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November 06, 2006

Counterpoint: Patents and Defensibility

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Three of my buddies who are patent attorneys disagreed with my diatribe against patents as a key component of a startup’s defensibility. Being the open-minded Guy that I am, I offered to publish their counterpoint so that you can obtain a broader perspective of intellectual property issues for startups.


Patent law is currently a sea of chaos, and the net effect is that patents simply don’t pack the ooomph that they once did—particularly for startups. For example, the Supreme Court recently issued a decision in eBay vs. MercExchange that many people expect will change the value of patents for small companies that don’t actually make and sell a product.

In the wake of the Court’s decision in the eBay case, tech startups simply cannot count on their patents as an effective and efficient tool to shut down the Microsofts of the world. And that’s after you actually have a patent. Just getting to that point could take years...and years....and years.

Also, the application backlog at the Patent and Trademark Office is at an all time high. Current statistics show that the average patent application takes longer than thirty months from the date of filing to the date of issue. Factor in some of the higher backlogged tech areas such as web business and Internet business methods, and it will realistically be at least five years before the Patent Office even starts to examine your application.

We’ve even heard of delays up to and beyond ten years in certain technology areas. Your competition could run you over by then, and it’s more than likely we’ll all be onto Web 5.0 by the time you get the pretty ribbon copy of your patent.

We’re not changing our day jobs anytime soon though because patents still play an important role in building a defensible business—they’re just not the whole enchilada. In most cases, entrepreneurs need to avoid the knee-jerk reaction of “Patent Everything!” and should instead follow a carefully planned, comprehensive intellectual property strategy to achieve defensibility.

Here are a few tips about how to do this:

  • Put patents in the right place. Don’t mistake this post as a statement that patents aren’t important. They are. You just need to keep them in proper perspective, which is the underlying theme of Guy’s comments. Practically speaking, this means asking “Should we patent?” at the end of the invention management. Then consider these issues:

    • How are your competitors using patents? In some industries like biotech, pharma, and medical devices, you can’t get past Go without them.

    • Is your invention better protected as a trade secret? Trade secrets are any formula, pattern, machine, or process of manufacturing used in one’s business which may give the user an opportunity to obtain an advantage over its competitors who do not know it. The formula for Coca-Cola is an example.

      Not all information can be kept as a trade secret. You need to be able to maintain the secrecy in-house—limiting access to the information—and your competitors can’t be in a position to reverse engineer your product/service and figure out how you did it. One drawback to trade secrets is that if one of your competitors later invents the same thing and obtains a patent, your “secret” use will not insulate you from patent infringement.

    • Could making the invention publicly and freely available create greater value for the company? Making source code and API publicly available might get you that all-important community support that can lead to life-sustaining critical mass and momentum.

    • Can placing the invention in the public domain by making a “defensive publication” work for you? A defensive publication is the publication—essentially donating it to the public domain of select inventions (inventions you don’t want to protect with patents or keep as trade secrets), information, and knowledge with the goal of preventing a later competitor from obtaining patent coverage on the exact same invention.

      Many large corporations have used this tactic; for instance consider IBM’s Technical Disclosure Bulletin One evil variation of this strategy is to publish the document not in the U.S., but instead in Elbonia, Kazakhstan, or some other far corner of the earth with the intent of keeping it generally secret but “published” for the intent of “prior art” status under the Patent Act.

      This won’t give you any rock solid rights, but it might prevent your competitor from obtaining protection on it. Keep in mind that this tactic truly is a donation, though. Once released, this genie can’t be put back in the bottle.

  • Look beyond the value in a legal action. When considering the role of patents in your overall strategy, remember that they can add value beyond just the ability to sue a competitor. This is the fundamental point that Guy missed. For instance:

    • Furnishing a key selling point: “patented technology.” (Whether it is justified is another issue, but it does have some value).

    • Blocking your competitors from getting patents which in turn keeps them from suing you.

    • Providing counter-offensive weapons: if you get sued at least you can counter-sue. The threat of a countersuit can prevent a suit or force settlement out of court.

    • Bluffing and strong-arming smaller competitors. They should know that paying you a nuisance value settlement to license the patent is cheaper than battling you in court.

    • Developing a portfolio of assets that may have value for future acquirers of your company who can afford to sue.

  • Consider the role that inventions will play in your business. Notice that we say “inventions” and not patents. Never forget that patents come second in this game. Think of the inventions and their role in your business first: Are they an important component of the value and growth of the company?

    If inventions are important in any way, develop an efficient system for identifying and managing them. You should have well-designed invention disclosure forms, clearly designed processing systems, regular meetings for reviewing disclosures, and a cataloging meeting with your internal decision-makers at least once each year.

  • Get trademarks that are strong and protectable. If your trademarks aren’t protectable, go back to the drawing board. Steve previously wrote about this on think Vitamin’s site: Trademark Tips for Your Web App.

    As you consider trademark strength, also look at domain name availability. Time after time we counsel folks who don’t spend enough time to find out if they actually can use a word or symbol. They just assume that it is okay to use.

    Get the domain name. You cannot afford to lose this race. Be creative and find something that fits in with your branding strategy. And don’t forget typos and other obvious variant domains that people might accidentally enter when seeking you out. (Did you hear about Utube.com and Youtube.com?) Spending an extra nine bucks here and there on GoDaddy today might help you avoid needing to pay an attorney thousands of dollars later. Consider this domain-name “insurance.”

  • Develop an overall branding strategy for your trademarks, including your domain name. Many entrepreneurs simply wait too long to consider this important and incredibly valuable aspect of intellectual property. If you’re wondering about the importance and value of a solid brand, ask yourself this question: If I were starting a search company, how great would it be if I could call my company “Google”? Guess what: You can’t. Solid branding with appropriate protections creates significant value. Period.

    Branding is as important as your technology is, and it sucks to have to rebrand everything twenty months into your corporate life just because you didn’t spend the time and money to get a legal opinion on the availability of a name.

The bottom line is that if your patent attorney tells you that you must patent everything without regard to the bigger picture, do yourself a favor and find a new one. A good patent attorney looks at the bigger picture and proposes a strategy—not a bunch of disparate tactics.

Patents aren’t the end-all answer to the defensibility question. And, yes, you might look clueless if you base your defensibility on nothing more than “We’ve got tons and tons of patents!” A strong intellectual property strategy designed in the context of the relevant industry can, however, give you defensibility.


About the authors:

Written by the patent attorneys at Rethink(IP): J. Matthew Buchanan, Douglas J. Sorocco, and Stephen M. Nipper. Matt, Doug and Steve also have a number of side projects including a legal jobs board and PatentFizz, a website designed to allow any person to submit any comment on an issued patent…anything from a simple, one line reference, to a piece of prior art, or a complete invalidity opinion.


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Listed below are links to weblogs that reference Counterpoint: Patents and Defensibility:

» Counterpoint: Patents and Defensibility from Marketing & Strategy Innovation Blog
By: Guy Kawasaki Three of my buddies who are patent attorneys disagreed with my diatribe against patents as a key component of a startups defensibility. Being the open-minded Guy that I am, I offered to publish their counterpoint so that... [Read More]

» A Rethinker's response to Guy Kawasaki's defensibility question from Promote the Progress
Guy Kawasaki recently asked us to respond to his comments about the role of patents in the defensibility of a startup. We did. And, as you've come to know us, we don't give the typical patent attorney response. Our take... [Read More]

» To patent or not to patent? from alex on Business Quests
There's a very good discussion going on about the relevance of patents on Guy Kawasaki's blog. This is a very important issue for any business that more or less relies on patenting to errect entry barriers and beat the competition. [Read More]

» How Important are Patents? from Bplans Blog
While patents aren't a silver bullet that will protect your growing business from competition, they are an important part of your business and something that VCs look for as part of a solid business plan. You can read more about [Read More]

» Patent law is currently a sea of chaos from Kempton's blog
It is wonderful to see Steve Nipper, US patent attorney my friend (we got to know each other from a long email exchange on the NTP vs. RIM case), and his two other patent attorneys co-authors at Rethink(IP) writing an insightful counterpo... [Read More]

» Defensibility from Status-Q
Last month Guy Kawasaki wrote about the good and the bad answers to the question What makes your startup defensible?. His first point is that patents arent much use unless youre in biotech, chip design, and medical d... [Read More]

» Counterpoint: Patents and Defensibility from
Patent law is currently a sea of chaos, and the net effect is that patents simply dont pack the ooomph that they once didparticularly for startups. [Read More]

» Adding Value to Patent Applications from Florida Intellectual Property Law Blog
In his Intellectual Property Counsel Blog post entitled A Litmus Test to Identify Exceptional Patent Attorneys , in-house Florida intellectual property attorneyTodd Mayover provides a good overview of things that distinguish a ... [Read More]

» Adding Value to Patent Applications from Florida Intellectual Property Law Blog
In his Intellectual Property Counsel Blog post entitled A Litmus Test to Identify Exceptional Patent Attorneys , in-house Florida intellectual property attorney Todd Mayover provides a good overview of things that distinguish a good... [Read More]

Comments

Guy,

Great post! As a Florida patent attorney at a small firm, I just want to comment on the following quote from your patent attorney buddies:

"The bottom line is that if your patent attorney tells you that you must patent everything without regard to the bigger picture, do yourself a favor and find a new one. A good patent attorney looks at the bigger picture and proposes a strategy—not a bunch of disparate tactics."

Keep in mind that the patent attorney "most knowledgeable" in a client's technology should be the one proposing the strategy--or at least participating in any discussions about it. Many larger firms have "name partners" meeting with clients and developing the strategy and an elaborate heirachy of overworked (albeit well paid) grunts doing all of the heavy lifting work.

Clients seldom bother to ask the low level patent attorney for his or her thoughts on the filing of a new application even though they are the ones in the best position to know.

John Rizvi
My blog:
Florida Intellectual Property
Law Blog

All,

This is a refreshing blog post. For too long I've seen IP strategy simply boiled down to inventions, patents, trademarks, copyrights, etc. If, in it's simplest form, a definition of IP strategy is "a documented and formalized plan for using IP to achieve business objectives", those only using inventions, patents, trademarks, and copyrights to achieve their business objectives are falling well short of the possibilities. If instead, the world of IP is seen and communicated differently in terms of achieving business objectives, for example: defensive & offensive assertion and enforcement, communication of IP position to investors, safeguarding of R&D investment, protection of brand, know-how loss, open source & open collaboration, leverage with customers, safeguarding against disruptive technologies, improving the speed of our innovations, etc., only then will IP and IP strategy get the true attention it deserves (in terms of formulation, resources, etc.) from upper management and C-level executives.

David French writes:

This is a big topic. Patent law will be a big subject in the coming year(s). A sea change may be about to occur.

The problem is that patent law is not a one-size-fits-all exercise. What is suitable for large corporations may not be suitable for small corporations, and vice versa. What is suitable for researchers may not be suitable for manufacturers, and vice versa. One result of the eBay case is that courts may have more flexibility in the future to fit the consequences of patent infringement to the circumstances.

Your commentators make it a very valuable point: get your trademarks, domain name and commercial image in order. This is probably more important for a market player than any patent rights they may obtain.

A patent does not guarantee success in the marketplace. It takes a good invention that people want to purchase and that can be sold at a price that people want pay to lay the foundation for success. Once you have a success, a patent can enhance profitability. A patent can also help a struggling start-up from being crushed by more robust competitors. But remember, that is only one scenario in the patent universe.

In terms of patents, I think we are living in interesting times.

While exclusively discussing patents in the pharmaceutical context, this article by Epstein might enrich this debate by placing patents in a broader context than pure defensibility and VC-funding-seeking:

http://www.ft.com/cms/s/86683512-6dbb-11db-8725-0000779e2340.html

(Subscription may be required)

Thanks.

Thanks Guy for asking us to respond to your article and getting this conversation started.

The patent question is a tricky one for every startup, but, nevertheless, it is one that should be asked. The smart startup, we think, avoids the easy, knee-jerk "patent everything" and "patent nothing" responses and asks the question - Should we seek patent protection?

Understanding patents in these modern times - what they provide and what they don't - is critical to answering the question. You also need to understand your own business objectives and appreciate the role played by patents in your industry, including the role they play in vc funding if that's relevant to the startup. Roll all of that into a broader intellectual property strategy, and then answer the patent question.

Ultimately, maybe you will seek patent protection, maybe you won't. But you do have to ask the question.

It will be tough to get a VC to invest in a patentless, but otherwise promising, software startup. If VC funding is on your road map, better stop for a patent application along the way.

Hi Guy,

Thanks for publishing the counterpoints for us to gain a broader perspective of IP issues for startups.

Hi the Rethink(IP) guys,

Thank you for your insights. Steve, it is nice to read something you have jointly written and thanks again for our previous exchange in patent laws (re: NTP vs RIM) (note: rightly or wrongly, NTP is at it again. this time with Palm.).

Thanks for bringing up "eBay vs. MercExchange", I have read the Wikipedia notes (and will be reading the sup's own judgment later).

Your analysis have be quite insightful. As a minor point, I was told that the likes of "IBM’s Technical Disclosure Bulletin" can simply be printed a few copies and then sent to the US Patent Office directly. As long as the US patent examiner can read them, the purpose of these publications have been achieved.

When you mentioned patents as "a portfolio of assets", I immediately think of Nathan Myhrvold's Intellectual Ventures (both have Wikipedia entries). This is exactly what "Intellectual Ventures" are doing. And this can be really bad or good. Will see. I have blogged about Intellectual Ventures.

Again, thanks for your wonderful analysis,
Kempton

Patents can play a role within the corporate environment, but in my opinion the key point is that they are not necessary nor sufficient to succeed, contrary to what most people think.

I appreciate the further clarification. I'm an engineer for a manufacturing company and IMHO, patents are important and good, but not the absolute gold that some portray them to be.

We have been sent "cease & desist" lawyer letters by folks that have claimed we infringed. Their patents should have been written better.

We have a proprietary technology that is impossible to protect because a hired chemist stole our work and patented it as his own. The patent is written so badly that we just ignore it because fighting it would reveal too much about the real technology.

After reading hundreds of patents, I think most are less-protective than owners believe. Many are written so specifically that they are trivially easy to work around.

Also, without a tight confidentiality policy, patents are worthless. No point in protecting a cookie recipe if you show everybody around your kitchen!

Finally, never under-estimate the possibility of industrial spys. If word gets out that you really have a competitive advantage, your competitors will make room in their budget to find out about you. Don't wait until one tells your customer how many square-feet of manufacturing space you have. It's happend to me!


Patents seem necessary when the work is more *research* focused, as in biotech, because the end results can be easily duplicated. Patents don't seem necessary when the work is mostly *development* focused, as in info tech, because the work must be done from scratch each time. For IT, just enforce the copyright.

Patents in the prespective of the small company is given very well, but looks like an article advising - "avoiding financial ruin by only filing patent". In the broader prespective large companies file patents by the dozen (yes they can afford) but avoiding the chance of smaller companies to tap into emerging technologies. I think patents should follow the US goverment rule - "We respect (patents) it but when it comes to the neck (national security) i will break it". So if a emerging company really needs a technology as to creat another, they should be allowed access

A clear management strategy for intellectual property of all kinds is needed not just for start-ups (although as Guy's point goes it is a key component of their business's defensibility) but also for large firms who may be sitting on a stockpile.

The starting point however would be to understand the inherent value of every such 'SKU' in your IP warehouse. Only then may one be able to determine whether it should be protected with shackles or whether it should be set free.

After all, not many of the Web 2.0 start-ups could even have gotten off the ground if Tim Berners-Lee had staked his claim on the 'patent' that enabled the web.

Innovation is about making money for the entrepreneurs, but above all this, isn't it about something else? Like enabling innovation in perpetuity?

I forgot to add this: Expect to pay 15-20k for each one. It ain't cheap.

Patents have become a slow down technique, not a business model themselves.

It's not a prime benefit to allow businesses patents they have no intention of developing.

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