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Friday, May 6, 2011

Patents and Investors - Mistakes to Avoid to Attract and Keep Investors (by Blake E. Vande Garde)

The development of most technologies is expensive, time-consuming and risky.  Patents can aid in offsetting those risks by providing a patent holder with the ability to prevent others from producing and/or using the technology covered by the patent.  However, entrepreneurs and investors should always be cognizant of the fact that by most estimates, only between one and five percent of patents ever become significantly profitable.  A granted patent provides no guarantee that that a product or process with be economically viable and produce a return for investors. 
Keeping this in mind, how important are patents to investors?
As with many things, it depends on the field of the invention.  Most investors will not even entertain a meeting with a start-up if they lack patent protection of some kind.  At a minimum, investors would like to see a U.S. provisional application on file prior to meeting with a start-up company.  Most investors will prefer that a start-up company have at least one utility application on file, and depending on the field of the technology, a Patent Cooperation Treaty (PCT) application to provide access to international markets.  Patent protection is more relevant in some industries than others.  For example, patent protection is essential to most biotechnology start-ups.  The same may also be said for medical device start-ups.  However, patent protection may not be as important for a software or internet start-up due to the rapid evolution of technology in those industries. 
What are some common mistakes made by companies?  How can these mistakes be avoided?
Nearly all start-up companies lack adequate funding for the numerous expenses that are associated with maintaining and growing a business.  One very important area where a start-up should not skimp on is legal help.  This applies not only to intellectual property, but also to important documents such as Non-Disclosure Agreements (NDAs), employee contracts and joint development agreements.  It is not necessary to go out and find the most expensive attorney/law firm in town, but attempting to properly file a provisional patent application, a utility patent application or a PCT application without the assistance of a patent attorney is not good business.  An entrepreneur running a cash strapped start-up may say to themselves, "I am as smart and possibly smarter than any patent attorney that I may hire to handle my IP needs.  If they can do it, I can certainly figure it out."  This line of thinking will almost certainly cause significant grief for both the entrepreneur and the start-up in the future resulting from forfeited proprietary information, lost or incomplete patent protection, and missed national and international deadlines.  While it may be true that an entrepreneur is highly intelligent, intelligence cannot replace the training and experience possessed by a seasoned patent attorney and his or her support staff in navigating the complex intricacies of national and international patent prosecution.
Start-ups must also be diligent and aware of time related to their intellectual property.  Under 35 U.S.C. 102(b), an inventor must file a patent application within 1 year after an invention has been patented or described in a printed publication in the US or a foreign country.  This often becomes an issue for members of the academic community when they publish an article in an industry related magazine or present work to colleagues at an academic or industrial conference.  The data summary presented by the inventor to others attending the conference is enough to serve as prior art which will prohibit the issuance of a patent that is filed more than one year from the date of publication or disclosure. 
Also under 35 U.S.C. 102(b), an inventor must file a patent application within 1 year after an invention has been used publically or offered for sale in the US.  Many start-ups lose the ability to patent an invention because of the mistaken belief that they must actually sell their invention to a buyer before the clock begins to run for this exclusion.  However, it is merely the offer to sell which starts the clock to the one year deadline.
Another mistake made by many start-ups is discussing their patent portfolio with investors without having a proper NDA in place.  It is possible that an investor may see a way around a start-up's patent in order to gain entry into a market without infringing on that patent. 
Will an investor become more involved in the patent process after they have made an investment?
The answer to this question often depends upon both the investor and the industry.  Some investors become very involved in "protecting their investment" and provide a great deal of input regarding a patent's prosecution.  Investor's may even go so far as to request that an additional firm or patent attorney be brought in to supervise the patent process.  Other investors may have reviewed a start-up's patent portfolio with their own patent counsel and they are satisfied with the current direction of prosecution, resulting in a "hands off" approach.
Are written patentability opinions necessary or of any value?
A thorough patentability opinion which was completed after the filing of a provisional application or a utility application can be very valuable.  A favorable opinion may help to sway investors in favor of backing a company.  An unfavorable opinion may help to guide a start-up into a less crowded field with their invention. 
All entrepreneurs should know going in that it is crucial to protect their intellectual property early and as thoroughly as their finances allow.  Taking a "do-it-yourself" approach with patents will almost certainly cause regret when potential investors ask who handled the patent filing and prosecution.  Finding a patent attorney of patent firm with which an entrepreneur is confident and comfortable is often a key to a successful venture. 
Blake E. Vande Garde
Patent Attorney
Hammer & Associates, P.C.

A note from Taffy Williams:
Blake Vande Garde is an excellent IP attorney in the Charlotte, NC area.  He participates in many events which are designed to help entrepreneurs.   He has a good understanding of the Biotech and Pharma industry and IP law.   When I asked him to help with the blog, he graciously accepted.   I am grateful for his input and enlightenment. Thank you Blake!