Key IP Considerations for Startups: Patents

1. Introduction

A startup company (“Startup”) focused on growth has a myriad of important issues to consider, not the least of which is how to best protect its intellectual property (“IP”) rights.

The smart company will know a well-considered IP strategy early on will add value, increase investor appeal, maximize market leverage, and minimize exposure for years to come.

Four major legal regimes are at a startup’s disposal to help protect its IP: patent law, trademark law, copyright law and trade secret law. This posting will cover some of the basics of patent law.

2. What is a Patent

A patent is a federal right granted to inventors for “new,” “useful” and “non-obvious” inventions. The right is a right to exclude others from practicing the claimed invention.

The scope of rights for each patent is defined in one or more “claims” appearing at the end of each patent. Click here to view a sample patent, this one to a “Football With Bladder Protective Panel.” (Homage to Bill Belichick and Tom Brady.)

A patent will typically last for twenty years from the date the patent was filed.

3. What Can Be Patented

The Supreme Court has stated that “anything under the sun that is made by man” can be patented, so long as what is sought to be patented is not a “natural phenomenon,” “law of nature,” “mathematical formula,” or “abstract idea.”

Although recent cases have disqualified patents based on the determination that certain patents are merely “abstract ideas,” the large swath of technologies – including, for example, cutting edge medical devices, electro-mechanical systems, IT hardware, software technology, and related methods and processes – remain patentable subject matter.

4. Why Patent

There are many reasons to seek and obtain patent protection.

For example, patents protect against exploitation of a company’s core technology and can prevent competitors from practicing the invention in the marketplace. Very powerful stuff particularly in emerging and competitive markets. Patents can also create an incoming revenue stream from competitors and others through well-considered licensing programs.

Conversely, if no patent protection, or poor patent protection, is obtained for a company’s core technology—virtually allowing anyone to copy that core technology—the value of the company and its ability to succeed in the marketplace can be greatly reduced.

A startup understandably may have budgetary constraints and could be deterred from outlaying funds for patent protection. A savvy startup should pause and think big-picture before foregoing a relatively small investment for what might yield much larger gains down the road.

5. When to Patent

Within the last several years, the patent system in the United States has undergone a major sea change due to the passage of the 2011 America Invents Act (“AIA”), which altered the patent system from a “first to invent” system to a “first to file” system.

Under this new regime, subject to a number of exceptions, the applicant who is first to file a patent in the United States will be given priority to that patent. Furthermore, certain publications, uses, sales and commercial activity concerning the invention will trigger a 1-year clock for the applicant to file a patent or otherwise the applicant will be barred from obtaining a patent on the invention.

A shrewd startup will therefore be judicious about how it develops and uses its technology and will file patent applications as early as possible.

6. How to Patent

The patent system is a federal system and therefore patents are applied for through and obtained from the United States Patent & Trademark Office (“PTO”).

The process involves submitting an application to the PTO, which could be a “provisional” (1-year placeholder) application or non-provisional (active) application.

A typical non-provisional “utility” application will be submitted for a patentable device, method or process and include a written description and drawings of, as well as claims to, the invention. A design application can also be filed for a novel ornamental product design, and will be subject to different standards than a utility application.

Once filed, the PTO will take action on the application in the order the application was filed, unless a special request is made to accelerate or expedite the application. Once the PTO issues its first “Office Action,” then the “patent prosecution” process between the patent examiner and applicant (typically through its patent lawyer) begins.

A typical obstacle to overcome during patent prosecution is distinguishing the claimed invention over the “prior art,” which is a broad term that encompasses all patents, patent applications, printed publications, and other sources and activities anywhere in the world that predate the patent application at issue.

Sometimes a patent application will “sail through” the PTO and be allowed to issue with no Office Action rejections. More commonly, there may be several exchanges between the applicant and the PTO, which may include revisions to claims, before a patent is allowed to issue.

The overall timing from filing to issuance can vary widely depending on the technology and prior art at issue, but a typical application should ideally (e.g., no backlogs) take about 3 years. A more accurate estimate of timing for a particular application matter should be discussed directly with patent counsel.

This may seem like a long period of time to a startup company, but many advantages are gained during the application process and before patent issuance. For example, the startup can tell investors it has one or more patents pending, and the startup gains provisional rights to royalties during the time the application is pending for infringers who are notified about the existence of the application.

7. Where to Patent

Patents are territorial, meaning that patent rights obtained through the PTO are only enforceable in the United States.

Numerous other countries around the world also have patent systems, and certain international treaties provide some uniformity when applicants seek protection outside the United States.

One such treaty is called the Patent Cooperation Treaty (“PCT”), which allows an applicant to designate the countries it wishes to file in and then later file in those countries.

For example, a difficult but important decision for a startup to make is which, if any, foreign markets it may seek to enter down the road. Filing a PCT can greatly assist this process because it provides a placeholder for filing in the 140+ countries participating in PCT up to 30 months before filing in those countries.

8. Cost

As with most legal services, a startup will be paying for the attorney time in preparing and prosecuting the patent application. The startup will also pay the PTO and any other international and foreign patent entity fees.

The legal fees for preparing, filing and prosecuting an application will vary based on the technology at issue and other factors, including the quality of patent counsel, which is an exceedingly important consideration.

To provide a general sense of cost, the preparation and filing of a patent application may range from $7,000 to $12,000 depending on the matter. Startups should consult directly with their patent counsel on this issue for their particular matter.

Fees charged by the PTO are standard and can be found at the PTO website. In the US, the PTO offers a 50% and 75% discount on certain fees if an applicant qualifies as a "small entity" or "micro entity."

9. Other Considerations: Freedom to Operate

Another critical decision for a startup to make is whether there are third-party patents that cover what the startup will be doing in the marketplace.

Many startups make the mistake of ignoring this and subject themselves to unnecessary and avoidable risks. To not understand and confront this risk is to literally fly blind.

A startup addressing this issue should confer closely with its patent counsel to determine the best course of action, including a freedom-to-operate search and analysis.

This posting is for informational purposes only and does not, and is not intended to, constitute legal advice in any manner whatsoever. Feel free to contact the lawyer with whom you normally consult for legal advice. The posting is an original writing by the author(s) only and is not attributable to Shores & Oliver, P.C. or its clients.

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