Lean Patent Prosecution
If you were to get opinions from a hundred startup experts on various topics such as funding, product development, business development, and PR the responses will be fairly consistent. The one topic where you will get the most wildly differing opinions is patents. Instagram sold for $1B without a single patent. Nest filed hundreds of patent applications and sold for over $3B. Wivity has multiple granted patents but we rarely mention them in our slide decks because some investors interpret it as meaning "we spent all our time filing patents instead of building our product and talking to customers, but that's OK because we now have a monopoly!" What is a startup to do?
We've all heard of "lean product development." I'm going to shamelessly steal that naming and propose "lean patent strategy." As you read this keep in mind that I am certainly not an attorney (although our attorney has looked this over), so don't substitute this post for legal advice. However, 99% of attorneys are not entrepreneurs so keep that in mind as well. Last caveat- not all industries are the same. If you're a biotech company for example, read no further.
In Net Neutrality the battle lines are clearly drawn between content (Google, Apple, Facebook) on one side and infrastructure (Comcast, Verizon, AT&T) on the other. With patents it's not so clear. Big companies like IBM and Microsoft have huge portfolios that generate hundreds of millions of dollars in licensing revenue. Big companies also pay out hundreds of millions of dollars in patent suit rewards. Non-practicing entities (NPEs, otherwise known as "trolls") sue not only large companies but later-stage startups as well. These same NPEs purchase patents from startups which puts money in the pockets of entrepreneurs. Someone should write about the dark world of the patent transactions (it would be a great TV series, BTW), but for now let's focus on patent prosecution strategy for startups.
A patent does not give you a monopoly. It only gives you the right to file an infringement suit against someone that manufactures, sells, or uses a product that you think infringes on one or more of your patent claims. So, a patent will not prevent competition unless you sue your competitors and win. We're talking lots of months and dollars that could be spent on improving your product and selling it. However, patents could help you with large companies. A large company has three choices- a) use your product, b) use your competitor's product, or c) build the functionality internally. If all have similar NPVs, patents could tilt the equation in your favor. If a large company is thinking of making an acquisition, patents could be a reason it puts your company at the top of the list versus one of your competitors. The problem is, obtaining a granted patent is expensive and time-consuming. You may get lucky and get an allowance from the patent office in a few months, but in my experience the process takes years and tens of thousands of dollars.
In order create patent strategy you have to understand how large companies value patents. The first thing to understand is that each company uses a different equation for patent valuation. When I was at General Motors we placed high value in granted patents when making a build versus buy decision because a patent suit could lead to an injunction that shuts down the assembly lines- an extremely costly outcome. Other companies are quite happy infringing on your patents and daring you to sue them. Companies that are highly sophisticated with patents (e.g.- Google) are able to place a dollar value on a patent that is directly proportional to numerous factors like cost to litigate, potential damages, who already infringes the patent, etc. The nature of the patent matters tremendously. If you have a software cloud patent it's unlikely Amazon is going to value it highly- they already have hundreds of similar ones and software patents are more easily invalidated. If you have a hardware patent in machine artificial intelligence that was filed a while ago and has very broad claims, it might be the apple of everyone's eye. However, no large company is going to tell you how valuable your potential patents are, just like the US military isn't going to tell you where the vulnerabilities are in the armor of an M1 Abrams tank. As an early stage startup you need to keep the door open on patents without letting your legal prosecution fees get out of hand too early. You need to go lean. Here are the steps to do it.
1. File provisional patents. A provisional patent costs only $130 for startups and locks down a filing date in case you decide to file a utility patent later. To keep your fees down, file it yourself- there are tons of online instructions you can search for. What's important is that your filing describes all the features of your product, especially the ones you want to patent. If you're in doubt about a feature, put it in. However, keep in mind that what you file will eventually be publicly available if you decide to go ahead with the utility patent.
2. File more provisional patents. Provisional patents are cheap, so keep filing them as you create new features. If you decide to go forward with the actual utility patent you can combine all your provisionals into one to save on filing costs. However, don't file a new provisional with only the new features- include all the features from your previous filings as well, if they still make sense. For example, suppose you filed a first provisional on Feature A on March 1, 2017. You create another Feature B on June 1, 2017. Instead of describing just Feature B in your second provisional, include Feature A as well. This might cost slightly more due to filing more pages, but if you can afford it (or you can summarize Feature A to reduce cost) it is worthwhile. You'll see why in step 3 below. Remember to save the USPTO acknowledgement letters and respond to any errors in your filing. Keep a spreadsheet of all your filings, including the title, official filing date, and serial number.
3. Don't file a utility patent until you can afford to spend $20k on prosecution fees. A provisional patent expires after a year, but don't let that force you to convert it into a utility patent. Attorney drafting and filing fees will cost you more than $10k, and all the office actions that come soon after will cost thousands more. It's better to spend that money on product development and marketing. If you followed my instructions in step 2 above you'll have a second provisional that hasn't expired yet that has all the information in the first provisional that is about to expire. The only thing you'll lose is the delta in the filing date (which is 3 months in the example I gave in step 2). We only felt comfortable going forward with a utility patent application once we raised $500k from investors. We'd suggest raising even more.
4. File as few utility patents as possible. When you have enough cash to convert your provisionals into a utility application, combine all your provisions into one application. This is exactly the opposite of what large companies do, but large companies want volume to juice their numbers and they have the money to pay for all the legal fees. As a startup you just want good claims, and if you can get all those claims in a single patent that gives you the most value for the least amount of money. The patent office may ask you to split up your patent further down the line, but your goal is to minimize your legal expenses up front so that's fine.
5. Use a battle-tested attorney. Not all patent prosecution attorneys are created equal. How you draft your utility patent up-front has a huge effect on not only getting your patent granted, but how valuable it is to large companies. The ideal attorney is someone who is familiar with courtroom patent battles and knows how to maximize the strength of your patent so it stands up during litigation. Patent litigators are good people from which to get referrals on patent prosecutors.
6. File with the PCT. In the current climate where US patents are routinely invalidated by Inter Partes Review (IPR), European patents are becoming more valuable. Filing with the PCT is a little more expensive but it will give you the option to file in other countries (including the US) and pushes off filing in individual countries for at least 8 more months after you file with the PCT.
7. Lengthen the process. Once you file your utility patent it kicks off a number of very expensive steps, each of which happen in succession. You may get an office action that says all your claims are invalid. If you haven't raised your 7-figure A round yet, your best strategy is to wait until right before the deadline to respond. Each response takes hundreds if not thousands of dollars. You should spend your seed cash on customers, not patent attorneys. Once you raise your A you can push to get your patent granted, but until then delay spending money as long as possible.
8. File continuations. When your patent gets allowed, you should file a "continuation" that keeps your patent "alive", which means you can file another patent with different claims. Large companies and NPEs love this because if someone creates a product that doesn't infringe on your granted claims, but there's something in your patent specification that will cause problems for the product, you can file a patent with a new claim that directly targets the product. Patents that are still "alive" are more valuable than those that aren't, but now we're getting into territory that is best addressed by a qualified attorney.
At the early stage of a company patents add very little value, especially when compared to the cost it takes to get them granted. At later stages the value of patents is higher for partnership and exit purposes, but you have get the process started early if you want the benefit of patents later on. Lean Patent Strategy allows you to prepare for the later stages while minimizing your expense in the early stages. Happy filing.
By Alfred Tom on January 5, 2017