Startup Patent Strategy

Patent strategy for startups is complicated and nuanced, yet it can be the essence of creating protected assets that can ultimately be transferred to other organizations. Being smart and intentional up front is essential to generating such value for a startup.

For high-potential startups, intellectual property is critically important. It can be the essence of protecting your secret sauce that makes your startup special.   In the U.S., there are four types of intellectual property: patents, trademarks, copyrights, and trade secrets. Each can be valuable assets of the company, and it is important to understand how they work and what you can do to protect them. For this blog post, I will leave aside the questions of trademarks and other commercial strategy decisions and focus on the protection of core intellectual property related primarily to a startup’s products. Here are some of my lessons learned shaping the patent strategies for four different startups:

• Decisions to pursue patent protection are strategically crucial for startups. Being granted a patent for patentable subject matter (as defined by Congress and the courts) that is new, useful, and non-obvious is complicated, time-consuming, and expensive. Patents are specific to particular countries and markets. Obtaining and maintaining patents in various jurisdictions can require years and tens of thousands of dollars per patent per country to secure, so deciding what to patent and where are major strategic decisions for a company. What makes patenting worth doing, however, is that issued patents are identifiable assets that can be quite valuable to investors and strategic acquirers and, by virtue of being specifically defined, are rights that can be transferred via licensing and other agreements.
   
• Freedom to Operate:  The power of patents is often misunderstood. While theoretically, an issued patent is a government-granted monopoly to build, sell, and use your invention for usually 20 years, it is essential to realize that a patent means you have the right to prevent others from building, selling, and using your invention. It does not automatically mean you can always use your invention as intended because others have corresponding rights based on THEIR issued patents to prevent you from building, selling, and using their inventions that may place restrictions on your product designs. Most of the time, patents will only cover a subset of the features and functions of your product because you have attempted to get patent rights that are as broad as possible. Others will be doing the same.
  
  To determine if your product design is potentially infringing on another’s issued patent, you have to review the relevant patents out there. This is called a freedom-to-operate analysis. The challenge is that you can never afford to be truly comprehensive in your freedom to operate analyses, so usually, you will focus on major competitors who would have the resources and incentives to enforce their patents against you. Nonetheless, you won’t ever be able to assert freedom-to-operate absolutely, yet because it is so vital, venture capital investors will often insist on some level of freedom-to-operate due diligence during their investment process, so it is something to be aware of and ahead of whenever possible. However, keep in mind that when you analyze competitors’ patents, you may become obligated to report that to the patent office when prosecuting your patents. Talk to your patent attorney about your plans every step of the way to find a good balance.
  
  
• Writing and defending strong patent claims takes great skill. Patent claims describe the specifics of what you have patented. Someone whose product meets all the elements of a patent claim is infringing on that patent claim, and the patent holder can insist (possibly by filing a patent infringement suit, which can be quite costly) that they cease and desist or perhaps sign a license agreement. Note that if even one element of the patent claim does not apply, then the product is not infringing. The art of writing excellent patent claims is critical to getting a solid patent issued and is one of the reasons to hire excellent patent attorneys with expertise in your technology to help you write your patents and navigate the patent prosecution process, which almost always involves a wholesale rejection of all of your claims and then a point-by-point negotiated defense to determine what you can get issued.

• The risks of patent publication:  To get a patent, you must provide enough details so that someone “skilled in the art” of whatever you are patenting could make and use your patent. That means you have reduced your idea to practice (e.g., made a working prototype) and means that if you do not get your patent issued AND the patent is published, you have taught your competitors what you learned along your invention journey. So, before you start or continue down the patenting road, be smart about whether you can risk having your patent application published and then fail to have the patent issued. That would mean that you revealed the specifics of your inventions and then might get no patent protection. The patent office review timelines can extend beyond the patent publication timeline, so this is a real risk, and you must consider the review timelines carefully. Sometimes I abandoned a patent before it was published when we thought it became unlikely to be issued. Another time, we paid some hefty acceleration fees to get a faster review before the publication date because it would have been devastating from an IP perspective if we had not been able to get the patent through. This option was available due to some fairly unusual circumstances. Still, it was a critical factor in our decision to invest in pursuing the scope of the patent protection that we did ultimately get issued.

• Once issued, patents can be challenged. Just because you have received an issued patent does not mean that your protection is absolute. First, you must legally enforce your patent rights if you find someone infringing on your patent. This can be a powerful competitive weapon, but it does require resources. In addition, you may sometimes be able to make the case that a competitor’s patent is invalid. This is an area where you need legal help if you discover that one of your competitors has a patent that you cannot design around.
  
  For example, once we identified a major strategic competitor’s patent very late in the game. Working with our attorneys, we convinced ourselves that their patent was invalid, and we prepared a secret legal challenge that could be filed the moment they tried to enforce it against us. A year later, as we were going through IP due diligence with some VC investors, we kept waiting for the VC’s IP attorneys to ask us about this concerning patent, but the question never came. Finally, I bit the bullet and asked them about it – and, to my shock, they said they were not concerned because the patent in question had been invalidated. I immediately called our patent attorneys to find out what had happened, and we discovered that, for some mysterious reason, the patent holder had challenged and ultimately invalidated their patent. What a wonderful surprise! We never did figure out exactly why they did that, but it did mean that we never had to incur the additional costs of filing our challenge after our investment in developing it in the first place.
  
  
• Some inventions are better protected as trade secrets. Think about what you would need to do to prove someone was using your patented invention. For inventions that can be readily observed, like particular hardware designs that can be taken apart, reverse-engineered, and measured from the outside, patents make great sense because you can show that a competitor’s product infringed on your invention. Alternatively, sometimes it would be tough to detect and prove that someone hostile to you had infringed. If you can’t determine infringement from “outside,” then maybe you should protect your algorithm, program, or other software inventions by keeping them as confidential trade secrets instead.
  
  For example, sometimes, we have decided not to patent software inventions that were embedded in encrypted microprocessor-based computer hardware to perform a specific task that would be virtually impossible to evaluate externally. Because we would have a challenging time detecting or proving that our competitor was using our method in their encrypted microprocessor, it did not make sense to patent and expose our invention via the patent process. Some reasons that software is only rarely patented are because it is often challenging to meet the definition of a patentable invention with software, difficult to access a competitor’s source code to determine infringement, and is challenging to write strong patent claims around software that cannot be easily designed around with a slightly different implementation.
  
  
•  The scope of patent protection — U.S. versus International Patent Protection. It is common to file patents with the USPTO because the United States is often the biggest market in many industries, so it makes sense to seek patent protection there. However, remember that a U.S. patent only protects in the U.S.. Suppose you think you need international protection in addition. In that case, you can file a Patent Cooperation Treaty (PCT) application to seek patent protection for an invention simultaneously in many countries by filing a single “international” patent application. However, ultimately when the PCT application reaches the national stage, you will need to select specifically which countries to seek protection in. This is a very strategic decision as you seek to protect in countries where you have major competitors, major markets, likely manufacturing, and other considerations while balancing the high costs of gaining patent protection in those countries.

Ultimately, patent applications and issued patents are potent tools in the hands of well-resourced strategic acquirers and provide a way to legally transfer and defend rights in particular intellectual property, so they should at least be considered as part of the development of a high-potential startup. This is definitely an area where you want to seek insight and counsel from skilled patent attorneys, experienced investors, and other startup leaders to help you make wise decisions for your particular circumstances. Hopefully, this blog gave you some dimensions to consider as you tackle this critical topic.