November 2013
Intellectual Property Today
Authored by Scott J. Popma and Elizabeth A. Shah
Vaporware—a publicized product that fails to materialize but is never officially canceled—has long frustrated the computer industry. For the emerging crowdfunding industry, the problem of vaporware looms large.
Crowdfunding allows entrepreneurs to raise money by pooling smaller contributions from a larger number of people, "the crowd." Crowdfunding has gained prominence as entrepreneurs, including the developers of Oculus Rift, ZPM Espresso, and Pebble Watch, have become wildly successful in generating capital using crowdfunding platforms. Many crowdfunders pre-sell products that are still in development to generate interest from the crowd. Through these pre-sales, contributors donate capital for entrepreneurs to develop their products and, in exchange, they receive the finished products once developed. Some of these pre-sale consumer products have failed to materialize, however, and investors have been left with nothing in exchange for their early investments. The question for the next generation of crowdfunders, then, is how to maintain confidence and enthusiasm among crowdfunding investors and avoid falling into the vaporware abyss.
A key step in building any successful business based on an idea—including a business that will rely on crowdfunding—is developing an intellectual property ("IP") strategy to protect the idea and to ensure that the path to market is clear. Without such a strategy, there can be several road blocks to a successful launch.
Some products never make it to market because there is no longer a financial incentive for the entrepreneur to produce them. A downside of the public nature of crowdfunding is that the crowd often expects detailed disclosures of your proposed product. Additionally, the public nature of crowdfunding campaigns makes the signing of non-disclosure agreements impractical. Without IP protection, established companies already in the market have little reason to pay to license a crowdfunder's idea when they could reverse engineer the product and produce it themselves. Well-positioned competitors with resources to bring a product to market quicker and cheaper can derail a product launch and render your idea valueless.
Similarly, the IP of third parties can present hurdles on the road to market if you lack a plan to navigate those obstacles. Established competitors with large patent portfolios can sometimes leverage that protection to block new competitors from the market. You may face the threat of costly patent litigation or may be required to pay steep licensing fees, either of which can capsize the economics of your product launch.
The idea at the center of the campaign is your source of funding and the driving motivation behind the future company. For all of the above reasons, before going live with your campaign, you must ensure that you have adequately protected your most valuable asset and that you have given proper consideration to potential challenges posed by third-party IP. A company that can demonstrate that it has thought through IP issues in addition to traditional business strategy issues will be a more attractive investment to an educated crowd. And a start-up that is able to raise more capital will have a longer runway to produce its product, significantly reducing the risk that its proposed product will go the way of vaporware.
The cornerstone of an effective crowdfunding patent strategy is filing a patent application to protect your idea. An issued patent, or even a published patent application, may help prevent an established company from copying your concept without reimbursing you. However, some patents are more effective at this than others, and an effective crowdfunding patent strategy requires consideration of many factors:
Researching your market is an essential step in building a successful IP-focused business plan. It is important to identify the players in the market (a.k.a. your future competitors) and understand the products that will compete for market share. How does your product differ from these existing products and what makes yours better? Who are your customers, and why are those differences important to them? This type of market research can assist with developing a patent strategy aimed at protecting the aspects of your product that provide value and may be targeted by your competitors.
You can learn a lot about the market you are trying to enter by studying the IP owned by your competitors and other third parties. Perform a prior art search to see how many patents cover technologies like that of your proposed product and who owns those patents. Check to see when and how often those patents have been asserted by another; this will give you an idea of how protected the market is, but remember this is only a partial picture. Many disputes never make it to court and instead are settled with licensing deals or a decision to withdraw from the market.
An understanding of the IP landscape will improve your odds of success in a future dispute. For example, filing a patent application that protects a key product feature will provide leverage when dealing with larger, more established companies. Having your own patent portfolio will help to level the playing field and increase the chances that your product successfully enters the market.
Let's say you have a great idea for a new gadget. Do you want to develop a long-term plan for producing, manufacturing, distributing, and selling that gadget? Or do you want to produce a prototype quickly, build buzz, and then sell or license your gadget to another company? It may seem counterintuitive, but one of the first things a crowdfunder should do is determine what, if any, exit strategy it may employ.
If your exit strategy is to get out quick, understanding your future acquirer, and tailoring your patent application accordingly, can increase your value. The broader your scope of patent protection, the more valuable your product will be to an acquirer. Obtaining patent coverage that is broad enough to cover a valuable feature of the acquirer's future product lines could make your company a more favorable acquisition target.
A patent application can be filed as either "provisional" or "nonprovisional." Provisional applications are a cost-effective option that give an entrepreneur one year to determine whether to pursue full patent rights through a nonprovisional application. In that year, you can hold a crowdfunding campaign to raise money to support future activity, such as product development or obtaining IP protection. At the end of that year, you can either allow the provisional application to expire and incur no additional costs or file a nonprovisional patent application and begin the examination process. Bear in mind that the provisional route may not be optimal if you have a short-term exit strategy and are in a rush to get a patent as soon as possible.
To create more value for yourself or for a potential acquirer, do not limit yourself to current geographical opportunities when seeking patent protection. Consider filing a PCT application, also known as an international patent application. This acts as a placeholder and preserves the right to eventually seek patent protection in other jurisdictions. Countries of interest may include those where the product eventually could be sold or those where it may be manufactured. There is a one-year deadline from the filing date of the primary patent application to file a PCT patent application.
If you are uncertain about whether to file foreign patent applications, filing a PCT application before the expiration of the one-year deadline will give you more time to determine a foreign filing strategy and to conduct a cost-benefit analysis. Fees for filing and maintaining foreign patent applications can add up quickly, so the amount of capital raised from crowdfunding, the projected timeline for going to market or manufacturing abroad, and the significance of those foreign markets should be weighed before filing foreign applications.
Remember that product development is an ongoing process rather than a static exercise. As time goes on, new generations of your product may be introduced, new companion products may be developed, and new uses or features may be added. These later iterations may or may not be covered by the originally filed patent application, and you should consider filing new applications or filing related applications, such as continuations, to cover the new features. As the product changes, make sure that what ends up on the market is also what is covered by your patent. Additionally, as business goals change, make sure that the patent filing strategy reflects those changes. Patent applications should mirror relevant products and aspects, which may mean abandoning an application that is no longer applicable. Intellectual property strategies should be flexible and should evolve as goals and the competitive landscape change over time.
Building a strong understanding of the market, determining an exit strategy, and developing an IP strategy will make entrepreneurs better prepared to bring a product to market and will demonstrate to crowdfunding investors that the company is capable of delivering its product. This, in turn, will assist with reaching or surpassing fundraising goals and will assist with a successful product launch and the avoidance of vaporware.
Copyright © Finnegan, Henderson, Farabow, Garrett & Dunner, LLP. This article is for informational purposes, is not intended to constitute legal advice, and may be considered advertising under applicable state laws. This article is only the opinion of the authors and is not attributable to Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, or the firm's clients.
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