The early stages of running a startup are fascinating — ideation, hiring, hustling and building. One of the most important steps is to apply for (and be granted) a patent. Assuming the company becomes successful, patents become a crucial strategic asset down the road.
But getting a patent can be confusing, and many Founders worry it is expensive.
Well, have no fear! The following article provides legal advice and strategies from the law startup Asia Law Network. It was written by Chan Wai Yeng who is a patent attorney at Taylor Vinters Via LLC.
Startups generally worry that acquiring a patent is prohibitively expensive
As discussed in the first patent article, the cost of patenting is high and generally several order of magnitudes higher than the cost of acquiring other IP rights such as trade mark and industrial design rights.
A cohesive patent strategy can yield significant competitive advantage
The high level of financial investment involved in patent filing may deter startups from developing a comprehensive IP strategy that includes patent filings at its initial development stage. However, startups with a cohesive patent strategy that aligns with their business can benefit from gaining a strong competitive advantage in the market.
Having a patent filing strategy can also mitigate litigation risks from competitors.
Patents can be a unique source of differentiation amongst competitors
In a crowded tech industry full of established and emerging competitors, startup companies need to establish a distinct identity to differentiate themselves and establish traction.
Strategic patent filings could form part of the overall branding strategy of a startup. Products labelled with ‘patent pending’ or ‘patented’ markings convey the impression to consumers that the products are unique and that significant R&D efforts had been involved in its creation.
It is also conceivable to justify a higher price for products marked ‘patent pending’ or ‘patented’ higher than generic equivalents since the perceived value of a patented product is generally higher.
Patents also can lead to higher valuations when raising funds
Filing patents can be a good strategy for startups to increase both short-term and long-term valuations.
In the Seed and Series A stages of a startup, owning a small number of patent applications reinforces any claims to innovative technology the startup may have, that in turn increasing attractiveness of the startup to early stage investors. A survey of 906 nascent ventures in 2012 revealed that those with patents or patent applications as well as prototyped innovations are more likely to obtain equity finance.
In the later stages of a startup, owning a strategic patent portfolio (including granted patents with significant patent coverage on the startup’s core products or services) can make it particularly attractive to be acquired by larger companies.
There are generally 3 patenting strategies for startups.
Strategy 1 — Offensive patent filing strategy
The purpose of an offensive patent filing strategy is to block competitors from using your proprietary technologies as well as to generate royalties by enforcement of patent rights. Using an offensive patent strategy means filing patents covering all reasonable inventions as soon as possible.
The high cost involved in filing large number of patent applications and maintaining them limits such strategy to be adopted by well-established corporations such as Microsoft and IBM, and may not be a viable strategy for early-stage startups. Businesses with large patent portfolio from an offensive patent strategy can generate significant revenue from licensing or selling its aggregated patent portfolio.
For example, its peak, it was estimated that Microsoft made about US$2 to US$3 billion annually from monetising patent assets that read on Google’s Android operating system. Another major patent licensor, Ericsson predicts annual patent licensing revenues of US$791 million “based on the current contract portfolio.”
In previous years, the company had raked up over US$1 billion in a year from licensing out patents.
Locally, Trek 2000 International, the patent owner of the ThumbDrive has amassed over 50 patent/patent applications in Singapore relating to data storage solutions and successfully executed licence agreement with Toshiba Corporation of Japan for its ThumbDrive related patents.
Strategy 2 — Defensive patent filing strategy
When filing patents defensively, a company files patents with a view to ensure that they are able to use their own innovations without the risk of competitors patenting that technology and restricting their rights to the invention.
With a defensive patent strategy, the overall cost is lower as there are less patents filed, but conversely there are less opportunities to generate licensing revenue from the small patent portfolio. Defensive patents are also filed with the purpose of using it to defend the company against future patent infringement lawsuits.
When faced with a patent infringement suit, patent owners can use their patents defensively as bargaining chips. This may include:
- Using its portfolio of patents to negotiate a quick settlement
- Countersue using patents from its portfolio
- Cross-licensing of patents as a form of settlement
Thermostat startup Nest had the foresight to file patents for their smart thermostat and these patents were used defensively against Honeywell, a Fortune 100 company appliance maker’s patent infringement suit against Nest in 2012.
Nearly 4 years after the patent infringement suit was filed, Nest (now acquired by Google) and Honeywell announced in 2016 that they have resolved their patent dispute and established a long-term patent cross-license agreement reflecting the respective strength of the companies’ patent portfolios.
When local Creative sued Apple for infringing their patent on a method of hierarchical search for user interface for portable media players, Apple countersued claiming that Creative infringed four patents in its hand-held digital players. A settlement was agreed upon with Apple paying Creative US$100 million for the licence to Creative’s patent.
Local startups that are starting to acquire a modest patent portfolio in Singapore include ASLAN Pharmaceuticals Pte. Ltd., popular ride share app, Grab and fintech company M-DAQ Pte Ltd.
Strategy 3 — Defensive publication/disclosure
Defensive publication, or defensive disclosure of a new technology, is a strategy used to prevent third parties from obtaining a patent on that technology. It involves disclosing a description and/or drawing of the product, apparatus or method so that it enters the public domain.
One of the conditions for grant of a patent as explained in our first article, is that the invention must be new. Hence when a technology is disclosed to the public and subsequently a patent application for the technology is filed, the patent application will be rejected by the patent office for not being new.
Defensive publishing, can be achieved at a fraction of the cost of patenting and with relatively informal paperwork. Thus, defensive publishing can be an attractive option for startups that has developed technology that have limited commercial value to justify patenting and cannot be protected in a manner sufficiently secure to support trade-secret protection.
The IBM Technical Disclosure Bulletin was a technical publication produced by IBM between 1958 and 1998, and it serves as a mechanism for defensive publishing. By publishing the details of the invention, patent examiners could have a searchable source of prior art that they could cite against subsequent patent applications filed by others on similar inventions.
Thus, IBM’s defensive publications force its competitors to reduce the scope of their patent rights, thereby minimizing the probability of competitors intruding into IBM’s innovative space.
In 2001, Plantronics developed a technology for reducing microphone noise. Instead of spending resources to patent the idea, Plantronics posted a description of it on IP.com. Thus, by disclosing its design in the public domain, Plantronics prevented rivals from patenting it.
Adopting a comprehensive strategy – blending all 3 approaches
The offensive and defensive patent strategies described above are not mutually exclusive. Most of the successful companies effectively utilize a combination of all three in their course of business.
Companies known to combine both offensive patenting and defensive publication are generally established corporations with well-defined patenting strategies such as IBM, Clariant Produkte (Deutschland) GmbH, Statoil and Valmet Corporation.
Alternative to patent filing – Trade Secrets
The competitive edge of many companies is based on keeping information confidential, which can last forever as long as the information does not enter the public domain. On the other hand, the duration of patent protection is finite (20 years) and the patented technology is disclosed to the public during publication of the patent document.
Taking into account the high cost of patenting and that not all patent applications will eventually be granted, companies may wish to manage their valuable technology as trade secrets. Google’s search algorithm is one of the top tech secrets that allowed the search juggernaut to continue its dominance in the market. Companies dealing in robotics, alternative energies, semiconductors, online games also regularly retain valuable segments of their technology as trade secrets.
Trade secrets involves using a combination of physical, technical, and contractual barriers to preserve the confidentiality of the valuable information and generally provides weaker protection than patents. Trade secrets are protected under Singapore law and allows a company to go after employees who leak confidential information or another companies that has stolen confidential technology.
Despite laws in place that protect confidential information, companies are vulnerable to departing employees that steal confidential data. At least 35 cases have been filed against former employees that allegedly pocketed trade secret information under a US federal trade secret law that took effect in May 2016.
In addition, trade secret does not protect against competitors that independently develop the same technology. A competitor would able to patent the same invention if the first company that developed the invention kept it as a trade secret.
Alternative to patent filing – Registered Design
Companies that are involved in the development of UX/UI should take note that protection of GUIs (static and non-static) should be protected as registered designs instead of patents in Singapore.
In US, registered designs are known as design patents and the US Patent and Trade Mark office issues design patents to applicant claiming novelty in the shape and appearance of articles. In general terms a ‘design patent’ protects the way an article looks as opposed to patents that protect inventions. This may contribute to the general public’s confusion that GUIs can be protected in the same way as inventions are protected by filing a patent.
In Singapore, a dynamic GUI can be registered as a design with IPOS with a series of static representations where each representation, in consecutive order (drawing or photograph), shows a freeze-frame of the GUI in action.
Whether a patent is right for your startup, you should think about it as early as possible
Not every startup business will benefit from building a patent portfolio, however whether a patent portfolio is needed should be considered as early as possible. Innovative companies, in particular will be best served to develop a comprehensive IP strategy with an emphasis on patents over other forms of IP rights such as copyright and trade marks.
You might want to seek the advice of your investors or advisors as well as that of a lawyer.
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