report (March 2012). With odds like these, young companies need to do everything they can to mitigate risks they face in their early days. Most start-ups tend to spend nearly all their time thinking about how to make a great product and get people to buy it. That makes complete sense, but in my experience too many start-ups overlook the need to protect their intellectual property -- a costly and sometimes even fatal mistake. Startups sometimes refrain from pursuing patents and other intellectual property due to limited funds. Despite the costs, however, there’s a strong case that start-up companies and their legal counsels need to incorporate intellectual property into their risk mitigation strategy early on to avoid problems as they grow. Besides being able to monetize patents, they can potentially block others from negatively impacting your business, and investors often see patents as a valuable property right.
Here are some of the reasons why, as well as some tips on how start-ups should approach developing a patent strategy that protects their businesses over the long-term.
Patent Protection Can Reduce Litigation Exposure and Grow Value
Most companies have some innovation that needs protecting whether they’re in the fast-growing tech or mobile sectors or in more traditional sectors like manufacturing. Perhaps the biggest reason for a start-up to think early on about patent protection is the threat of patent litigation. Litigation is a potent weapon that some competitors use to halt the progress of fast growing companies, and in some cases, they become bet-the-company cases. Smaller companies are easy targets – they have limited resources and expertise – and they are not in a position to deal with large patent risk. And, as companies grow, they also become targets for non-practicing entities and what some refer to as “patent trolls,” who can tie companies up in often frivolous but very costly litigation. In fact, a staggering 60% of defendants in non-practicing entity patent suits target companies with less than $100 million in revenue. See RPX Broker Rundown (May 2016).
But there are a number of other good reasons for start-ups to think more proactively about patents. A strong patent strategy is often a competitive advantage; can help a start-up get funding; can enhance its reputation; can facilitate joint ventures and partnerships; help it go public or be acquired; and can lead to licensing and monetization opportunities. Investors and Wall Street often look at a startup’s patent portfolio in their decision to invest, as well as how much to invest. Mary Juetten, Do Venture Capitalists Care About Intellectual Property?, Forbes (Aug. 11, 2015). Patents provide investors security and position a startup for long term growth. They add gravitas to reaching the initial public offering stage and are a factor in the longevity of a business after IPO. See Wagner & Cockburn, Patents and the Survival of Internet-Related IPOs, 39 Research Policy 214 (2010).
Some Thoughts for Software and Tech Companies
Perhaps somewhat surprisingly, companies in industries that are seeing some of the most rapid innovation -- like software and tech companies, particularly those focused on content delivery -- often ignore the problem and don’t focus on future risk mitigation until they have a problem, and the result can be costly. See Ozluturk, The Cost of Not Having Patent Protection, IP Watchdog (Oct. 21, 2014).
There’s a long history of software programmers not being very keen on patent protection, though this has been changing. One reason is that until 2000, most considered software unpatentable, and there are still many today who believe that all software should be free and remain unpatentable. Although many people believe that the controversial Supreme Court case Alice Corp. v. CLS Bank Int’l, 134 S.Ct. 2347 (2014) made software ineligible for patent protection, it isn’t true. Software companies can and should seek patent protection for their ideas. Those patent applications will receive more scrutiny and they need to be carefully drafted, but patent protection is still available.
The debate over whether software should be patented goes back to the beginning of software, but a good example is looking back to when Microsoft was a young company with almost no patents. Now they are one of the most prolific patent filers. That acceleration in patent filings is fairly recent over the past 15 years, as companies have increasingly recognized the importance of protecting their innovation with large patent portfolios. A more recent example is Twitter, which is known for stating that patents are unimportant, but at the same time has been quietly filing patents and accumulating patents through acquisitions. They even tout the importance of their patents in their filings with the Securities and Exchange Commission. The bottom line is that if Microsoft and Twitter recognize this need, small software and tech start-ups should, too.
How A Start-up Should Go About Developing a Patent Risk Mitigation Strategy
So how to begin? Here are a few patent tips that all young companies should put into practice:
- File patent applications on your inventions and, where needed, acquire licenses to patents, or buy patents to fill gaps where you’re not protected organically.
- You need to file and you need to file quickly because the U.S. is a first to file system, so you need to do this before you publicize an invention or you’ll lose your patent rights, even more so in non-U.S. countries.
- It’s also important to file patents while you are developing your product on all the incremental improvements, different embodiments, new features and build up a core patent protection defense for your company.
In terms of developing a patent risk mitigation strategy, there are a number of ways start-up companies can approach the complex patent challenges they will likely face as they grow. Companies can choose solutions from for-profit and non-profit organizations that range from proactive and defensive to reactive (after an assertion takes place), from less costly to more costly. Some solutions focus on opportunities for operating companies to counter assert, and others on where there is not an opportunity to counter assert.
Ultimately it is up to each company to determine which solution or mix of solutions fits their business, as there is no one silver bullet to solve all patent problems, and which patent strategy gives them the best protection at their particular stage. But regardless of the solution, start-ups that focus on patents and put in place early risk mitigation strategies will be in a stronger position to achieve their business goals and increase value over the longer-term.