Pop quiz: What percentage of U.S. patents is litigated?
The right answer: A
With such a tiny proportion of patents enforced in court, why should entrepreneurs even bother patenting? But, in fact, for startups, the reasons to acquire patents have little to do with enforcement. Rather, patents play a critical role in signifying the ownership of something proprietary. It is this factor that helps startups secure capital and compete in the marketplace.
Investors want to know what makes your product or technology proprietary. Do you have a secret sauce? Can your product be copied or reverse-engineered?
Despite our patent system being far from perfect, patents still provide the best legal protection for inventions that are one or both of the following:
Old concepts, meanwhile, may not be patented. And technology that can’t be easily copied or reverse-engineered may be best protected as a trade secret. But when you have the right mix of both novelty and a high risk of copying, patents are key for securing capital.
Don’t take just my word for it. The 2008 Berkeley Patent Survey showed that startups that received VC funding had on average six patents or patent applications, compared to zero patent filings by startups without VC funding.
So, decide early on, and act quickly. Although you have a one-year grace period to file a U.S. patent application from the date of your earliest public disclosure (e.g., think trade show or web/app launch), you shouldn’t wait for someone else to beat you to the Patent Office under the first-to-file rule. There’s no middle ground here, as indecision practically equates with a decision not to patent.
Licensing patent-pending technology
If you’re tempted to forego patents and rely instead on a nondisclosure agreement (NDA) to support your licensing efforts, ask yourself: Is the other side even willing to sign an NDA? If so, what will deter them from breaching the agreement? The threat of a lawsuit? Everyone already knows the high cost for a lawsuit.
And, unlike an NDA, patents and patent applications are transferable assets. It’s the difference between licensing an asset versus selling a lawsuit. Who wants to buy a lawsuit?
Search “someone stole my idea” online and you’ll notice a pattern of penny-wise/pound-foolish horror stories: inventors who failed to patent a concept that was eventually monetized by others. In addition, the only avenue for recovery under an NDA is to sue for breach of contract.
Had a patent been secured, the original inventor at least could have monetized the IP by partnering with a larger company with the resources to enforce the patent.
Exiting with added value
As assets, patents add value to a company even without enforcement. While there is little agreement as to the right valuation method, most acquirers would agree that patents and pending applications add some value to a target company. Ultimately, the value may lie not in the price tag assigned to each patent, but rather to the overall valuation of the company as bolstered by a strong patent portfolio covering core technologies.
Defending with patents
Patents may also serve a defensive purpose in deterring infringement lawsuits from competitors. Notice I said “competitors” — companies that make stuff, as opposed to nonpracticing entities that won’t feel threatened by an infringement suit. If you receive a patent-infringement complaint or a cease-and-desist letter from a competitor, it’s nice to know you have options for a counterattack. At a minimum, you gain leverage in negotiating a more favorable settlement or a potential cross-license.
Patenting or not
Patents aren’t for everyone. A substantial investment of time and money is required. A utility patent also might not make sense if you’re chasing a fad with a short lifespan. Keeping your technology confidential may be yet another reason to bypass patenting. By applying for a patent, you are agreeing to give up certain confidential information on your invention in exchange for exclusive rights.
Since patents are a means to an end and not the end itself, figure out where you want to take your business. Then work backwards to see how patents might help you get there. Just don’t let enforcement be the reason to skip out on patenting.