Patent Strategy for a Technology Startup: Part 1 of 2, Gauging Value

The world of patents sits at an intersection of law, business strategy, and technology. Whereas patent are legal documents and while the subject matter is technical, business strategy drives what should be pursued. In a technology startup, the patent portfolio is important, but the company is likely not blessed with experienced patent attorneys on staff. Someone has to work with outside counsel and figure it out.

Generally, the goal of creating a patent portfolio should be to build value for the business without siphoning too much money from other efforts. Two knotty questions come up:

1. How do you gauge the value of a patent that may issue years in the future at the time when you are applying for it?
2. How do you do build a valuable portfolio while controlling costs?

This post will address gauging patent value. The next one will comment on building a portfolio while minimizing costs.

My three-year experience of patent strategy for a startup makes me perhaps a late-stage beginner, but a few points here may be helpful to those beginning to think through the topic. Since I have a technical background, please do consult a patent attorney on topics where I steer close to legal issues. My aim here is to raise questions on portfolio strategy.

Analogy Digression

Patents are inflexible weapons in that you can sue for infringement based on what is in the patent. Pretend you and competitors are building settlements on a coastline. Patenting something is like placing fixed cannons on a bluff to fire at approaching competitors. It is valuable if it prevents others from crowding your settlement, unless they work out a deal with you. A great patent would be like the artillery placed on Alcatraz Island in the 1850s, preventing hostiles from entering San Francisco Bay. A useless one would be placing cannons where no one was ever going to visit. Patents are not automatic like land mines; someone has to take action to enforce patent rights.

Value from Patents

A patent is likely going to be more valuable to a technology startup when it excels at the following:

• Is aligned with the company’s business,
• Has its own strong business case,
• Covers valuable technology, and
• Is useful from a legal perspective.

Continuing the cannon analogy, the cannon should be on a prized spot on the coastline, should be placed where it can hit an approaching ship, and should fire properly. Some argue that many patents do not generate much value so it is worthwhile to think through what value each patent will deliver for you, when it eventually issues.

Business Alignment

Working backward, three ways to derive value from patents are 1) by protecting a product’s advantage by deterrence of competition, 2) by licensing the intellectual property (IP) for a product, and 3) by batch sale of patents. The valuable characteristics of the patent’s content look similar when used as a deterrent (1) and when used in an IP license (2). The case of a batch sale of patents is less relevant for a technology startup since this activity shifts attention from the company’s product and customer and toward the large corporate IP manager, who is the new customer. Some buying criteria for this case is suggested here.

Deterrence Value

In a successful case of protecting a product advantage, patent protection of the underlying technology stops competitors from copying the product’s technology, likely by deterring them or potentially by litigation resulting in an injunction. To serve as a valuable deterrent, the patent must claim concepts that a competitor wants to use but is stopped from using because of the patent. At the decision point of filing an application, the deterrence value is not verifiable so some reasoning is appropriate to estimate it. First, if the subject matter is closely aligned with the company’s product then all of the company’s progress with the product can be used to gauge the value of the patent. For example, if a company that makes clamps to hold solar panels applies for a patent on a new clamp design, then the company probably already has estimates for market size, value proposition for the improvements, manufacturing know-how to help estimate costs, etc. If the invention is not aligned with the product, estimates of product value will be at a much earlier stage so the patent’s value will be much more uncertain.

Besides the business case for the underlying product, other criteria for gauging deterrence can be considered. Is the concept even observable? If not, keeping it a secret may be sufficient. Next, the concept must add value for others, or else lack of utility is the deterrent and not the patent. If the concept is very specific to the company’s product, then others will not view it as something they can benefit from. Also, for a specific patent to serve as a valuable deterrent, a competitor must not be already deterred by another, more general patent. By analogy, one can value the deterrence of a nuclear arsenal but also conclude that additional warheads do not increase deterrence.

As an example, suppose a company had a product similar to competitor products, and then an inventor came up with the Widget, which cut overall product cost by 20%. Suppose they intend to show the Widget to customers to help sell the product. So, the Widget is observable, is likely useable by competitors, and uniquely improves the product in a quantifiable way. Apply for a patent on the Widget.

In another example, if the overall product looks unique, it may creatively solve problems of its own creation. No one else may be interested in these secondary technologies, and patenting the core concept may be enough. The secondary concepts perhaps may be added into the specification of the patent application of the core concept though.

If a member of the technical staff has a great idea to improve a product produced by another member of the value chain, the business case for the patent may be much harder to develop. For example, if a solar panel company engineer proposes a better solar panel clamp. Does the company really know the cost to deliver a clamp? Are they going to spend the time and effort assessing the clamp market, customer preferences, etc. to know that this proposed concept is really a winner? Building the value proposition for the patent application is much more difficult here.

IP Licensing

A patent can generate a cash flow from royalties through a licensing deal or perhaps by litigation. In these cases, the paying party is using the technology or plans to use it so many of the same questions arise as for the deterrence case. There must be business value of a product that the technology supports. Someone needs to have the wherewithal to put it into practice, such as engineering, supply chain, sales and distribution, etc. Overall, the licensee has to put together the whole plan far beyond simply what is in the patent. Very likely, the patent they want to license is not just a missing puzzle piece in their puzzle. They may need to license all of the patent owner’s related intellectual property, including trade secrets like engineering designs, simulations, test results, prototypes, manuals, etc and may also want training. The patent is therefore much more valuable when it is a part of a much larger package of IP. Here too, close alignment between patent subject matter and the company’s product allows all of the homework done for the product to map to the patent’s value proposition.  Even if this licensee just wants the patent, the technology provider is much better positioned to provide a desirable patent if they have done all of the surrounding product development. Maybe it does happen that patents not associated with viable products find license agreements? I suspect that this is not probable.

Jurisdiction

Business and legal considerations both weigh into how much the patent’s jurisdiction adds value. Patents are rights granted by national governments for use in their countries, except for a few international ones like the European Patent. If key competitors are in France and if a key market is France, a European Patent validated in France may have business value whereas a U.S. patent would not. It may be relevant for your product and markets to pursue patents in a carefully considered selection of countries, for example by following the PCT process.

A second question about jurisdiction is the hypothetical legal strategy for an infringement suit (a topic where I will quickly defer to attorneys). There needs to be an effective judicial system, such as in the U.S, for litigation to be realistic. Also, consider scenarios of what could be achieved with litigation in that country. Where are competitors based? Where do they manufacture? Is it useful to bring suit in the country where the products are used?

Open Continuations

Using continuations can add value from a legal strategy perspective and also from a product alignment perspective. While a U.S. patent application is pending, a Continuation Application can be filed that retains the priority date of the parent application, uses the same specification as the parent, and features a new claim set. While this continuation is pending, additional continuations can be filed. This can continue indefinitely.

Having an application pending in a patent family adds value because it enables filing additional continuations. In particular, a patent attorney can write a continuation with a new claim set that specifically targets a competitor’s new product while retaining the old priority date. This can quash any wiggle room competitors see in the parent application’s claim language. In general, additional claims can be filed around concepts in the specification that had not seemed interesting at the time of original filing. They can help tailor claim sets to the evolving nature of the product.

Patent Technical Content

What the patent actually says matters. From a technical point of view, the specification and claims should be aligned with the product configuration that is important to the company, and this may have changed over time. Also, the breadth of the claims matters. They may have been narrowed after rejection by the patent examiner, or they may have been written with a different focus than is presently desired. For example, there may be a big difference in value if a company has a patent on, say, “swivel chair” which everybody uses versus on a very specific kind of swivel chair, e.g. 9-leg, ceiling-suspended, voice-controlled swivel chair. Someone is much less likely to infringe upon the latter.

Quality of the Patent

Implicit in the above discussion is that the patent is well written from a legal perspective, and I will leave commentary on this to patent attorneys.

Closing

Focusing on the case of a technology startup, patents will garner more value when bringing together business, legal, and technical qualities. The patent subject matter should be closely aligned with the product. The patent itself should have a business case. The patent should be written to maximize usefulness from a legal strategy perspective. Finally, the subject matter should be technically strong and aligned with the product.

Part 2 of 2 of this series will comment on building a valuable patent portfolio.