5 Best Practices For Creating a Winning IP Strategy

By Efrat Kasznik

New patent laws in the U.S., the long backlog at the patent office, as well as the increased risk of patent litigation, make it absolutely critical for a startup to start building its intellectual property (IP) portfolio as early as possible.

Unfortunately in our startup advisory practice, we repeatedly see startups come to us after they have mismanaged their IP strategy, either as a result of ignorance about the process or as a result of miscommunications with their patent lawyers.

Many entrepreneurs are also getting misleading advice from investors and other Silicon Valley influencers who are misinformed about the basics of IP strategy. The implications of embracing the wrong IP advice can be devastating to startup valuations and successful exits.

Take, for example, a recent blog written by a partner of Andreessen Horowitz, a prominent Silicon Valley VC firm, which says: “One of the rookie mistakes first-time entrepreneurs often make is to be too guarded about their idea — in fact, many will actually spend their first $25,000 on patent lawyers without ever fully vetting their product…most young entrepreneurs massively overestimate the chances of someone stealing their idea versus the benefits associated with sharing it.”

The author goes on to describe how, when he started a company, he went on to send his idea, including a diagram of his product, to 20 different people for comments, while recommending that every startup should follow a similar strategy of freely sharing their ideas for feedback.

While likely well intentioned, this type of advice is so ill informed, it’s actually dangerous for anyone who follows it.

To counter this advice, I created a list of the top five IP best practices that every startup should follow in order to grow its competitive positioning and valuation in the marketplace. These best practices are based on my 20 years of experience providing IP strategy and valuation services to some of the leading, most successful IP holders across a variety of high tech industries:

1. File early for patents

New patent laws in the US (the America Invents Act, or AIA) introduced the “first to file” patent regime, which awards the priority date for an idea to the first party to file it with the U.S. Patent and Trademark Office (USPTO). The AIA represents a shift from the previous “first to invent” regime, which awarded priority on an idea based on the moment of invention. The need to be first at the USPTO is further compounded by the fact that the office is dealing with a chronic backlog of over 600,000 patents as of the end of 2014, with over 300,000 new utility patent applications filed annually, which translates into a very long pendency time of about three to four years from the initial filing until the patent is granted.

Filing early is absolutely critical to getting your idea in first, and getting your patent underway as quickly as possible. Therefore, a company should definitely consider spending some of its early dollars on patent filing. Having said that, the cost is nowhere near the $25,000 quoted in the Andreessen Horowitz blog.

The USPO allows the filing of a provisional patent application, an inexpensive preliminary filing that allows you to claim your product as “patent pending.” It is highly recommended to file for a provisional to secure the priority date before any publication of the idea, in a conference, on a website or any other place that could be considered public domain.

2. Control the distribution of your ideas

In contrast to the advice offered by the blog, one can never be too guarded about sharing one’s ideas. There’s a difference between distributing non-confidential information for feedback, as opposed to sharing the totality of your idea, including all the novel, patentable aspects of your innovation. Sharing confidential information could not only put you at risk of people misappropriating your trade secrets (in non-legal terms: stealing your ideas), but worse yet, could risk your ideas leaking into the public domain.

Once your ideas have leaked into the public domain, you may never be able to patent them anywhere, not in the U.S. and not in any other country, as the idea is not considered “novel” anymore (one of the key patentability criteria). So the distribution of ideas should be carefully controlled, and limited only to the non-confidential portions of the idea, unless the receiving parties (employees, contractors, third party advisors) sign a non-disclosure agreement (NDA), preventing further distribution of the idea to the public.

3. Own the process: don’t leave it all to the lawyers

The two most common complaints we hear from startup founders who approach us for IP strategy services are: They are not communicating well with their patent lawyers, and they feel like there’s nobody in charge internally who takes full ownership of the patent portfolio. Understanding the filing process, working efficiently with the patent lawyers and creating a strategy and roadmap around filing patents are critical for getting the best return on investment.

When we work with startups, we facilitate the flow of information between startups and their IP lawyers — which often gets bogged down in bottlenecks due to the startup’s inability to produce the needed documentation for filing a patent — while at the same time involving management early on in laying out a filing strategy and roadmap, and securing the necessary funds in future fundraising. As the startup grows and patenting activities expand with funding, the company eventually hires in-house patent lawyers to handle the process, but in the early days management needs to fill many of these gaps and work efficiently with the outside law firm managing the filing.

4. Build an IP portfolio that increases your valuation

There is so much more to building a strong IP portfolio than just protecting your current products. A good IP strategy should also focus on filing patents for the future in order to cover innovations that are going to be on the critical path of your industry over the next five years, so that your IP will also cover other companies’ products. A well-crafted IP portfolio creates a platform for monetization that allows a company to extract value much beyond its own products.

Spending on IP and spending on products should not be mutually exclusive activities. On the contrary, spending on IP should be done in conjunction and alongside the building of products, and if done smartly, the company will create an IP platform that allows it to pivot into new products should the current product not succeed in the marketplace. The IP filing needs to be very strategic, creating the right balance of offensive and defensive goals while positioning the company to gain market share, enhancing valuation and positioning for funding, and increasing the likelihood of a successful exit.

5. Manage the risk of litigation

IP litigation has reached an all-time high in the U.S., with over 6,000 new patent lawsuits filed in 2013. The increase in litigation activity in recent years was largely fueled by the emergence of non-practicing entities, also known as “patent trolls.” These are entities that buy patent solely for the purpose of enforcement, through litigation or forced licensing. That being said, much of the patent litigation is still initiated by competitors, and in the case of startups, by incumbents trying to inhibit the growth of a young competitor through expensive and disruptive litigation. As soon as a company becomes successful, it can expect to be sued, as has been the case with Nest being sued by Honeywell, alleging that the Nest thermostat infringed patents owned by Honeywell.

Having their own strong patent portfolio can serve startups well as a way to hedge against the risk of litigation. It provides ammunition to countersue the competitor, and in that regard, will make them think twice before suing you. It also provides tools for negotiations with partners and collaborators in the marketplace, thus allowing the startup to cross-license its patents in return for access to others’ patent portfolios, thus avoiding future infringement and potential litigation.

[This post originally appeared at BizJournals.com.]

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