Protecting Startup Intellectual Property with Patents & Trade Secrets

Protecting Startup Intellectual Property with Patents & Trade Secrets

In this interview with Michael Van Loy, a Member in the Intellectual Property Section of the law firm of Mintz Levin, we discuss various strategies for protecting your intellectual property as a startup. Mike’s practice focuses on all aspects of Intellectual Property, or IP strategy, which includes:

  • Development of IP portfolio
  • Investigation of patentability
  • Drafting and prosecution of patent and trademark applications
  • Patent infringement
  • Preparation and support for patent litigation
  • Licensing negotiations, and
  • Monetization strategies for IP portfolios

Mike drafts and prosecutes patents and advises clients on IP issues in a wide range of technical fields in the technology and life science areas. He also represents investors in early stage companies to help assess the strength and value of these companies’ IP portfolios.

He has his bachelors in chemistry and his PhD in environmental engineering from the University of California, Berkley.  He earned his law degree from Santa Clara University.

Mike was named a San Diego Super Lawyers Rising Star for Intellectual Property in 2016.

Hope you enjoy this interview:

Patrick:     Hi, this is Patrick Henry, the CEO of QuestFusion, with the Real Deal…What Matters. I’m here today with Mike Van Loy. Mike is a patent attorney. He’s a member of the Intellectual Property section of the law firm of Mintz Levin.

                  His practice focuses on all aspects of intellectual property, or IP strategy. That includes development of IP portfolios, investigation of patentability, drafting and prosecution of patent and trademark applications, patent infringement, preparation support for patent litigation, licensing negotiations and monetization strategies for IP portfolios.

Mike drafts and prosecutes patents and advises clients on IP issues in a wide variety of technical fields in the technology and life science areas. He also represents investors in early stage companies with assessing the strength and value of these companies’ IP portfolios.

He has his Bachelor’s degree in chemistry and his Ph.D. in environmental engineering from the University of California, Berkley. Go Bears. He has his law degree from Santa Clara University. Mike was named a San Diego Super Lawyer Rising Star for intellectual property in 2016. Welcome, Mike.

Mike:         Hi, Patrick. It’s nice to be here.

Patrick:     Mike told me before we turned the cameras on that he actually went to Patrick Henry High School, so we have some connection there.

Mike:         It’s a very small world.

Patrick:     Let’s get right into it. What is a U.S. utility patent, and what is it not?

Mike:         Any patent is basically a monopoly right that is granted to an inventor or set of inventors. It can be assigned to another entity like a company. That intellectual property right is basically the right to exclude others making, using, buying or importing the protected technology within the country that the patent is issued in. A U.S. utility patent basically allows its owner to sue others for patent infringement if they do one of those four activities relative to what’s covered by the patent.

Patrick:     When I was running tech companies, we had the strategy where we would patent stuff in the U.S. That was the most valuable aspect of patenting. Sometimes we had to patent stuff in Europe, China, Korea or different places where we sold because they all had their own patent capabilities, laws or whatever it was.

                  What do you think the best strategy is, especially for a startup when they’re getting involved in starting to protect their intellectual property with patents? I’ve heard about checker boarding. If you have multiple patents, then you use some in different areas.

What do you typically advise clients in those types of areas? It can get pretty expensive.

Mike:         It can get extremely expensive. I’ve seen an estimate for the total potential spin for a patent that you wanted to protect in the five biggest economies of the world. Those would be Europe, China, Japan, Korea and the U.S. The total lifetime spent on a patent might be a quarter of a million dollars.

                  Of that, maybe $15,000 to $20,000 might be your drafting of the application, filing fees in the U.S. and prosecuting it and getting it issued in the U.S. Your bang for your buck with the United States is very high. Your filing fees aren’t out of control.

For a small company, it’s $800 to file the application. You may pay another $1,000 to $1,500 in fees before you get the patent issued. Your attorney fees, depending on the complexity of the invention, might be sometimes in the single digit thousands.

Depending on the technology and what it covers, you’re probably looking at spending somewhere between $8,000 to $15,000 on attorney fees to get it drafted. Then maybe that much again dealing with the patent office to get it done.

Sometimes I have clients that come in and say, “Hey, I want to protect this every month.” Then you explain to them how much that’s going to cost. Then they say, “Well, maybe not.”

There is a strategy. You have one year from your first filing to make a decision whether you’re going to file outside the U.S. One option is to file what’s called a Patent Cooperation Treaty application, which is about $4,000. That $4,000 basically buys you the right to wait another year and a half past that one-year deadline before you start spending real money.

Sometimes, if you have a patent that you consider to be fundamental to your business, and you don’t have this barrier, then any old person that shows up can copy what you’re doing and run with it. It might be worth at least filing that PCT application to have the opportunity. Hopefully things go really well, and in a year and a half, you’re ready to move. If you don’t, then you have to make that decision.

It’s one of those boxes that investors like to see checked. You’ll get a question that asks, “What are the barriers to competitors stealing what you’re doing and running with it?” One way to say that is, “We have patent protection on this. We’ve filed the PCT application. We have the option to file internationally.”

A lot of it depends on what stage you’re at. Some of the largest pharmaceutical companies might try to patent something in every country in the world. What we refer to as checker boarding is effectively having enough large markets covered.

Someone who wants to infringe or do the same thing may think, “Well, I can’t do any of those activities in the U.S. I can’t do any of those activities in Europe. I can’t do any of those activities in China. Maybe I should take a license worldwide.”

If you have enough barriers there and closed off enough markets, then it may be worth it to someone to ask you for a license. If they’re going to try to avoid your patents, then they’re going to have a much reduced market.

Patrick:     If someone is infringing, then they have to infringe by selling into a geography where you have patent protection. Is that how it works?

Mike:         It’s any of those four activities. It can be making, using, selling or importing. A U.S. patent actually does reach outside the U.S. If someone makes a competing product in China, then they could certainly make it and sell it in China. You’d have no recourse.

If they make it in China and try to import it into the U.S., then you can potentially have the customs service intercept it at the border. It’s called the International Trade Commission. It’s an ITC matter.

                  You can basically sue. It’s a very rapid trial. It takes about a year. If you win, then the customs service basically will interdict infringing goods at the border and destroy them. It could be quite powerful. If you make it in the U.S. and ship it elsewhere, then you have that if you just use it here.

There are patents that rely on sort of a network situation or the internet. Even if the server is offshore somewhere, if they have customers in the U.S., then they’re infringing. This is true as long as your claims are written the right way.

Patrick:     Talk to me a little bit about claims. Why is it important to get them right? How do you make sure that they’re comprehensive? I guess there’s always this struggle about being specific but also being broad enough that you cover everything so that someone can’t just patent around it.

                  I remember back a couple of decades. I don’t know if it was a bunch of Japanese companies or Korean companies. They would basically have a U.S. company that had a basic patent. Then they would do all this patenting around it and be able to make products that you would have to take a license from them.     You had to do both things or multiple things in order to actually build the product.

Mike:         Right. There are two questions in there. The issue of sort of circling around a patent or having an improvement on an existing patent. That’s a situation that you can end up in if you’re a competitor and someone has a fundamental patent that has some core technology that you need in your product.

                  If you have some improvements on that that still rely on the original underlying patent, then you may be able to patent the improvement. Having a patent doesn’t give you a license to actually practice the invention yourself. It’s not a guarantee that someone else doesn’t have an underlying patent that you also infringe.

The situation that you described is where there’s sort of a fundamental patent that may be fairly broad, but then I can patent something that’s more specific within that broad coverage of the original patent. If two different entities own those two patents and want to make the improved version of something, then the entity that patented the improvement would need a license to the folks who had the original patent.

The folks who had the original patent would have to come and get a license from the people with the improvement. You end up with sort of a cross licensing issue.

That happens a lot with large companies. That’s one reason that large companies tend to accumulate a lot of what I would characterize as sometimes fairly incremental patents. They have patent incentive programs. They encourage their engineers to come up with ideas and patent them.

Sometimes you look at a whole suite of them and say, “These are the same thing.” What it means is that if they get sued by another competitor for patent infringement, then the competitor might come at them with 6, 8 or 10 patents.

You rarely want to go into litigation with one patent. That’s like going into war with one bullet. With one patent, your opponent may say, “Okay, one patent. We can fight that. We can go to the patent office.” There are procedures to be able to argue that the patent shouldn’t have been issued and is invalid. With one patent, they may go do that. Then you’re stuck.

Each one of these procedures at the patent office is not cheap. If you have 10 of them, then they have to go and try to invalidate 10 patents. If I have 10 patents, and they come at me with 10 patents, then I can say, “Oh, guess what? I have 15 that read on what you’re doing.” You’re quickly going to get to a situation where they say, “Okay, why don’t we all just cross license and stop paying the attorney so much?”

Let’s get back to claims. The claims are the part of the patent that actually dictate what is covered by the patent. They’re a textual outline of the boundaries of the intellectual property space that is protected.

You can think of intellectual property in terms of ranch land. Rancher number one has a fence around what he owns. In patent speak, his claims would describe in words what the boundaries are that he’s protecting.

In order for you to get that patent, those words that you use to describe your little fenced off area have to be specific enough so that you are able to show that your little area that you’re trying to claim has not already been done. You have to show that none of that area is covered by something that’s been done before. We call that prior art. Prior art means other things that were in the public domain prior to your filing of your patent.

Ideally, you’d like to write your claim very broadly and cover lots and lots of stuff. If you have a very broad patent, and you have a lot of potential infringers, then it’s a very powerful patent.

On the flip side, you have all this space that you’re trying to hold. It only takes someone finding one other thing that’s inside of that original space to say, “Hey, that patent is not valid.”

There’s a little bit of a tension there. People say, “I have a nice, strong patent. It’s very broad.” You may have a lot of infringers, but you also have some risk that it’s not valid.

The other side of that is that it’s very narrow. That means that it has a lot of detail in the claims. The claims go on for a long time. It may not have as many infringers, but it’s going to be much harder for someone to show that something in the space that I’m protecting was covered before.

Sometimes I get inventors who say, “This claim isn’t very long. It doesn’t cover anything.” The breadth of a claim is inversely proportional to how long it is. The more words there are in it the more details there are and the more you’ve cut into what space you have.

For someone to not infringe a claim, they just have to show that they don’t do one of the things that’s required by the claim. The claim requires someone to do operations A, B, C and D. They say, “I do A, B and C, but I don’t do D.” They don’t infringe.

Again, if you want to say that that claim is invalid, then you would have to find something in the prior art that makes each of those elements A, B, C and D shown to have been done before and that they were either known or obvious. It was a trivial modification of what was done before.

The claims are pretty much crucial. The format of a patent application is generally a description that runs through what the invention is. Then maybe a little bit of a discussion of what kind of problem you’re solving.

For various reasons, under U.S. patent law, you don’t like to necessarily lay out specifically what the problem is because then if your technology ends up solving another problem, then an infringer might argue that it doesn’t really cover what they’re doing.

At a high level, you run through what the problem is and why you’re an improvement over what was done before. Then write a fairly technical and reasonably specific description of what it is that you do and some alternatives to that that you think would be work-arounds.

Then write some claims that are written in English. A claim is one long sentence that looks kind of dense. It’s written in a strange syntax. It basically lays out all of the elements that you consider to be within your invention. It would be required by an infringer.

Patrick:     I’ve run multiple different tech companies. We would file provisional patents, especially with small companies. I guess that was a way to at least get our invention on the books but not spend as much money.

                  During that period of time you could add additional claims to your potential patent. Has that changed now? What is the current state of the art of what people are doing as far as startups go?

Mike:         Provisional applications are still an option. You have to mostly write it. A provisional application is never formally examined. It is basically a technical disclosure of your invention. There’s no requirement that it have anything. I’ve seen provisionals that were basically scrawled on the back of a napkin.

The patent office will never look at it. It will get filed. You have a year from your first filing date of that provisional application in order to file a utility application to have it mean anything.

If you don’t file something within a year that claims priority back to the provisional, then the provisional just goes away like it never happened. I envision it getting put into one of those crates that you see them wheeling off at the end of Raiders of the Lost Ark. It gets wheeled off into the warehouse, and no one ever sees it again.

That probably doesn’t happen anymore. It probably just goes to some dark corner of the patent office’s intranet and never gets seen.

With that said, while you can file something that is very scant as a provisional application, there’s a risk. The patent office will probably not look at your provisional application. In some instances, I’ve seen examiners look at the provisional application if they find intervening prior art.

Let’s say you file the provisional application today, May 21, 2016. Then you didn’t file your utility application until May 1, 2017. Maybe someone else publishes something six months from now.

If you were entitled to the priority date of your provisional application, then it would not be prior art. You created it.

However, if your provisional application is so vague or lacks the details necessary to write a claim that’s actually allowable, then that prior art that was intervening could actually come and get you. Someone can argue and say, “You know you didn’t really describe what you’re claiming here in the utility application until you filed it.”

Certainly, we can take some technical document and file it as is. I usually don’t recommend that just because it helps to at least take one pass through. Let’s have a conversation about what we think we’re going to claim and what we think the important things are. Let’s make sure that we at least have description around that.

Typically, when someone gives you a disclosure, it’s very easy to describe the problem. You can give a whole chapter and a half on what you do, but where is the interesting stuff? You really need the details around your secret sauce and what makes you new and different. Otherwise you run the risk that when you write your application later, it may not be entitled to that earlier.

Patrick:     The value of putting the stake in the ground really isn’t that valuable unless you at least have some reasonable description of claims.

Mike:         Yes. That’s an issue in the U.S. The U.S. has a fairly liberal interpretation of what amounts to sufficient disclosure. I can have some pictures. I can have a few words here and there. I can file something nine months later and argue that it’s all there. It meets the sniff test, and that seems reasonable.

                  Most other countries, especially Europe, China and Japan, have a fairly tight rule as well. If you can’t show actual textual support for what you’ve claimed, then you better be able to show that it was absolutely clear, if not quite literal. You can probably conjugate the verbs differently. It needs to be pretty close to literal textual support for your early date in order to be able to have it.

If you file a fairly vague provisional application and start doing things yourself, then an examiner may argue that your original disclosure document was not sufficient to support the claims you’ve made. It can also be argued that your activities between the provisional and your utility filing date were sufficient to cause prior art.

Most other countries outside the U.S. don’t have a one-year grace period. By and large, most activities by the applicant themselves that are less than a year before the utility filing date don’t amount to prior art. It changed a little bit with the America Invents Act in 2013.

They changed some things with the law. There haven’t been a whole lot of court cases that have established it. Assuming that things fall out mostly the way they did prior, it’s better to file something before you start doing it or before you disclose it. We can file it in that year. It just adds a little bit of uncertainty, which we don’t like.

Patrick:     I heard that the U.S. Patent Trademark Office is backed up for seven years or more. Is that true? Is that certain pockets? What’s the deal there?

Mike:         The term is art unit. They divide the patent office up into groups of examiners who handle very similar technology. Seven years is probably a bit on the long side.

                  Maybe five years ago, for a while it seemed like you would file something, and you’d wait many years. I’m still working on some patent applications trying to get them through the patent office that have been on file since 2005 or 2007.

Most of those have at least had one. I can’t remember the longest I had before one actually got examined. These days, in most art units that I deal with, it seems like they’ll get a first office action out within less than 18 months.

It’s gotten better. They’ve hired a lot of examiners. In certain areas now there’s a lot more uncertainty with software patents because of some court decisions of late.

It makes it easier for the examiners to issue a rejection. They can say, “Oh, it’s not eligible for patenting because of this rule.” They’ve been encouraged in the last five years or so to work hard at really cutting down the backlog.

Patrick:     Along those lines, there have been some recent changes about patents. How does that affect the importance of filing dates, invention dates and those types of things?

Mike:         There are two main things that have changed in the last three or four years. There was the America Invents Act, which took full effect in March of 2013. That officially changed the United States from a first to invent jurisdiction to a first to file jurisdiction.

                  Under the old regime, if you filed a patent application, then your priority date was technically the date that you invented the invention.

Patrick:     It’s like all the engineers that I used to work with. They had their old books. As long as they documented that it was the prior art even if it didn’t get filed for a couple of years after they did the initial invention.

Mike:         In theory, doing that would have given you the opportunity if you filed your application now. Let’s say I file my application today. I can document that I actually invented it six months ago.

                  Let’s say that the patent office came up and said, “There was prior art that was published in January this year.” You would say, “Well, our guys actually invented it before that.”

You could file a declaration of the inventors and put their notebooks into evidence. Then you could say, “Look, we actually invented this before that.” We predate it, and we’re okay.

You could only go back a year. If the patent office found prior art that was available for more than a year before your filing date, then you’re pretty much done. There was some ability to say, “We actually invented this prior, and there was a delay in getting it filed.”

Now the official rule is that the date of invention is not the determiner. It is the date of filing. There are these exceptions for the applicant’s own activities. Either the inventor or someone that they have an obligation to assign it to.

In their company, if they publish something and then file it in a year, then their activity is not prior art. If they publish something and someone else sort of republishes it and it’s clear that it was derived directly from what was originally disclosed by the company, then that also should not qualify as prior art.

Under the old regime, there was an old procedure known as an interference. That meant beyond things being prior art, there’s the theory where two different groups or companies file patent applications on the same thing.

You would have this sort of mini trial that would determine who actually invented it first. Those have gone away. Interferences are still valid for anything filed before March of 2013.

Now they actually have what they call a derivation proceeding. That means you filed first, but you actually effectively stole it from me. The burden is a little different. That said, in 15 years of practicing I have never had any patent application that went into an interference. They’re tremendously expensive.

There was all this gnashing of teeth with the America Invents Act. People were saying, “It’s making it harder on small inventors. We’ve now made it so that whoever has the most resources and can file first wins.”

The truth of it is, under the old regime, if you were a small company and got stuck in a situation where you had to try and fight an interference out with a big company, then you were done. You’re not doing it.

I don’t think it actually changed very much. The rules changed, but the reality on the ground didn’t change very much.

Patrick:     How do you tell if a patent is actually being infringed? How is it detectable? Is that easy in some ways, and in other ways it’s hard?

Mike:         Well, that depends. That’s why certain types of patents are certainly easier to detect. If you have a patent that is some sort of mobile commerce situation, then I can look at a competitor’s app and say, “Look, they take this. That must go to the back end. Something happens. Then a result comes out.” It’s clear that what they’re doing must fit on the claims that I wrote, or that we have.

                  Typically, the way you start a potential argument about someone infringing is first sending them a letter that says, “Here, we think that you should be aware of this patent.” Often times, you’ll get no response.

They might write back and say, “No, we don’t. Tell us why.” Then you would basically put together a claim chart. It takes your claim on one side of the column. It walks through here’s the element that we claimed. On the other side it walks through here’s what we think you’re doing that fits it.

If it’s a physical object and they’re selling it, then you can buy it. Then you can take it apart and see what’s in it. They’re things that you may not want to actually bother patenting.

If it’s a backend process that’s fairly opaque, then patenting that may not actually be worth very much. For example, if it’s a black box that something goes in and something happens, and we have some kind of unique little data structure.

There are two reasons why it may not be worth patenting. The first reason is that in order for you to get a patent on it, you have to write a whole description of it and share it with the world. Once your patent is published, there will be a nice little recipe on how to do that.

Here’s the second reason. If you can get the patent issued, then your competitor may have some data on the front end that comes in and out. You don’t know what’s going on. From seeing what’s publicly available you can’t actually tell with certainty what’s going on behind the curtain is what you did.

You can certainly file suit. You can do some investigating. You may be in sort of a gray zone there where you can’t really figure out whether there’s true infringement or not. You’d have to wait until you file your lawsuit, which costs money. Then the other side may say, “No, that’s not it. We don’t do that.”   

Patrick:     Those are things that might be better to keep it as a trade secret?

Mike:         It’s certainly worth considering. If it’s an internal process, then you’re never going to know unless they share it. I have big clients that do this, too. For example, it may be something that we do such as something that just helps us put our code together.

                  Company A has this process, and Company B comes along and says, “Oh, we do the same thing.” It’s unlikely that someone is going to share that.

Patrick:     Tell me a little bit about the importance about who gets named on a patent. Is it who the inventors are? Is that important to the company, or is it just important individuals? How does that work?

Mike:         It depends. Some companies, especially startups, don’t have an incentive program. A lot of larger companies do. You get a cash payout or something like that. Some startups will give you some extra options if you’re inventing core technologies.

There’s actually a legal standard for it although it’s fuzzy. Inventors should be someone who had meaningful contribution to some feature that’s included in the claims.

It could be six or eight engineers sitting around a table. Five or six of them are talking, and there’s one person at the whiteboard. Maybe she’s going crazy, and three guys say, “Hey, do this, that and the other thing.” Then someone else is sitting there nodding, or maybe they throw out one idea.

Brainstorming sessions become very fluid. It’s very uncertain who invented what. Typically, if there’s a group that is doing brainstorming you may just say, “Look, you’re all inventors.”

Where you can get into trouble is when you have companies that say, “Well, he’s left the company, so he shouldn’t be an inventor.” I have companies that say this. I say, “Well, that’s actually not the legal standard. We don’t like him anymore, or she went to a competitor is not a good reason to say that they’re not an inventor.”

The reason for this is that you may cut them out, file your patent application and get your patent. Five years down the line your company is doing great. You have this patent. You file suit against someone for infringing. They find this person who left, and they say, “Well, she said that she contributed to that, and you didn’t list her as an inventor.”

There are two outcomes in that case. One, you need to add her as an inventor. In a case like that, if an inventor doesn’t assign their rights, then all inventors are joint several owners of the entire patent. She may be an inventor, and we can go to her and get a license. The other outcome is that the patent is straight out invalid because you didn’t name the inventorship right.

The safest thing to do is, if anyone is in that circle, then say that they are probably an inventor. All the inventors sign what is called an inventor declaration. It basically says, “I believe that I’m an inventor of the subject matter that’s claimed in this patent.”

You have them under oath saying, “I believe I’m an inventor.” Typically, if your company was set up right, then it has the right employment policies. If you’re in the state of California and they’re a technical person, then they’re basically hired to invent. Their obligation is to assign to the company.

You sometimes end up with these sort of independent contractor situations. I’m not an employee, so maybe I don’t fall under that rule. You’d better make sure that your contractor agreement has something in it about who owns the IP.

Assuming that you have all that, the safest thing to do is name anyone who has some reasonable proximity to that inventive nexus. Make sure they sign a declaration. Get them to sign a formal assignment to the company.

Then five years down the line when you try to have this argument and say, “I was an inventor,” then exhibit one during their deposition is the declaration. You ask, “What’s this?” They respond, “It’s a declaration.” Then you ask, “Is this your signature?” They respond, “Yes.” You ask, “What does it say?” They respond, “It says I believe that I was an inventor.” Then you ask, “So you were lying then, or you’re lying now, right?”

A slightly bigger tent is probably safer. That said, sometimes you get folks that say, “Yes, he’s a really good guy. He should be an inventor.” You don’t want to stretch that so far that every person who has been at the company for the last two years becomes an inventor on everything. It can go the other way.

Let’s say that you were someone who just took direction when someone said, “Here, go code this.” Then all you do is take it and code some aspect of it. That’s not an inventor. I tend to err on the side of if you were in the original conversations of let’s figure out how to solve the problem, then you’re probably an inventor.

Patrick:     Talk to me a little bit about what a trade secret is. Is there a formal definition for it? What are the pros and cons of keeping something as a trade secret versus patenting it? You talked a little bit about that earlier, but are there other things that come to mind?

Mike:         A trade secret is basically something that has value that is in the public domain. For it to be a company’s trade secret, they have to take some steps to mark it as secret and keep it secret.

                  Your only real cause of action with a trade secret if someone gets it is if they stole it. If someone buys your product and manages to reverse engineer how you did it, then it’s not a trade secret anymore.   If someone else independently comes up with the same idea, then you have no recourse.

All you really have in that trade secret is that you have to basically show that someone stole from you. You tend to see it used when an employee leaves and suddenly this technology has now shown up in the competitor’s product that they went to.

You may say, “Hey, you signed this agreement. You’re obliged not to share it.” Those tend to get very ugly because they’re very fact dependent. California has fairly strong employee protection laws. We’re a very anti anti-competition state.

When saying that I left a company and went to work for someone else, it doesn’t matter if I signed a noncompetition agreement. Company A is going to have a tough time preventing you from going to Company B. There may be some dickering about what from here is now there. There’s certainly going to be an argument, but the presumption is that you’re free to go somewhere else.

Patrick:     Basically for a trade secret you have to document it. The only protections are if you can prove that someone stole it and is using it somewhere else.

Mike:         There’s a risk. Again, a trade secret doesn’t expire. A patent expires. There’s that exchange with a patent where I have to file a patent application. I have to effectively describe in sufficient detail what I have to claim. There’s a possibility that I don’t get the patent. In that case I’ve just shared everything with the world.

                  In the U.S. you can actually file your patent application with a request not to publish it until it’s issued. You can only do that if you’re staying in the U.S. only. If you’re filing internationally, it will be published 18 months after the first priority date.

Patrick:     Is that another reason to do that extension thing? You can kind of keep it secret. You do a provisional that gives you a year. Then once you actually do your utility patent, you have a year. Then you can pay that money to extend it by another year. How does all that work?

Mike:         The publication is 18 months from first priority. In the situation where you file your provisional and don’t file your utility until a year later, it’s still going to publish six months after your utility application. If you file the PCT application, then you’d have to do that at the one-year mark as well.

If you’ve filed your U.S. utility application earlier and requested nonpublication, then when you file that international application you have 45 days. It’s a hard 45-day deadline. You have that time to let the patent office know if you’re going to rescind the nonpublication. Otherwise your U.S. application is abandoned.

It’s one of those situations where you have to think, “Are you sure?” Make sure that we have a little flag in the file that says we’ve filed internationally. We have to make sure that we let the patent office know.

Patrick:     What about software? You mentioned it a little bit earlier. I know when we had different companies where there was a lot of code, we could say it was copyrighted.

I don’t ever recall us patenting anything in software. They might be an algorithm that we had. Then we would code it in software. We could patent the algorithm, but the software itself we could never patent. What’s the deal with that?

Mike:         A copyright immediately jumps into being the minute that you create a new work of anything. If I write a story, then it’s copyrighted the moment that I write it.

                  You can register the copyright with the copyright office for some fee. That basically allows you to recover statutory damages. It means that you don’t have to show loss. You can just say, “I have this original work that’s mine. I’ve copyrighted it. If someone copies it, then they owe me some fixed royalty for every instance of copying.”

That being said, let’s say that I have some software and write code out. If someone looks at what my software does and says, “That’s pretty cool. I’m going to give it to my coders. Don’t look at the code. Just write up something that does this.” Their code is not infringing the copyright. The code is actually on the specific way the words are written.

Patrick:     They have to rip it off line by line.

Mike:         Yes. In order to show copyright infringement, you have to show that it’s a copy or some issues that it’s a very close derivation. They took that and maybe added a little bit to it. By and large, you’re looking at a copying issue.

                  There is an option. There are plenty of software patents that get filed. They have become hard to get. There was a whole area of patent law for the last 15 or so years, probably longer than that, that were sort of business process patents.

A lot of them boil down to here’s some sort of economic something or other that we’ve now automated. Instead of having a pad of sales orders and writing them out, I go online and do it. There are lots of patents that cover that kind of stuff. A new portal for taking that data and putting it in and making an automated sales process.

Those patents have become harder to get. Many of the ones that were issued in the last 10 or 15 years are probably invalid. There was a Supreme Court decision about 2 years ago in June of 2014 called Alice vs. CLS Bank.

Honestly the claims at issue in Alice vs. CLS Bank were not terribly well written. Most patent law court decisions come down to a terrible patent. The things that are very vague and have a lot of money involved. It’s the ones that get fought all the way up to the Supreme Court.

The Supreme Court is not patent lawyers. They’re smart people. Basically the decision was that these claims in the patent at issue were too abstract. They effectively just claimed an idea without having something significantly more involved with the idea.

There was another one called Bilski. One of them had to do with escrow payments. It was effectively automating the escrow process. It was a high speed trading escrow process. Take the stuff and hold it here.

There was another one that I forget what it was off the top of my head. Again, it was what was considered to be a fundamental economic practice that was just being automated.

That decision happened in 2014. The lower courts, the court of appeals for the federal circuit, which is the federal appeals court for all patent decisions, has heard something like a dozen cases since then that involve this sort of question. Of those dozen or so cases, there’s been one case that they’ve held that the patent was valid. That trickles back down to the lower courts and software patents are in doubt.

Some people say, “Software is not patentable anymore.” The Alice decision was not a terribly lengthy decision. Justice Thomas is a fairly economical writer. He wrote the decision. Even then it was still a 10 or 15-page decision.

If he’d wanted and the court had agreed to say that software was not patentable, then he could have been really economical. He could have said, “This is an invalid patent because it patents software, and software isn’t patentable.”

I have clients in the database space. Some software is patentable if you can show that your claims are tied to some technical underpinning. If you read the claim and you say, “This sounds like I could do this, albeit a lot slower, with pen and paper or by just thinking about it.”

Even if you just say, “I could take a pen and paper, 10 million legal pads and 20 years. I could still get to the answer.” Chances are that your patent is not valid.

Then there’s a lot of stuff in the computer implemented invention space, like database technologies and certainly a lot of networking. If you have the hooks that require that it be on a mobile device, if there’s a use interface or those kind of things, then under U.S. law they currently tend to get you over that first hump.

What Alice did was add a more substantial first hurdle before you got to the argument about the prior art. The question was, “Is this something that should be eligible for patenting?” In the past the question had been, “Is it useful?”

That first hurdle was not there. Now that is a substantive question. Is it something that is eligible for patenting?

Patrick:     The first hurdle is basically that you’re not just automating something that’s done in a particular way.

Mike:         Yes. That being said, the law is very much in flux. I think that the patent office has issued four alerts now. They actually will be issuing another alert for clients here in the next couple of days.

They keep trying to tell their examiners how to examine patents because, frankly, the test is a mess. There’s really no bright line rule. This is directed to an abstract idea.

Here’s further analysis, which is not really smart. Judges are smart. There are a lot of really smart lawyers. I think that if you got 100 of those people in a room and said, “Here’s a patent. Is it eligible or not?” depending on the patent, you might get 60/40 or 50/50.

It’s very fact dependent and very examiner dependent when you’re dealing with that. I’ve seen analysis about two patents that are technologically very similar, but they just got classified into different groups. Maybe one sounded a little bit more economic practices, and it got sent to this group that examines that stuff.

The other might have been sent over to the database group. The economic practices group tends to be very unfriendly. Everything gets an Alice-based rejection. Very similar sounding claims that went over here to the database guys tend to go right through with no problem. They assume and think, “Of course you have to have a computer involved or else how are you doing this?”

There’s going to be a lot more to come. It’s certainly not settled. That being said, I still get things a lot all the time that you could characterize as entirely software. It’s just a matter of making sure that it’s very clear on the specific details of what problem you’re solving.

I saw a court case which said that inventions that you could characterize as entrepreneurial in nature are going to be harder to patent versus something that is technological in nature.

Inventions that are entrepreneurial in nature are ones where you say, “Wouldn’t it be cool if we did this sort of business model?” Inventions that are technological in nature are ones where you can clearly say, “Yes. There’s computers talking to each other. They’re integral to the whole process. It required some clever something or other in the architecture to make it work.”

Patrick:     Interesting. Early in my career I worked with big companies. Some of them had big legal staff that would be out there going after small companies or even other big companies. They would tell them, “Hey, you’re violating our patents.”

                  There’s a lot of cost licensing going on. I remember Texas Instruments. There was one order where I think their whole overall process was based on their IP licensing business.

As a small company, you can’t really afford to have that. It’s more of a defensive type strategy. When you’re working with small companies on getting patents, what advice do you give them?

You mentioned not to get just get one patent, but get half a dozen or a dozen patents so that you have some defensive capability. Beyond that, what are other things that you would counsel small companies on? Something like saying, “We can license this to everyone in the event that we can’t make a product.”

Mike:         As a small company, your market for trying to license something is going to be small. If you’re going that route, chances are that this is going to happen. After your company stops being viable, then some non-practicing entities or group like a hedge fund that is assembling a portfolio will buy your patents for not a lot relative to what you think they’re worth.

They’ll bundle them up with a bunch of other patents that are sort of similar. Then they’ll go to various folks and say, “Hey, you should take a license to this.” There are groups set up to do that very efficiently.

                  Most of those groups that are going and doing that licensing work aren’t doing the patents themselves. They’re buying them up at bargain basement prices from other folks who had them. Those people can’t afford them, don’t need them or have pivoted somewhere else.

As far as creating your startup strategy, you need something. Your investors are going to say, “Why do I give you money? You have to give me some reason.” Once this gets viable and you start making money, that’s when people are going to start copying you.

As a startup, sometimes I get people who say, “We have this patent issue. We need to sue everybody.” What do you do? If you start a lawsuit, then do you have a spare several million dollars to go fight a patent or litigation?

You want them there in case a big company comes along and says, “Oh, that’s an interesting little thing. They’ve built a nice market. We should pay them. By the way, they have a nice little fence around it, so that’s even better.”

I think the key is to sit down and ask a few questions. What is it that we’re doing? What are the key aspects here that make us different? What are our advantages? What are the things that will make some competitor say, “That’s really great. Let’s copy them. Let’s do this.”

Make sure you have a strategy that covers those things. It’s difficult because your patent attorney isn’t making you any money. Hopefully I’m helping you protect what you have later. When you’re talking to me, you sit down and think, “That is a bill that’s going to be showing up a month from now. It’s going to be sizeable. That’s money that we might spend on other things.”

I don’t want to say I’m a necessary evil. If you’re doing anything in what space you’re in, then there are certain business models where your key is just to get customers and grow. If you’re fast enough and get your marketing together right, then you’ll do great.

There are other ones that are slow. Maybe you build a market, and someone says, “There’s no branding around this. There’s no customer base. It’s a cool little widget.” Someone else can make that same widget.

If it’s an unprotected thing, and Apple, Google, Oracle, Amazon or whatever comes along and says, “That’s interesting.” Then they say, “We’ve got smart guys. Just do that.” They don’t have any protection. In that case they’ll eat your lunch.

Patrick:     What’s the deal with West Texas and patent litigation?

Mike:         West Texas is where the tumbleweeds live. The eastern district of Texas is the premier venue for filing patent infringement lawsuits. I haven’t checked for the recent numbers. As recently as 2012 or 2013, something like 25% of all patent litigation suits were filed in the eastern district of Texas.

                  It has a reputation. It’s one of those chicken and egg things. I’m not actually aware of why it started. I’m sure there’s a reason.

They have some judges and courts that are very patent savvy. They have a whole setup and know how to handle patent infringement suits. They have gotten a reputation as being very patent friendly. That means if I have a patent and want to sue someone, then I’m going to go there.

The cases will tend to move fairly quickly. The judges tend to be not terribly sympathetic towards stays. That means putting the procedure on hold.

There are procedures at the patent office so that if you’ve been sued for infringement of a patent, then you can go to the patent office and say, “I don’t think this patent should have been issued.” You can reopen that process.

That process tends to be less expensive than a full blown patent investigation. However, there’s a tendency for eastern district judges to not award a stay. They have a reputation for that.

I go to the patent office and say, “This patent is invalid.” They say, “That’s all well and good. We’re going to keep going.” Because of that speed at which things go, you can get very rapidly into having to defend that patent, which becomes very expensive very quickly.

If you’re an accused infringer, you just map it out. You say, “We’re not going to be able to stay this by filing an inner party to reexamine at the patent office. We need to settle. Figure out a monetary value on this, and let’s get it done.”

The reason that it’s available is the venue rules where you can actually bring a lawsuit. They require there to be some overlap. Something has to have happened in the eastern district of Texas that is an infringing act for a suit to be filed there.

The hurdle to get to that point is very low. If you’re an internet company and you have a website, then if anyone has an internet connected computer in the eastern district of Texas and turns it on, you have an infringing act.

There’s been some push. There was actually a federal circuit case decided just last week that brought up this question about whether there should be a higher burden for establishing venue. A court decided no. The status quo is fine.

Now there’s a push in Congress to actually try and address this through legislation to try and make it more difficult. Some greater nexus of activity to the venue.

For now, there’s a whole industry of law firms that are right there in the eastern district of Texas who are the local counsel. Accused company might bring in their own patent attorney or litigators to defend. Then they’re going to hire local counsel.

I’ve been through eastern Texas. It’s certainly a nice enough area. It’s not what you would characterize as the high tech capital of the world where we should be deciding these disputes.

Patrick:     Interesting. Every company that I’ve been with even as a young engineer and then running companies, it’s always been a head scratcher to me. I’ve always been very reluctant to pursue any patent litigation because I always wonder if the rewards are going to be worth the cost.

                  It’s super expensive and very time consuming. It takes a lot of management time. In your experience, what have you seen? What would be the acid test for saying, “We do need to pursue this even though it’s going to be expensive?”

Mike:         I think it comes down to what stage you’re at. Like you said, it’s expensive. Estimates for taking a patent infringement suit all the way to completion is certainly in the millions in attorney fees. You might get out for two million, or it might take you four.

If you’re going to get to that point, especially for an early stage company, then first of all you should be making every effort not to get to that point early on. Even if you’ve raised a lot of money, then this lawsuit is going to be going on for a while.

Smart wealthy people who want to stay wealthy don’t want to throw their money into an open litigation. It’s an invitation to spend a lot of money.

There are certain situations where you say, “Look, either we stop this competitor from doing this, or we’re out of business.” It’s not an easy conversation.

Patrick:     It has to be a life or death situation for a company, especially an early stage company, to say, “Okay, we really have to go out and try to enforce our will upon someone.”

Mike:         Yes, you could probably characterize it like that. Litigation, to me, is the last stage in a license negotiation. Even if you win a litigation, then very few injunctions get issued.

                  You win. That means that Company B owes Company A maybe some damages. If they’re going to continue doing what they’re doing, then they owe them a royalty. With that in mind, you say, “At the end of this entire expensive process, there’s going to be a royalty payment. There may be some damages and attorney’s fees if we’re really lucky. By and large, we’re going to spend a lot of money to get here.”

It requires taking a deep breath. It’s very emotional. It’s like they’re stealing your stuff, but that’s it. You need to do the math.

You don’t just immediately launch into a litigation. You send them a letter and say, “We believe you’re infringing.” You’re going to keep going up this ramp. Hopefully at some point you’ll get to a point where you can say, “Let’s agree on something reasonable.”

It’s certainly possible that if you keep pushing it, then the other side will turn around and say, “By the way, we have these patents that you infringed.” You get into that same situation.

Typically, the ones that go all the way to full blown litigation, there has to be certainly into just a few millions involved. It has to be tens of millions at a bare minimum. It’s more likely hundreds of millions.

Those are the ones that you read about. Google and Oracle are fighting things out, or Apple and Samsung are going to World War III. Those are billions of dollars involved, so it makes sense.

If you’re a company that’s not even revenue positive yet, then it’s a tough situation to be in. Especially if the infringer is some big company. You don’t want to pick a fight with a gorilla. You’re not a gorilla.

Patrick:     That’s for sure. Talk to me a little bit about valuing patent portfolios. How do you go about doing that? I’ve always kind of chuckled a little bit about those when I see these valuations coming out of companies that you’re in negotiation with.

                  They say, “Our patent portfolio alone is worth $100 million.” I think, “Maybe. Maybe not.”

Mike:         Without even looking at your portfolio, the portfolio itself I’d say in most cases is not worth it. Your business as a whole including the portfolio, customers that you have and whatever activities you’ve done is a factor. I add them in there.

                  There are certainly people who will be happy to buy your patent. They are these aggregators. There may be nonentities that are looking to license, or there are some other groups that buy up patents sort of defensively. It’s sort of a subscription model. You can join this group that goes and acquires patents to have that ability to cross-sue if you had to.

It depends. There certainly are very valuable patents. In the high tech space, it’s hard to put a massive value on a single high tech patent.

On the pharma side, if you have a patent that covers a drug that has a market of many millions of dollars a day, then you can say, “That’s a very valuable patent.”

That’s especially true if it’s on a specific compound because it either is that, or it isn’t. If someone is selling the generic, and it has the same compound in it, then they infringed.

You want to have them. They’re useful. They have some value. They’re certainly a deterrent. What they’re actually worth at the end of the day is very hard to say.

It’s hard to say, “That patent is worth X.” That patent in concert with hopefully your well planned portfolio is a nice wall. What’s inside the wall also has a lot to do with the value of your company. If you just have a really good wall, and inside is a rundown shack that no one visits, then it doesn’t have that value.

Patrick:     Was there anything else that we missed or that you wanted to talk about or mention to our audience of entrepreneurs out there?

Mike:         No, that seemed like a pretty good overview. Is there anything else that you thought of?

Patrick:     No, I think that was great.

Mike:         I think you ran out of questions.

Patrick:     Terrific. Thank you very much Mike. I appreciate it. This is Patrick Henry, the CEO of QuestFusion with The Real Deal…What Matters.

We hope you enjoy this interview with Mike and find is insights valuable.  Also check-out Eight Key Things for Protecting the Intellectual Property in Your Startup and Startup Intellectual Property Tips:  Protection and Avoiding Infringement.

What are your experiences with intellectual property protection strategies?

This is Patrick Henry, CEO of QuestFusion, with The Real Deal…What Matters.

Close Menu