Top-10 Most Common IP Rights Mistakes During
VC Due Diligence
1. TOO LATE TO START FILING US AND INTERNATIONAL
PATENT APPLICATIONS.
Unfortunately, for many good technology companies, it
may be too late to file for patent protection. The current
U.S. rule generally provides applicants with a 1-year
grace period during which a patent application must be
filed after certain public or private disclosure of the
invention. Such disclosure may arise, for example, from
a mere "offer for sale" of the technology, even
if the product has not yet been built or prototyped. In
comparison, the foreign rule, which applies to many industrialized
jurisdictions, such as Japan and various European countries,
do not give applicants the benefit of any grace period
after a public disclosure has occurred. Thus, it is legally
compelling for applicants to consider filing for patent
protection sooner than later. Although in some situations,
there may be some special exception, which still allows
for late filings; it is not advisable for applicants to
count on those exceptions.
2. TOO NARROW LEGAL SCOPE OF CLAIMING PATENTABLE
INVENTIONS.
Many issued patents are not commercially valuable because
the scope of their submitted claims are particularly narrow,
and can be relatively easily avoided by determined competitors.
Thus when submitting new patent claim language, applicants
should broadly define novel concepts that include potential
design-around by other parties. Although this legal blocking
strategy sounds easy enough to state as an objective,
in fact, the serious exercise of analyzing future competitive
and industry directions can be an extremely difficult
task, particularly because the analysis often requires
sophisticated market understanding, as well as technical
and engineering vision.
3. INTERNALLY MISMANAGED PATENT INFRINGEMENT
"WILLFULNESS" EXPOSURE.
Under U.S. patent law, one's awareness or willful state-of-mind
about the existence and infringement of a competitor's
issued patent may significantly affect subsequent legal
liability. Thus if a party is proven to be a willful infringer
of a known patent, then for punitive policy reasons, economic
damages may be awarded to the patent owner up to three
times normal recovery amount. This treble-damage exposure
is so substantial, that company management should be careful
to avoid creating evidence of internal communications
such as emails that may be construed later to indicate
such willfulness state-of-mind. Additionally in many cases,
it may be appropriate for companies as a matter of policy
to discourage looking at issued patents owned by other
entities. And when a suspect patent is already known,
management must take careful steps to refer the matter
to competent patent counsel for appropriate analysis and
opinion.
4. RELYING SOLELY ON COPYRIGHTS FOR SOFTWARE
PROTECTION.
Copyright protection in the U.S. and many other countries
arises instantly and at virtually no cost to protect software
technologies, such as computer programs, electronic databases,
and graphical display screens and related media. In fact,
copyright protection is often quite a suitable means to
secure much digital media such as video and audio creative
works, often even without compliance with copyright registration
and notice requirements. Copyright protection, however,
is legally vulnerable to reverse engineering efforts by
competitors, during which no copyright infringement may
arise when the reverse engineering results does not result
in literal copying of the original code, but merely an
understanding of the underlying ideas and functions. In
this vulnerable scenario, perhaps patent protection may
be more appropriate to secure any novel algorithm, methods,
and computing apparatus.
5. INADVERTENTLY TAINTING I.P.R. WITH 3RD-PARTY
CO-OWNERSHIP RIGHTS.
During the course typically of joint-development engineering
projects, ideas may originate from many sources, such
as advisors, consultant, employees, and even customers.
This collaborative scenario sets the stage for creating
intellectual property rights that may be co-owned by multiple
parties. And unless the rights of such joint owners are
specified up-front, for example by contract terms, then
there is a problematic possibility that certain parties
later may assert not just their partial ownership interest,
but actually endeavor to offer licensing rights to other
3rd parties or even competitors.
6. IGNORING THE IMPACT OF NEW "FESTO"
U.S. SUPREME COURT RULING RE PATENT AMENDMENTS.
On May 28, 2002, the U.S. Supreme Court (Festo
Corp. v. Shoketsu Kinzoku Kogyo Kabushiki Co., Ltd) substantially
changed the legal effect of amending patent claims, particularly
upon the effective scope of amended claims. This judicial
change cannot be ignored without possibly impairing commercial
value of many issued U.S. patents, especially where applicants
introduce explicit argument that distinguish various prior-art
cited by the Patent Examiner. Without getting into the
subtle legal and policy complexities associated with the
so-called "Doctrine of Equivalents," the Festo
decision and related subsequent federal cases clearly
narrow many patent claims scope whenever applicants propose
routine amendments to distinguish the claimed invention
against cited prior-art references.
7. UNDERESTIMATING THE IMPORTANCE OF TRADE SECRETS
& CONFIDENTIALITY.
Since patent protection may not arise for many years until
after filing patent applications, and copyright protection
may not be applicable to protect functional aspects of
various technologies, trade secret protection may serve
realistically as a solid backstop against competitive
piracy or other misappropriation of company know-how.
Thus the importance of diligent use of Non-Disclosure
Agreements (NDA) and in-house policies and systems to
secure confidential and proprietary information rises
to a more significant level of management priority. Additionally
early disclosures, for example through customer marketing
presentations, may irreparably hurt company rights to
file domestic or international patent applications.
8. OVERLOOKING LEGITIMATE OPPORTUNITY TO SET-UP
OFFSHORE LICENSING TAX SHELTERS.
Often neglected by early-stage startup companies
and entrepreneurs are offshore strategies for mitigating
federal tax exposure. Such international tax strategies
are especially relevant when foreign licensees of intellectual
property rights are contemplated possibly in the company
business plan. In many cases in fact, it is particularly
beneficial to deploy one or more corporate entities offshore
much sooner, rather than after licensees are identified,
in order to minimize certain taxable valuation exposure
associated with transferring such licensed rights.
9. RESPONDING SLOWLY TO U.S.P.T.O. OFFICE ACTIONS.
Because the U.S. patent rules now provide 20 years of
enforcement patent protection, after the U.S. filing date,
it is important to expedite the claim amendment and application
prosecution process; otherwise applicant's enforcement
period is effectively eroded by unnecessary delays in
the process. Accordingly, applicants should endeavor to
respond in timely fashion, expediting all office action
responses and facilitating communications with patent
counsel whenever possible. Additionally, the new patent
rules actually apply a time penalty to deduct enforcement
period against issued U.S. patents in certain situations
where applicants contribute to delays during patent prosecution.
10. OVER/UNDER-SPENDING ON LEGAL FEES TO PROSECUTE
PATENT APPLICATIONS.
In the realistic context of the current economic recession
especially in Silicon Valley, startup companies and entrepreneurs
who are strapped for cash may negotiate for substantial
fee discounts from patent counsel to prepare and file
patent applications. However, patent applicants should
be careful to ensure that most qualified legal counsel
in terms of technical and business experience are selected
and engaged to work on critical company inventions, perhaps
with bottom-line pricing being just one of a number of
significant factors to consider.
AUTHOR: Dennis Fernandez, Managing Partner, Fernandez
& Associates LLP, Menlo Park, CA
( www.iploft.com )
