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The Top 5 IP Mistakes Tech Startups Make

Written by: John Boyd
Rimon Law Group
Posted: May 21, 2011 @ 11:24 am
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It’s not easy being a technology startup. There are many challenges, including racing towards product and business development milestones, recruitment and management of employees, funding goals and restraints, fierce competition from big and small competitors, changing legal and regulatory landscapes – just to name a few.

One of the costliest mistakes a startup can make is mismanaging intellectual property rights.  A company needs to not only manage its own IP rights, but also avoid those of third parties, including competitors. To be on the safe side, therefore, intellectual property management should include efficiently protecting the startup’s IP rights while also avoiding the IP rights of others.

Consider, for example, a typical smartphone that likely implicates each of the following IP rights:

  • Utility patent rights
  • Design patent rights
  • Trademark rights
  • Trade dress rights
  • Trade secrets
  • Copyrights

Regardless of a company’s size, effective and proper IP management is important to any emerging company. Smartphone makers Apple, RIM and Google’s Android partners have the resources to address these issues with relative ease, but what about the startup or emerging company? Addressing and managing these issues can be a challenge for any company on a tight budget.

Intellectual property rights are important because they can be used to create a legal barrier to competition, establish a portfolio of assets that can be used to generate revenues through licensing or IP transfers or augment the value of a business for purposes of raising seed or venture funding.

It is critical to address these issues as efficiently and as cost effectively as possible.

Here are some of the common mistakes to avoid.

Mistake #1: Not protecting commercially valuable innovations with patents

Some companies choose not to protect innovations with patent filings for philosophical reasons – they don’t believe in patent protection despite the benefits provided by an enforceable patent portfolio.

Others never think about filing a patent application because they don’t believe patent protection is available. Others avoid seeking patent protection for valuable IP assets because of cost concerns, a legitimate issue that has to be balanced against what is lost by not having the protection.

What’s tragic about anyone who neglects to file a patent is that under U.S. patent law, any person who “invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent.”

Virtually “anything made by man under the sun” can be patentable, including software-related inventions and even certain business methods as confirmed by the Supreme Court’s decision in In re Bilski.

Mistake #2: Spending too much money on patent filings.

Patent application drafting, filing, prosecution and maintenance can be expensive, particularly when pursuing international filings.

It is important to be cost effective and efficient in managing patent assets because a lot of money and resources can be wasted on improperly managed IP assets. A good patent strategy considers the following issues:

  1. Identify which innovations should be protected.
  2. Identify in which foreign countries, if any, should patent applications be filed.
  3. Prioritize the extent of the company’s investment in pursuing patents by understanding costs of filing patent applications and prosecuting them to issuance – and evaluating against budget constraints.
  4. Focus on drafting the strongest most valuable patent claims.

Even large companies make mistakes in preparing, filing and maintaining patent applications. These mistakes include:

  • Including just a single granted independent claim when a US patent application can include three independent claims and up to twenty in total for the same filing fee.
  • Only including claims with “means plus function” limitations, which are now interpreted narrowly by courts and often create a costly litigation issue.
  • Mistakenly pursuing claims that do not cover the product as sold by the company.
  • Filing applications in foreign countries with a low likelihood of being granted, maintained or ever enforced. Most non-US applications require yearly fees that escalate over time and patent enforcement is often more difficult compared to the US.

It’s important to develop a strategy that reduces both legal and government fees. This usually requires working closely with a patent attorney or patent agent, but startup team members should be actively involved and do some of the initial work themselves to save money and result in a stronger patent. Companies can employ strategies to create cost effective synergies between inventors and patent attorneys.

Mistake #3: Failing to include protective IP provisions in agreements with employees, contractors, suppliers and other parties.

Startups often work with consultants, suppliers, partners and other parties.

All employees and members of the team (including executives and active board members and advisors) should be required to assign any and all intellectual property relating to the business of the startup or generated using the startup’s resources, and they should be obligated to assist the startup in protecting those IP rights.

To the extent any development work, R&D, engineering or design work is outsourced to non-employees, it’s important that the agreement with these non-employees include similar provisions assigning IP rights to the startup.

I’ve seen even large company’s pay for outsourced development or engineering work and overlook including provisions securing the IP rights generated. If you are hiring a third party to develop something that could embody IP rights, it’s easy to include provisions to own such rights.

Mistake #4 – Infringing someone else’s trademark rights.

It is relatively easy to create trademark rights since common law rights can be generated by proper use of the mark in commerce.

Moreover, filing an application to register a trademark is also typically straightforward and worth doing — your startup’s name could become integral to the business and therefore very valuable.

However, third party trademark rights are often overlooked. Before investing resources in a new mark or brand, it’s important to do your diligence and conduct a full clearance search. The goal of a search is to evaluate whether your proposed trademark likely infringes similar marks being used by others.

Trademark infringement occurs when it is likely that consumers would be confused regarding the source or origin of a product or service. Infringement also exists when consumers would perceive an association between the services or products, or an affiliation or sponsorship between companies, that does not really exist. This is referred to as a “likelihood of confusion”. This includes other marks that might look, sound or means the same as your mark.

In addition, a company can be liable for trademark dilution by using a mark in a way that would lessen the uniqueness of a “famous trademark”.

Investigating a trademark’s availability by conducting a full trademark search greatly reduces the chances of being involved in a costly trademark infringement dispute.

Trademark infringement disputes often result in the infringer having to change its mark, including stopping any and all use of the infringing mark on business cards, brochures, products, packaging, letterhead, phone listings, signage, domain names and in all marketing, advertising, and promotional materials.

Having to stop using a mark that you’ve adopted and invested resources is costly and disruptive. Further, the infringer also has to incur the costs of re-branding under a new trademark. If a trademark infringement dispute results in federal court litigation, the infringer many be liable for three times the trademark owner’s damages, as well paying the other side’s attorney fees and costs.

Startups should reduce the likelihood of any infringement issues by having a clearance search performed before using a mark.

Mistake #5 – Losing the ‘secret’ in ‘trade secret’: loose lips sink ships.

A “trade secret” can be any information that is valuable and confidential.

Among the things that the law recognizes as trade secrets are formulae, compositions, patterns, compilations, programs, devices, methods, techniques, processes, blueprints, stock-picking formulae, customer lists, pricing information, and non-public financial data.

Virtually anything that a third party can or will leverage to your company’s detriment should be held close to the vest (unless you think it’s more valuable to get patent protection).

New customers, prices being offered, margins, potential deals, new hires — all may be valuable trade secrets. Here are some examples of how not protecting trade secrets can hurt a business:

  • Price leaks can undermine your profits. Competitors may learn exactly how to undercut you. Prices offered to one customer might make another angry or provide them with a stronger negotiation position.
  • New hire leaks can make recruiting even more expensive. The former employer may make counter offers or take other actions.
  • Describing a new product before launch can put you at a competitive disadvantage. A competitor may beat you to market or innovate in front of you. That is, they may think of patentable improvements to your product before you do.
  • A premature public disclosure of a new product can also be detrimental to procuring IP rights. You could forfeit foreign patent rights if publicly disclosed or offered for sale before filing a patent application.

Leaks can occur by leaving documents at unsecured locations, displaying documents on your laptop in public locations such as a coffee shop or on a commercial flight, using a cellphone in public, etc.

Conclusion

There are many things a startup can do to optimize its intellectual property assets and manage them strategically and cost effectively.

It helps to work with a lawyer who wants you to succeed and looks out for your interests. Whenever hiring a law firm, be sure to confirm which attorney(s) will be doing your work. The ones doing the pitch are not always the ones that will be helping you.

Finally, in the end, if it sounds too good to be true, it likely is. Advertisements for inexpensive patents are often referring to design patents, which are different from (and usually a lot simpler than) utility patents. Moreover, patent application quality is important since the principal reason to spend the resources to prepare, file, and prosecute is to secure an enforceable patent.

There are many great patent attorneys and patent agents to work with. Be sure to find the right fit for your company.

About the Author

John Boyd is a partner in Rimon Law Group's patent law, patent prosecution, IP transactions, and litigation group. He is based in New York City. For more information, visit: www.rimonlaw.com.

7 comments
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  1. John,

    Great article.

    I would add the point that startups need to take into account timing in their patent strategies. On the one hand, some startups need that first patent as soon as possible in order to get initial funding. On the other hand, the more you can delay costs, the better. How you balance the two can have a big impact on your ultimate success.

  2. Mistake #6 Not securing IP rights online. Essential domain names and social media domains should be secured as well, and before any TM application is published. So get your .com and facebook.com/trademark, twitter.com/trademark and youtube.com/trademark.

  3. #3, failing to have employees and independent contractors sign invention assignments and non-disclosure agreements is by far the most common mistake I’ve seen.

  4. This is an interesting list — note how today’s patent law provides “bungee cords” that give a startup some opportunity to recover from many of these errors. However, most of these recovery opportunities depend on the existence of today’s 35 U.S.C. § 102(a), the prong of the grace period that lets a company develop and test an invention, and bring in investors and strategic partners. However, the America Invents Act totally repeals today’s § 102(a). It’s GONE under the new legislation.

    Startups will be forced into trap #2, “Spending too much money on patent filings” because the new America Invents Act takes away time to “1. Identify which innovations should be protected” and “3. Prioritize the extent of the company’s investment” — the new America Invents Act puts small companies in a “use it or lose it” box, in which “file first, think later, and put your solvency at risk” (and put your patent attorney at risk of not getting paid) and “go patent naked” are the only alternatives.

    “America Invents” is bad. Call your congressional representative, and have your clients call as well.

  5. David-

    What is your position on prior user rights? As you know, I am less concerned about first to file than you. I wonder whether first to file changes have simply been a Trojan Horse all along, with the intent always to seek prior user rights.

    Cheers.

    -Gene

  6. Lately some have come to view trade secrets as a viable alternative to expensive patent prosecution. But with trade secrets, as with everything else in life, you get what you pay for.
    http://smallbusiness.aol.com/2010/05/10/how-to-file-a-patent/

  7. [...] The Top 5 IP Mistakes Tech Startups Make [...]