Patents 101: What Every CEO Should Know  

If you’ve watched “Shark Tank” you’ve likely heard the Sharks probe the existence of patents to guide their valuations of the businesses seeking their funding. A “yes” to patents are usually met with nods of approval and a free pass to continue, while a “no” sets off a gathering series of “I’m out’s.”

While the show’s coverage of patents is cursory and perhaps overly dramatized, the Sharks are right to emphasize it, much like they do sales results and distribution partners, as they kick the tires on the viability of their potential investment. Although neither invulnerable to challenge nor all-encompassing, patents offer inventors peace of mind in the form of constitutionally-grounded protection of their innovations. As a bedrock of intellectual property (IP), patents create a legal monopoly in favor of the creator to exclude others from practicing their invention for a fixed period of twenty years. A framework intended by Congress to create the necessary incentives for developing creative works – and the time required to commercialize those works – without unduly compromising the competitive forces of a free market. As a further balancing act, the patent laws require that the patentable subject matter extend well beyond the ordinary, embodying innovation that is new, useful and non-obvious to those in the field.

Background:

With technology advancing in virtually every domain (AI, Robotics, VR/AR, Gene Therapy, etc.), never has the platform for innovation been greater for enterprising individuals. These innovators, in turn, have ushered in a fresh wave of tech start-ups and the private equity (PE) firms that invest in them. As these companies take shape, there are a number of IP considerations and developments for CEOs to internalize and confront.

In knowledge-led industries like tech, a company’s “intellectual assets” – consisting of its intellectual property (IP) as well as its strategy and organizational framework for protecting and expanding that IP – are not merely foundational for assessing valuation and prospects for growth, but may be essential to its very survival.

Too often though a company’s intellectual assets are overlooked or dismissed altogether by busy founders and execs. Perhaps due to misplaced perceptions of so-called intangible qualities, corporate and PE indifference to intellectual assets can undermine a company’s growth potential, with possibly serious consequence.

Consider the following:

IP Considerations for Start-Ups to Mature Companies:

  1. The US requires the filing of a patent application within 1 year of public use or disclosure/publication of that invention (which is an incredibly broad, thorny concept that can easily trip up inventors). Most systems outside of the US have no such 1-year grace period, thereby patent rights are forfeited immediately in those markets upon any public use/disclosure prior to the filing of an application (incl. potentially a marketing “reveal” with details of the idea or invention). A debilitating and irreversible mistake for any business. Equally costly mistakes include poorly and narrowly-drafted claims in issued or pending patent applications.
  2. A stunning 30% of US “Unicorns” have no US patent assets at all (issued or pending). And 62% have 10 or fewer according to IPWatchdog.com. (http://www.ipwatchdog.com/2015/11/03/the-naked-truth-30-of-us-unicorns-have-no-patents/id=62842/)
  3. Vulnerability to 3rd party IP claims can slow or even block a company’s expansion plans overnight. (See Ericsson v. Xiaomi, whereby Ericsson enjoined the import of Xiaomi phones in India.)
  4. Based on a recent PWC study, median jury awards in patent litigation are at the highest point in 10 years at $9.2M per case. The same study pegged the average time to trial of such cases at 2.5 years. (See “2016 Patent Litigation Study: Are we at an inflection point,” May 2016.)
  5. A variety of sources estimate patent litigation costs at between ~ $3M – $5M per case, depending on the amount of damages being sought.

 China Specific IP Developments [WHY CHINA MATTERS]:

  1. Over the past 2-3 years, China has emerged as the #1 market for overall patent filings (eclipsing the US) based in no small measure on the China Gov’t subsidizing the patent filing costs of Chinese companies.
  2. Its status as the global leader in manufacturing – and growing disappointment by patent owners with the costs and remedy limitations of US litigation – has also elevated China as the #1 venue globally for IP litigation, attracting Chinese companies suing non-Chinese companies, and US companies suing US companies. (See Huawei v. Samsung (2016 in China and US courts) and Apple v. Qualcomm (2017 in China and US courts))
  3. The Chinese Govt’s most recent 5-Year Plan contains significant coverage on IP. One of the most notable directives involves a forecasted target for patent royalties to be secured by Chinese companies against mostly Western companies abroad to more than double from $4.4Bn to $10Bn by 2020. This and the prior point have led Chinese companies to take an increasingly aggressive approach vs US companies in Chinese courts. (See recent patent case by the China Academy of Sciences in China against US-based LED maker Cree.)

Of course, the protections afforded by patents are neither certain nor fool-proof, and poor patent quality remains a hot topic of discussion among practitioners, academics and policymakers. Furthermore, patents can’t overcome bad business strategy. But the considerations mentioned above must be recognized by early-phase tech companies – or really any company lacking an established IP operation – to drive the development of an IP strategy within their organizations before they suffer a loss of patent rights or face the consequences of costly litigation. A strategy that requires informed, proactive, resolute, and timely action by all CEOs.

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