How startups and small businesses should handle their intellectual property Featured

8:01pm EDT August 31, 2011
How startups and small businesses should handle their intellectual property

Small startup businesses and individual inventors often don’t take the necessary steps to protect their intellectual property. That can hurt them in the long run, even rendering them unable to profit from their own ideas.

“Many startups look at what it costs to achieve patent protection and they say, ‘I can’t afford that,’ but that is underestimating the value of IP and properly protecting it,” says Sue Ellen Phillips, a partner with Fay Sharpe LLP. “The U.S. Patent and Trademark Office has done startups, individual inventors and small shops a big favor by initiating the provisional patent filing option.  It gives smaller entities a cost-effective route to protecting their innovations with time to explore their options for getting to market.”

Smart Business spoke with Phillips about some common mistakes startups make with their IP and how they can protect their innovations.

Why should startups be concerned about IP?

They should be concerned primarily because it can be a very valuable asset to them moving forward, whether it is in the form of a patent, copyright or trademark. If they develop a cohesive IP portfolio, it gives them an offensive position within their relevant market, and they can also use it defensively to keep others from encroaching on their market.

On the flip side of that concern, startups should be aware that there are third-parties out there with IP that may be the same or similar to what the start-up is developing, and that there are serious consequences to encroaching on the IP rights of those third-parties. Businesses can be fooled into thinking the way is clear by not seeing their innovation in the market – but that doesn’t mean someone else does not have patent rights relating to that innovation.  Not practicing your patented technology does not mean you can’t enforce it against an infringer.

Also, a strong IP portfolio can become an asset you can license or sell. Maybe you have several streams of innovative ideas that come from your initial ‘a-ha’ moment. You decide to concentrate on line A, but you also have lines B and C. As you’ve grown and your business has become more focused, you have realized you don’t really want those other ideas, but somebody else might. If your IP has been properly protected, i.e. if you have patent coverage, it can be a good revenue source, whether you sell your IP rights outright or license them and collect royalties.

What options are available for startups to protect their ideas?

A lot of startups have financial concerns. They usually aren’t working with a big checkbook, so they should take advantage of provisional patent filing, assuming they meet the patent office criteria, and file for protection of their ideas right from the start, particularly for patentable technology.

Under the provisional filing procedures, you file a patent application defining your innovation. It’s very inexpensive and the patent office doesn’t do anything with it for one year after your filing date.

Nobody looks at it, and it is kept confidential, but you have preserved your filing date.  You can also now mark your product as ‘Patent Pending.’ A year from the filing date, you must convert the provisional filing to a full utility application filing and the normal examination process begins.

This provisional patent application is especially appealing for startups, because it gives them a year to determine whether or not they can find backing, whether or not it is a viable idea they can take to market, whether they can find a licensee or buyer who wants their technology or wants to partner with them. Essentially, you have a year to get your ducks in a row.

When a startup has an innovative idea, what should the next step be?

The first step is to record every idea. This used to happen in lab notebooks. People would make sure everything was properly dated, witnessed and signed off on by someone who could verify it was their work. Today, that happens on a computer, but you still want to do it. Keep good records. Document your progress.

Then, there are three basic things the start-up needs to do.

1. Initiate the process to protect their IP, whether by preparing and filing a provisional patent application or a full utility filing.

2. Be sure your innovation does not infringe the IP rights of a third party.  This step dovetails somewhat with the first.  By conducting a state-of-the-art search or a freedom-to-operate search to be sure the way is clear for you to move forward, also known as doing your due diligence, you will be able to define your innovation in your patent application to achieve patentability over the art you find that may be close.  This step also keeps you from finding out down the road, subsequent to any expenditure of time, effort and money to get your business up and running, that your use of your innovation is blocked by the IP rights of another.

3. Make sure you have appropriate documents and agreements in place to protect your ownership interest in your innovation. It’s very important for startups to ensure they have the appropriate ownership and confidentiality agreements in place with any third-party to which they disclose their innovation. An appropriate agreement provides for maintaining the confidentiality of any and all disclosures you may make to a third party, including an acknowledgement that they will not themselves use the information to compete with you or to help someone else compete with you. Depending on the service the third party is providing, it may be appropriate to provide for ownership of innovations that may be developed by them through collaboration with you and based on your IP. Also, be sure that your own associates and employees have signed employment agreements with these same provisions. You want to block off your technology as yours – effectively building your IP portfolio. Often, a startup or individual inventor will develop something that fits well with an existing business of a third party. Your first idea might be to take the idea to that company, hoping they will buy it or help you market it because it complements what they do. Especially in this instance, you want to make sure you have an agreement in place before you disclose anything, to prevent them from declining to do business with you and then walking away with your idea. Be careful to whom you disclose your ideas.

What all can be considered intellectual property?

Your intellectual property is not just your innovation. It’s not just the device or process, but also all the know-how you used in the developing the innovation. That can include design, manufacturing and processing, and many other aspects, even marketing.

If you are taking your idea to a manufacturer to get it produced, you will probably disclose a lot more information during a meeting than you put on paper. You need to realize that is all part of your total IP portfolio. Be sure that when you get those agreements in place they cover everything you might tell someone, give them in a physical format, or transfer to them electronically. Everything you disclose needs to be covered, not just the plans for your device.

What are some common IP mistakes startups make?

Startups often underestimate the value of doing their research and due diligence, and making sure what they are doing doesn’t encroach on the IP rights of a third-party. If they haven’t taken a look at that and they aren’t protecting their own IP, what often happens is they put a lot of time, effort and money into turning their innovation into a going concern, only to get a knock on the door from a third-party who says, ‘You’re infringing on my patent rights’ and proceeds to sue them for infringement. The legal system does not take kindly to those who do not do their due diligence and do not respect the IP rights of others.

You can lose everything you have by not respecting the IP rights of others.  Of course, if you protect your IP, you can be the party knocking on someone else’s door.

Sue Ellen Phillips is a partner with Fay Sharpe LLP. Reach her at (216) 363-9000 or at sphillips@faysharpe.com.