Startups, Take Heed: Two Cautionary, True Tales Of Patent Law

patent law

Tech startup companies often rely on patents and other types of intellectual property (IP) rights to help safeguard against competition, protect their investors and increase their chance of executing on their business model. 

However, in many cases there are fundamental misunderstandings among the individuals and companies who invest in startups as to how to best use IP rights. Either the wrong attributes of the startup’s products and services are protected, or IP is forgotten altogether. 

There is no better way to learn how best to protect and exploit IP than by examining the successes — and miscues — of others. Here are two stories based on the real-life experience of practicing IP law for almost three decades. 

True Story Number One: The Bad Investment

How an investor may ask IP questions, but not the right ones

About 10 years ago, I received a call from a general partner at a well-known VC firm. The firm had recently made a large investment in a startup, which we’ll call “Acme Corp.,” which had a large patent portfolio. My friend wanted me to take a quick look at the Acme patent portfolio. 

My first thought was, “Why is he calling me after the investment has closed, rather than before the investment was finalized?” Nevertheless, I told him I’d take a look. 

The patents looked interesting and appeared to cover a technology (“Technology A”) fairly well. A few days later, I called my VC friend back. I walked him through Acme’s various patents, including some of the patent claims, which specifically define the invention covered by the patent.

“Are you sure that’s what the patents cover?” he asked, completely surprised by the nature of the patent portfolio owned by the company in which his firm had just invested a large sum of money. 

The investor explained that Acme’s current business model was completely based on another technology, Technology B. They used to have products that used Technology A, but had pivoted away from that business three years prior.

“Didn’t anybody take a look at their portfolio before the investment was finalized?” I asked. 

“No,” he responded. “We simply asked whether Acme had filed patent applications, and they answered in the affirmative. It was a line item on a checklist’

Unsurprisingly, relations between the VC firm and Acme management subsequently were strained over this major oversight. Acme later tried to correct the misstep by filing additional patent applications for Technology B, but because it had waited too long and the technology had already been disclosed publicly and commercially, it was severely limited in what it could claim. 

As a result, the firm’s competitive advantage in the marketplace was significantly damaged. 

Some important lessons from this true story: 

  • Ask the right questions about IP. Don’t ask, “Have patent applications been filed?” Rather, “Have the right patent applications been filed?” 
  • IP should not just be a line item in a checklist. All too often, IP is oversimplified to a binary: “patent applications filed,” or “patent applications not filed.” The real answer is almost always much more nuanced and usually necessitates a closer look. 
  • Management doesn’t always know what they have and don’t have with IP. Often without deceptive intent, management of a startup may not truly know what IP they own. 
  • Take action early. Missteps with respect to protecting your IP may not be able to be corrected later. Waiting too long can be a costly mistake. 

True Story Number Two: David v. Goliath

How an IP slingshot resulted in an acquisition

I represented a serial entrepreneur who developed some pioneering digital financial services technology. We worked together to map out a suitable patent strategy, balancing a comprehensive protection approach with a limited budget. Over time, we built up the patent portfolio to protect a large swath of the inventions embedded within the client’s products. 

After operating for several years, it became clear that a larger competitor was steadily encroaching into the client’s space. The competitor took important features from our client’s offerings and incorporated them into its own. By the time the client fully realized what was happening, we fortunately had secured several key patents, including its most valuable inventions. 

While the competitor had also filed for patent protection, our client had superior claims given its headstart in filing. 

After taking a closer look at the competitor’s activities, we determined they were, indeed, infringing. 

Our client’s first inclination was to file a patent infringement lawsuit and try to recover damages and/or force the competitor to cease infringement. However, as we explored options, we determined it was in our client’s best interest to work with the competitor in some fashion.

We carefully reached out to the competitor, set up meetings to discuss the patents in general terms, and negotiated a solution: it became clear that it was in everyone’s best interest for the competitor to acquire our client. 

We helped structure the deal, and the transaction was consummated. Years after the deal closed, the combined company continues to dominate its field. 

Some important lessons from this true story: 

  • A robust IP position can be created on a startup’s limited budget. There are innovative techniques to protect the most important IP initially, and later expand and cement the IP as the company grows.
  • IP can be a means to a beneficial end for both sides of a dispute. Be creative when considering potential solutions to an IP dispute, to achieve a win-win outcome. 
  • IP can level the playing field between smaller and larger companies. In many cases, IP can help bring different types of companies together, leveraging the strengths of both.

This article was originally published in Smith, Gambrell & Russell’s Trust the Leaders magazine.

Greg Kirsch is the head of SGR’s Intellectual Property Practice. His practice encompasses the entire range of patent law, including patent procurement, strategic patent portfolio develop- ment, patent opinions, post-grant proceedings at the U.S. Patent and Trademark Office, licensing and patent litigation.