This is the second in a two-part series. Read Part I here.
In the first article, we examined the impact of innovation and intellectual property strategies. In this article, we summarize the major issues in developing and implementing an intellectual property strategy. Startup and emerging technology companies in particular should have a clear innovation and intellectual property strategy in place—and these strategies should be reviewed on a regular basis to ensure that it continues to match the company’s business strategy.
The elements of an effective innovation and intellectual property strategy include:
I. Patent strategy.
Utility patents protect inventions which are new, useful and not obvious (other types of patents, design patents and plant patents are used in a limited number of companies). Such inventions can be electrical, biological, mechanical, and chemical or even a business process. Example of works protected by such patents are the laser, genetically engineered bacteria for cleaning up oil spills, a method of running cash management accounts and a method for curing rubber.
1. The company should have a process for identifying potentially patentable inventions. The decision should take into account the trade-off between patent and trade secret protection. Many companies prefer to focus on “chokepoint” inventions, which can control similar products made by competitors. The strategy should consider patenting both the product and the method of manufacture. The company should have experienced counsel review the patent portfolios of its competitors to determine which company inventions are most valuable to protect. If possible, the strategy should take into account the patents filed by competitors in order to be able to respond to potential challenges by such competitors.
2. This process should also provide a method for deciding the countries in which the invention will be protected, based on the importance of the market as well as the cost and the availability of protection under local law.
3. The patent strategy should ensure that the decisions regarding protection of inventions are made prior to public disclosure to obtain international protection. This strategy will need to be changed in 2013 when the U. S. shifts to a first-to-file patent system, rather than the current “first-to-invent” system.
4. The patent strategy may also include a decision to disclose some inventions that the company has decided not to file as a patent so a third party cannot patent it. Many large companies such as IBM have a substantial publication strategy but startups can also benefit from this approach.
II. Copyright strategy.
Copyrights protect “original” works of authorship which are “fixed” in a tangible medium of expression. The standard for originality is very low. Technology products covered by copyright are manuals, firmware and computer software as well as more traditional works such as songs, novels and motion pictures. Unlike patents, copyrights arise automatically when a work is created and do not require an application to the government. However, a U.S. company needs to “register” the copyright prior to bringing a court action for infringement.
1. The company should ensure that it has appropriate transfers of copyrights developed by employees and independent contractors.
2. Employees should be sensitized to copyright issues to avoid unauthorized use of third party software, manuals or other copyrightable materials.
III. Trademark strategy.
Trademarks are words, names, symbols, slogans, smells, sounds or devices used by manufacturers of goods or providers of services to identify their goods and services. Trademarks include the bitten apple logo for Apple computers, the word “Google” for Internet searching, the roar of the MGM lion for films, and the three-dimensional design of the Coca-Cola bottle for soft drinks. Trademarks can endure forever, so long as they are continuously used.
1. The selection, clearance and protection of trademarks is expensive and the company should limit approach to these decisions in a structured way. The most common trademark strategies are
a. A single trademark for virtually all products. Adobe is close to this strategy
b. A primary trademark used on all products, with secondary marks for certain products. Microsoft has adopted this strategy using Microsoft on all products and secondary marks such as Internet Explorer, Windows and Word for specific products.
c. A trademark for each product with customers rarely knowing who manufactures the product. The best example is Procter & Gamble (P&G) which uses Tide, NyQuil and Metamucil, but does not use P&G on its products.
2. Prior to adopting a trademark, it should be “cleared” to ensure that another company does not have rights in the trademark both in the U.S. and other relevant countries.
3. Once cleared, the company should determine in which countries to protect the trademark. These decisions may vary for different trademarks depending on the importance of the trademark and the product. For example, one large Silicon Valley company adopting a new major trademark started clearing the trademark in more than 20 countries at least nine months prior to the introduction of the product.
4. The company should ensure that it has a trademark use policy to ensure that the trademark is used properly and that the company’s use of its own trademark does not undercut the company’s ability to enforce the trademark. For example, Intel lost the right to use ‘386 as a trademark because they did not control its use by third parties.
IV. Trade secret strategy.
Trade secret law protects information of any type that is valuable to its owner because it is not generally known in the industry and its owner has taken reasonable steps to maintain the information in confidence. Examples of trade secrets include customer lists, source code and semiconductor manufacturing processes. Trade secrets can include both positive and negative information.
1. The company should have procedures in place to protect its trade secrets and be able to prove the use of such procedures in order to enforce trade secret rights in court. To enforce its trade secret rights, the company needs to prove that it used “reasonable measures” to protect their confidentiality. These measures can include employee assignment and confidentiality agreement, non-disclosure agreements and a marking program. The misappropriation of trade secrets can be very expensive. For example, Lexar Media obtained damages of $460 million from Toshiba Corp. for violation of its trade secrets.
2. The employees should be trained to recognize and properly protect trade secrets.
3. The trade secret program should coordinate with the patent program, because the issuance of a patent will terminate trade secret protection.
V. Licensing strategy
1. The company should carefully review inbound licenses to ensure that they include license rights that are sufficiently broad to take into account the evolution of the company’s product. For example, the growth of cloud computing requires a review of standard software license restrictions on time sharing. Another critical issue is to ensure that such a license can cover the “collaborative” nature of development for many products. For example, the ability to sublicense these rights may be important, particularly for life science startups who will be partnering with large pharmaceutical companies to manufacture the startup’s product. These licenses, if critical, must also be transferable in the case of a merger or asset sale.
2. The company should ensure that its exclusive licenses do not preclude it from exploiting its technology in markets it intends to enter, and include appropriate minimum performance requirements.
3. The company should carefully consider how much risk of liability it will accept through warranties and intellectual property indemnities to its clients. Startups will sometimes accept unlimited liability for infringement of third party rights to “get” the deal. For a startup, this liability is theoretical because of its limited resources. However, such unlimited liability will be a significant risk to a potential acquirer and may cause the acquirer to lower the purchase price to reflect the higher risk.
The development and implementation of an intellectual property strategy is critical to the success of a company’s ability to innovate and succeed in the markets where the pace of innovation has dramatically increased.