Authored by Gerson S. Panitch
Ideas Are the Fuel Of New Companies, And Securing Patent Protection Requires Both Watching Out For Competitors And Mapping Out An Aggressive, Solid Business Strategy
In the new economy, ideas fuel economic growth. Even before a business is up and running, venture capitalists bank on their belief that good ideas will produce significant returns on investment. Down the road, when the new business prepares to make its initial public offering, the strength of its ideas will strongly influence its share price.
Yet regardless of how good an idea is, the patents protecting that idea can make or break a high-tech company. If core ideas can be copied by competitors, the value of any investment may sour. And if a rival should obtain a patent on one of those ideas, the business may be left with the unsavory choice of pulling the plug or fighting a costly infringement suit.
Before a technology start-up goes looking for outside capital or before a new business announces its IPO, it is only prudent to ensure that the company's patent position stands on firm ground. A strategic intellectual property plan initiated at the birth of the start-up can do just that. It can identify key patentable ideas and map out ways to maximize protection while minimizing exposure to destructive infringement suits.
A new high-tech business needs to think offensively and defensively about patents. Offensively, the business must make sure its product or service is protected. It must examine existing patents and consider patenting other ideas. And it must analyze the possibility of obtaining "blocking" patents to weaken the patents of competitors.
Defensively, a new venture needs to find out whether rivals have already obtained blocking or "improvement" patents that will effectively prevent it from practicing its own patents. If such blocking patents are discovered early enough, products, services, and business methods can be redesigned to avoid trouble. But if the company is already in full operation when a blocking patent is discovered, redesign can prove far more difficult.
The new venture should ask itself four critical questions:
- Is its patent protection adequate to keep rivals from copying an important part of the business?
- Does any competitor hold key blocking or improvement patents preventing the business from practicing its patents?
- Are its patents valid and enforceable?
- Is its patent position, relative to the market, optimized, thereby decreasing its exposure to infringement suits and increasing its value?
In a perfect world, the answers will be yes, no, yes, and yes. The real answers are unlikely to be so simple.
Adequacy of patent protection. The first step is to open one's mind to the range of ideas that can be protected by patents. Historically, patents were viewed as a tool solely for engineering and scientific companies. Today, they protect much more than gears and motors and drug compounds. A new and valuable type of patent is available to protect business models and methods. This form of patent is sweeping the country and helping Internet and other nontraditional service companies lock out competition.
Successful IP planning pushes a business to protect its innovations in a way that provides value. A patent has value only if it defines an invention that the market wants. The greater the demand, the more valuable the patent.
Think of a transportation system. If the only way to get across a river is one particular bridge, then the owners of that bridge can charge a high toll. But if there are many bridges, then competition will drive down the price. In the same way, if the only way to provide a high-demand product or service is through a specific patent, that patent can command a high price. But if alternative routes satisfy market demand, a patent blocking only one of those routes has less value.
Despite common misconceptions, it is not very difficult to obtain a patent. Last year, the IBM Corp. obtained more than 2,600 of them in the United States alone. The difficulty lies in figuring out where the market wants to go and then writing patents to cover as many routes as possible to that destination.
Patent protection should be considered not only for the complex inventions but also for the simple ones. Technical staff involved in the day-to-day development of hardware and software often take for granted the value of inventions they consider "obvious." But as experts in the field, their perceptions of obviousness are often skewed and, more important, are not necessarily the same standards applied by the U.S. Patent and Trademark Office. Just like the process of technological invention itself, the process of obtaining the most valuable patents often requires one to think outside the box and to adopt aggressive strategies that push the boundaries.
Since market forces in large part determine the value of an invention, the market should be used as one gauge for deciding which patents to apply for. Those working at the heart of a new business may focus their attention on the most technologically challenging solutions. But patenting decisions need to be guided by what forces outside the company perceive as value. These are not necessarily the same innovations that fascinate the engineering and scientific staff.
One way to determine whether patent protection for a new venture's technology and business methods would be valuable is to work with a strategic planner in the patent field. With critical-path analysis, proprietary concepts can be isolated, examined for value, and tested for patentability. Then, patent applications can be crafted to achieve specific business objectives. This approach not only ensures that important inventions are identified, but minimizes expenditures for patents that have only marginal value.
Blocking or improvement patents. No matter how aggressive a company is in procuring its own patents, it needs to guard against charges of infringement by others. Simply having one's own provides no defense to infringing another's. Yet even sophisticated businesspeople assume that their companies have the right to make, use, or sell what is described in their own patents.
No patent gives anyone the right to make, use, or sell anything. A patent only conveys the right to exclude others from making, using, or selling what is patented. This distinction, while subtle, is extremely important.
Consider a new business that has developed the technologically revolutionary "Gizzmo." To make the Gizzmo, the company has to use a certain manufacturing method. Unfortunately, that method was patented by another company. Thus to make the Gizzmo requires infringing the second company's patent. The owner of the Gizzmo can still prevent anyone else from making the Gizzmo. But it has no right to use its own invention, since doing so would infringe the patent of another.
Or consider this real example: After penicillin itself was discovered and patented by British scientists, an American pharmaceutical company obtained a patent on the method of producing penicillin. The British could not produce penicillin efficiently without using the American method. Thus the method patent blocked the practice of the penicillin. The British had to obtain a license from the American patent owner.
Apparently valuable patents can be essentially worthless. To salvage their value, their owners have to acquire licenses from the owners of the blocking patents.
One more example shows how appearances can be deceiving: After a company obtains the Gizzmo patent, others improve the Gizzmo and acquire patents to those improvements. Customers clamor for the bigger, better Gizzmo. Again, to salvage the full value of its patent, the owner may have to seek licenses from those holding improvement patents.
Invalid or unenforceable patents. If the business has to assert its patents in an infringement suit against a competitor, one thing is certain: The alleged infringer will attack the validity and enforceability of the patent.
Even though the Patent and Trademark Office has issued a patent, that does not mean it is valid. A federal court has the power to declare the patent invalid. Though the patent is presumed valid, the alleged infringer can introduce evidence overcoming that presumption And even if the patent is valid, it might be unenforceable because of conduct engaged in by the applicant during the process of patent prosecution.
There is a wide range of theories that an alleged infringer may assert to show invalidity or unenforceability: (1) first use of the invention by others, (2) invention anticipated by the prior art, (3) invention obvious when compared to the prior art, (4) invention barred by a prior sale, (5) lack of enablement in patent, (6) best mode of practicing the invention excluded from the patent document, (7) inventors improperly named on the patent, (8) inequitable conduct in securing the patent, and (9) misuse of the patent. Even smart companies get tripped up.
Optimization of patent positions. Properly executed strategic planning should "optimize" a company's patent position to increase the value of the business. Optimization occurs when both offensive and defensive strategies are employed as discussed above. Optimization also requires a prospective view of the market and of the products and patents of competitors.
When rivals hold patents that are highly desired or that pose infringement risks, a company needs to position itself to gain access to those patents. This is accomplished by forecasting patents that a competitor will likely need and staking out those patents in advance, even if they further no other business objective. Such patents can then be used to trade for cross-licenses or simply to deter suits from rivals, who must now worry about a counterclaim.
Horse trading is common in the patent world. In the 1980s, many foreign companies used barter to gain access to the core technology of U.S. companies. Having lost the race to develop and patent a first generation of chip-based products, these foreign companies set out to improve the products of their U.S. competitors and then to patent those improvements. The U.S. companies owned the core technology, but were left with no choice but to trade it for access to the improvements. Otherwise, the U.S. companies would have had little latitude to upgrade their own products.
On a smaller scale, this type of trading goes on daily. Whether through outright cross-licensing or unspoken decisions to ignore infringement by rivals holding troublesome patents of their own, strategic patents can provide access to otherwise unattainable technology.
Do You Have a Plan?
In short, to woo venture capitalists and IPO investors, a new business needs a strategic IP plan. Such a plan begins with a detailed review of the business's model, methods, products, and services to identify critical and potentially patentable aspects. Critical-path techniques help isolate the most valuable inventions. Thereafter, carefully tailored searches determine what competitors have already patented and ascertain their patenting trends. Commercially valuable aspects of the business are protected by filing patent applications crafted to achieve specific objectives.
As part of the offensive portion of the strategic plan, the business's existing patents are reviewed to ensure that they fully coincide with the business's objective, are not too narrowly written, and do not contain any facial defects. Certain defects are correctable if caught early, and strategies are available to recast patents that were too narrowly written to begin with. The result of the offensive portion of the plan is a patent portfolio that maximizes a venture's exclusivity as to its business model, key products, and key services.
From a defensive perspective, competitors' patents located during those carefully tailored searches are overlaid on the business's technology and analyzed to identify any impediments they might pose. If a troubling patent is identified, experts work with the company to redesign the technology, thereby reducing the exposure to infringement.
A strategic IP plan also examines the competitive landscape for opportunities to obtain blocking or improvement patents that will best position the company to gain access to its rivals' important technology.
In the 24-7 competition that faces high-tech companies, hiring an attorney to simply "obtain a patent" is not enough. Even promising new ventures with their own brilliant innovations need to implement IP strategies that will lock out the competition. At the same time, they need to make sure that they are not stopped dead in their tracks by competitors' IP strategies.
Only when a new venture can say that its best ideas are truly protected and truly exploitable will the venture capitalists and the IPO investors come rallying round.
Copyright © Finnegan, Henderson, Farabow, Garrett & Dunner, LLP. This article is for informational purposes and is not intended to constitute legal advice. This memorandum may be considered advertising under applicable state laws.