It is commonplace for the top decision makers in high-tech companies to be far more familiar with the business and marketplace realities facing technology companies than the actual science and technology that made them high-growth darlings in the first place. And that’s a big problem.
Executives that have decision making capacity within any innovation-based organization, whether a young startup or a Fortune 500 corporation, almost universally have little or no familiarity with patents from a legal perspective. Sometimes these leaders also have little familiarity with science or technology, and are hired because they are particularly adept in leading a rapidly growing company with hopes of an initial public offering (IPO), or because they have shown a particular facility with raising ever increasing rounds of capital from investors, or for their ability to make returns to early investors on their capital investments.
Whatever the case, after a high-tech startup has outgrown the founders as being the top leaders in the C-suite, it is commonplace for the top decision makers in those high-tech companies to be far more familiar with the business and marketplace realities facing technology companies than the actual science and technology that made them high-growth darlings in the first place.
It should go without saying, but let’s be transparent and say it anyway—if those in the C-suite do not understand the science and technology there is zero chance they have any real understanding of intellectual property.
The C-Suite Needs to Know IP
The previous statement, as unrevolutionary and undeniably true as it may be, should be utterly appalling and downright unacceptable to any investor, perhaps with the exception of day traders and those who prefer short positions. While it is completely understandable that C-suite executives are hired to run the business and understand the marketplace, how can anyone believe it is acceptable that those in the C-suite with real decision making authority know nothing about the business realities, fragilities, value and processes associated with the core assets of the company?
It has become chic to criticize patents, patent owners, innovators and even inventors over the last decade, but investors well understand the necessity of exclusive rights. The exclusivity of patent rights is what prevents the competition from copying you and free riding on the copious amounts of time, money and energy invested into researching and developing. That is why even companies that say patents aren’t necessary ultimately wind up buying patents before they go public (e.g., Twitter) or are acquired (e.q. LinkedIn). Being irresponsible about patents during the early growth years is sometimes navigable by very well-funded companies with good technologies who race off to large market shares, but ultimately, they succumb to reality—they always do.
Patent practice, patent law and the maze of decisions, pitfalls and opportunities that permeate the sometimes bizarro world of patents can easily remain a mystery. Yet for many, if not most or even nearly all, innovative companies the value proposition lies with the patents and trade secrets owned. Without protection companies have no chance when the tech giants arrive. Sometimes even with protection and a comprehensive strategy smaller companies struggle. Indeed, it is hard to imagine where Snap would be without a strong patent portfolio given Facebook’s march to take and copy whatever they want, property rights be damned.
It is critical to understand that the goal of an innovative entity is not simply to get patents, but rather the goal is to leverage the innovation commercially. There is a substantial difference and having at least some knowledge, even just enough knowledge to ask the right questions and direct those within the entity who report to the C-suite, will pay enormous dividends.
CEOs, CFOs, CTOs and General Counsel are typically very good at making decisions when they have the relevant information, but how often do they have the relevant information when making decisions regarding patents and innovation? Even worse, when decisions are being made, the Chief Patent Counsel is frequently not even in the room, so how could they possibly have the relevant information? Further, if the relevant information is presented and they don’t know what it means or why it matters there is little chance that it will impact decision making the way it could or should.
What if you were in the room when patent and innovation related decisions were being made? What if your CEO were to want a tutorial on all matters related to patents and innovation? Here are the things I’d convey.
1. The limitations of most patent attorneys
You hire a patent attorney to prepare and file a patent application, prosecute that patent application with the U.S. Patent and Trademark Office (USPTO) and ultimately, after working with the patent examiner, obtain a patent. The easy thing to understand is that not all patent attorneys are created equally, so you may not get the same scope of rights from one attorney that you would from another attorney, and it may take one attorney longer (and therefore) more money to get to a positive result. Cost and quality must be tracked, and in most corporate environments such tracking takes place on some level or is at least becoming more commonplace.
What C-suite decision makers need to understand is that patent attorneys are good at getting patents. Even the best patent attorneys are not always very good at the business decisions that go into determining whether the patent that likely can be obtained will be useful for the client. And frequently clients don’t ask. If you are not going to work with a patent attorney that can provide a broader business perspective you need to have someone in-house that keeps an eye on patent applications and the ongoing prosecution to make sure what is likely to be obtained, and what is ultimately obtained, is valuable to the company.
If what is likely to be obtained is not valuable, or what is obtained is not valuable, paying for the patent is just wasting precious resources. Issue fees are not cheap, and maintaining patents is expensive when you have a portfolio, particularly if the portfolio is made up of worthless assets.
2. What should be patented
Sometimes it is not the best move to file a patent application, but when you hire a patent attorney you are likely going to get advice that says a patent should be filed. It is like the old saying: If you are a hammer the world looks like a nail. Frequently, however, it is appropriate to keep a trade secret rather than pursue a patent. The questions to consider are many, but if you obtain a patent are you likely going to be able to detect infringement? If not, why file a patent application? How much will it cost to file, obtain and keep the patent maintained? If that cost is more than the value of the advance then you should probably be thinking about a trade secret, not a patent. Each situation is different, and trade secrets are extremely fragile because they are valuable only as long as they are secret, but they do not need to be disclosed and every licensing deal includes licensing know-how (i.e., trade secrets). Often the trade secrets you license are more valuable than the patents because it is that know-how not in the patent the licensee really wants.
So, do you have a trade secret protection regime in place? Without a comprehensive plan to protect secrets they don’t exist, and you are allowing tremendous value never to exist in the first place. You are also not following best practices with respect to protecting your patented innovations, which need to be secret at least up to the time of filing.
3. Provisional patent applications are a tremendous asset
U.S. first to file laws must be interpreted to mean file first before you disclose anything, demonstrate an invention publicly or offer it for sale. The risk of waiting to file a patent application is simply too great and may forever foreclose the ability to obtain a patent. To obtain a filing date as close in time to the date of invention a provisional patent application, which focuses on disclosure and not the formalities of a patent application, can be extremely helpful.
While provisional patent applications are often considered the domain of the independent inventor, since U.S. laws became first to file, major law firms have been advising clients to consider provisional applications, and corporations of all sizes are doing just that. Explain the invention the best you can and obtain a filing date. There is nothing wrong with filing a second provisional patent application within 12 months of the first provisional patent application. This strategy is explained more fully in Provisional Patent Applications the Right Way, the Walmart Way. Walmart filed 39 provisional patent applications on a single invention before they filed a non-provisional patent application claiming priority to all the previously filed provisional patent applications. That is an extreme example, but it shows how one can and should protect and important invention as improvements are made over the course of the first 12 months after filing the provisional patent application.
The benefit of doing this is simple. In the Walmart case they obtained 39 separate priority filings for the purpose of prior art. Whatever is described in an application defines the invention and nothing that comes after can be prior art. So, as the invention shifts and becomes more complete a new filing adds information not previously in the filing and requires a new filing date. And then on the anniversary of the first filed provisional a non-provisional patent application is filed which wraps together all 39 previously filed provisional applications into a single application.
Many patent attorneys will counsel against filing provisional patent applications, and instead recommend filing only non-provisional applications. But for a large entity the cost of filing a provisional patent application is $280 and the cost of filing a non-provisional application is $1,720. It gets very expensive to file only non-provisional patent applications, and why would you when you can file serial provisional applications, acquire priority dates as close to invention as possible and then wrap everything together in the end? It is both smart, and economical.
4. Prosecution traps that can needlessly waste financial resources
There is a significant cost associated with chasing bad patents, because what you chase you might actually catch. And in the patent world the likelihood of catching a bad patent when you chase one is pretty close to 100%.
The dirty little secret in the patent world is you can patent almost anything. If you are willing to accept patent claims that are so nuanced and/or narrow you can convince even the most unwilling patent examiner to issue a patent. Of course, as already discussed, the goal is to obtain a patent that will be valuable, and that is dictated by whether it will be useful for the overall business objectives of the company—a different conversation for a different day.
When you chase bad patents, it wastes your prosecution budget, and it also wastes your maintenance budget, and that will prevent the company from investing in assets that could be valuable for the company to own. All very sensible, but how do you ensure this doesn’t happen?
Patents are filed in many technology areas and then not taken up for consideration by a patent examiner for 2 to 3 (or more) years. Patent prosecution can then take another 2 to 3 (or more) years in an ordinary case. If the technology is revolutionary, or the field is crowded, or there are hiccups in the process, the timeline can easily get extended. As this happens the case will have multiple filings, multiple requests for continued examination (RCEs), and if the company has shown a willingness to pursue the patent for a period of years it can be very difficult for any patent attorney to advise against the next filing even if it seems futile.
This problem is compounded when the person who authorized the patent filing is no longer with the company, the file has switched from one outside counsel to another and perhaps even moved to a new firm entirely. You have someone new in-house and new outside counsel and a company that seems to want this patent badly. That is not a recipe for the company getting the most objective advice about an application that seems futile unless there is a carefully cultivated culture. But if the application is futile because it has no realistic chance to mature into a patent, or because any patent would be worthless and only a drag on resources, someone somewhere needs to hear that advice.
Prioritize for the New Year
It is not necessary for those in the C-suite to become patent or intellectual property experts, but CEOs, CFOs and General Counsel really owe it to the company, and to the shareholders of the company, to familiarize themselves with some of the most basic aspect of patents and intellectual property so they can make better decisions.
These four things that C-suite executives need to know by no means present an exhaustive list, but they are a very good start because they address the people, understanding their incentives and creating a culture to get the right advice they need so they can make smarter choices about what necessarily needs to be a limited budget. Doing more with that budget must be a priority in 2020, and wasting resources chasing bad patents is practically malfeasance.