7 Intellectual Property Issues Startup Entrepreneurs Should Not Overlook | JD Supra Perspectives

When startups are in the whirlwind of launching a new product or strategizing a marketing plan, there are crucial intellectual property issues that should not be overlooked.

Below are seven things startups should know about IP law, from the perspective of attorneys at Knobbe Martens Olson & Bear:

Ownership and enforceability of your IP will be scrutinized during any IPO or acquisition diligence and are thus critical to optimizing the valuation of your company and positioning for a successful exit...

1. Make Sure You Own Your IP

Mark Lezama: "The laws determining ownership of IP are complex. The rules governing ownership of patent rights differ from those governing copyright, which differ from those governing trademarks, and so on. Applying these rules to a startup’s IP can be particularly challenging. For example, engineers at a startup often have just left or are in the process of leaving another job in the same technology space. They may have competing obligations to assign IP rights to their former employer in connection with their work in that space. Similar concerns arise when startup personnel also teach or perform research at a university. Funding partners will require security interests in the IP. Startups often build on others’ work, such as by using open-source software. Doing so saves costs but complicates the issues of who owns the IP and who has the right to enforce it. Ownership and enforceability of your IP will be scrutinized during any IPO or acquisition diligence and are thus critical to optimizing the valuation of your company and positioning for a successful exit. Retaining quality patent counsel is key to navigating these thorny questions successfully and ensuring that you own your IP and have the right to enforce it."

2. Provisional Applications Help Protect IP, If Done Right

Bruce Itchkawitz, Ph.D.: "If obtaining foreign patent protection is part of a startup’s business plan, the company must get a patent application on file before disclosure of its technology to the public. Even in the U.S., where there is a one-year grace period to file a patent application following public disclosure, there are advantages to filing as soon as practicable. U.S. provisional applications are useful for obtaining early priority dates prior to public disclosure, but there are risks to the unwary. A provisional application only provides its earlier priority date for subject matter that is (i) disclosed by the provisional application and (ii) claimed by a subsequently filed utility patent application. As a result, relying on a provisional application which discloses too little can provide a false sense of security when the claims of the subsequently filed utility patent application are not fully supported by the material in the provisional application.

In addition, public disclosure subsequent to the filing of an insufficient provisional application can prohibit foreign protection for the disclosed technology and can unwittingly start the one-year grace period in the U.S. This issue can be particularly important when the technology is undergoing research and development between the filing of the provisional application and the filing of the subsequent utility patent application. In such instances, strategically filing multiple provisional applications can be helpful to protect important improvements in the technology during the course of research and development and to obtain as early a priority date as possible. The subsequently filed U.S. utility patent application can then rely on these multiple provisional applications within the preceding year, on a claim-by-claim basis, for priority."

3. Consider Faster Patent Protection with the “Track One” Program

Bruce Itchkawitz again: "Savvy startups also strategically utilize the 'Track One' program with the U.S. Patent & Trademark Office to obtain prioritized examination of their U.S. patent applications. Under this program, a startup can put its patent applications on a fast track through the USPTO and potentially obtain U.S. patents within one year of filing. While there are additional USPTO fees for using the Track One program (currently $2,000 for a small entity), the advantage of avoiding the typical pendency of two or more years and getting a U.S. patent in hand early on – with the concomitant increase in company valuation – can be well worth the extra costs. In some instances, the early grant of a patent in the U.S. can be further leveraged to obtain earlier patents in other countries as well, utilizing the “patent prosecution highway” agreements between the USPTO and certain foreign patent offices.

4. Many Different Written Agreements Affect IP Rights

Mark Speegle: "When it comes to protecting the company’s IP, your vendor agreements, employee agreements, investor agreements, operating agreements, and others, all matter. All written agreements that touch on the ownership and secrecy of your IP are of great significance. And it’s not simply having these agreements in place – the terms of the agreements matter. For example, you may have a non-disclosure agreement with a supplier, but do you have a non-compete with them? Does your operating agreement require the assignment of IP from the founders to the company? Is it a present assignment or a mere obligation to assign in the future?

Startups should press to use their own written agreements with third parties whenever possible.

Too often these agreements are treated like minor formalities rather than affecting critical IP rights. Even subtle differences such as an employment agreement being governed by California law compared to Delaware law could be the difference in whether your startup’s IP is adequately protected. Startups should press to use their own written agreements with third parties whenever possible. Beyond that, these agreements need to be properly vetted by IP counsel. More often than you may expect, a five thousand dollar early investment in proper written agreements can avoid hundreds of thousands of dollars in legal work during a due diligence or litigation."

5. Don’t Be “U.S.-Centric”

Salima Merani, Ph.D.: "Some important technologies are patentable in the U.S., but not patentable in many key countries around the world, such as Europe and Japan. One example is methods of medical treatment. Although such method patent claims can be immensely valuable in the U.S. and sometimes in Australia, other countries generally will not allow such claims to receive patent protection. Thus, a medical technology startup with a revenue model having an initial revenue stream in Europe (a very popular approach in light of the shorter regulatory pathway in Europe) may be sorely surprised if it does not have an early IP strategy in place to protect its IP in countries outside the U.S. A startup should know early on which countries might be important and consult with an IP firm that takes a global perspective on patent filing strategy. In the scenario above, even if methods of medical treatment might not be patentable in Europe, the underlying device that is adapted to perform the method might well receive meaningful patent protection—and it may be quite valuable to include such disclosure in the startup’s early patent filings.

6. Early Third-Party Licensing Terms Can Kill A Future Deal

Salima Merani again: "Many startup companies will license foundational technology from an institution or other third party. Sometimes, these license agreements will not have been reviewed by IP counsel for at least two reasons. First, the founder will consider the license to be a purely financial transaction such that he will only think 'how much is this going to cost me today to get this done'— getting IP counsel involved never crosses his mind. Second, the startup may be so newly formed that it hasn’t even engaged IP counsel. These scenarios can lead to IP terms that are incredibly unfavorable to the startup in the long run. For example, licensing terms that call for excessive milestone payments or that do not allow the startup to unilaterally terminate the agreement, control litigation, or get acquired without consent from the licensor, can all be deal killers in future investment rounds and acquisition.

'Field of use' terms that are sufficient to cover the startup’s first generation products are sometimes too limited to cover version 2.0.

Another significant risk can stem from licensed fields of use that are too narrow to evolve with the startup’s future innovation. 'Field of use' terms that are sufficient to cover the startup’s first generation products are sometimes too limited to cover version 2.0. This can lead to a great deal of tension between the startup and the licensor, where the startup is unhappy that it needs to pay additional fees (which are sometimes very high) to cover its second generation product. Even more distressing is when the startup realizes that the licensor has already licensed this valuable field of use to a competitor. Startups should be cognizant that IP terms in what seem to be straightforward early licensing agreements could have far-reaching detrimental consequences, and should therefore retain IP counsel to review the terms before signing on the dotted line.

7. Consider All Forms of IP Protection

Tom Cowan: "In the U.S., only certain types of inventions are eligible for patent protection. In the wake of recent Supreme Court decisions addressing the boundaries of what is and is not patent-eligible, the USPTO and courts have subjected biotech, software, and business-method patents to increased scrutiny. For example, patent claims to isolated DNA, to certain medical diagnostic tests, to software that performs well-known functions, or to methods of mitigating risk in financial transactions or investing, all face an uphill eligibility battle at the USPTO (and in the courts if challenged by third parties). In view of these trends, startups—especially those in the areas of biotech, software, and business methods—should consider all options to protect their IP.

Consider that the patent system requires public disclosure 18 months after you file a patent application. Many businesses monitor patent publications to keep up with competitors. If you have a lucrative genetic discovery, for example a correlation between a genetic mutation and Alzheimer’s, a patent application will tell the world about it very soon, and the “eligibility” hurdle may make it difficult to get a valuable patent on that discovery. It thus may make sense to consider keeping such innovations as trade secrets.

Trade secret protection should also be considered for software. The search algorithm for Google is one example of a very valuable trade secret. But another option for protecting software is copyright. Registered copyrights will also be disclosed to the world, but if the software may be easily reverse engineered, a copyright is likely a better option than a trade secret.

The details surrounding the invention and your startup’s business goals will determine which kind of IP is best for you. But with certain technologies, startups should consider all forms of IP protection."

JD Supra publishes a series of posts, "Legal Perspectives," and Knobbe Martens attorneys discussed seven intellectual property issues that startup entrepreneurs should not overlook.