Is IP protection ignoring its intended function?
- Tuesday, September 29th, 2015
Is intellectual property (IP) protection more formality than function? In many cases, if you are looking at patents in particular than the answer is yes.
While it makes perfect logical sense to protect your IP with patents, the amount of protection you receive is rarely what you are led to believe. In fact, in many cases your IP protection is doing the exact opposite of its intended function. There are several ways that patents work against your goal of protecting your IP and I’m going to explain the most common ones here.
Patents Advertise Your Strategy to the Competition
When you file a patent you lose the element of surprise, which can be incredibly valuable. You can request for your application to be kept from public domain, to increase privacy, but this only gives you 18 months of lead time. Considering the amount of time, energy, and resources required to gain substantial market share in any industry, 18 months is a blink of an eye. Even if your competition can’t see exactly what you’re doing, they can still anticipate your next move and start investigating your strategy.
Once your patents are in public domain, it’s only a matter of time before someone copies your IP. Most companies in the US won’t release a product that blatantly steals your IP, but they will have no problem reverse engineering and studying your IP in-house.
The real danger is protecting yourself from companies in China. They monitor all new patent filings, constantly looking for something new and exciting. Unlike US companies that could potentially face legal ramifications, Chinese companies are virtually untouchable in that regard. Unless your company is already a major international enterprise, good luck enforcing your IP protection in China. Though even then, in tens of thousands of IP cases in China, Microsoft has only ever won three of them. So if Microsoft struggles, then there is little hope for most of us.
I learnt that there was only one IP strategy that really works in China. That is partnering with the biggest and most powerful company in their respective region and leveraging their influence, connections with the Government and local gangs in order to keep other neighbouring companies from infringing on IP. Though putting your faith in one company is also a huge risk factor and will a good portion of the time end in disappointment. We have spent a considerable amount of time in China, it is a very difficult and unstable country to deal business effectively in, both business wise and politically.
I once entered a factory in China once and the owners of the factory took me into a very large room, approximately fifteen meters by three meters high. The room was packed with jewelry magazines from floor to the ceiling. They would go through each magazine and tear out pages of the designs that they wanted to copy. This factory, like many others was notorious for copying/emulating products.
There are some things you can do to prevent this, or at least attempt to prevent this. I happen to know that the largest commercial landscaper in Singapore, who has over 60% of the local market, files dummy patents to leave his competitors on a wild goose chase. About one out of every twelve patents that he files is his actual IP. That same person, when receiving orders from Chinese companies, sends over his competitors products instead. Within a few months, replicas of his competitors products flood the Chinese markets.
I also heard of another friend recently who manufactures innovative fish tanks. His designs were always being copied by Chinese companies. So he decided to post some content of a highly illegal religion in China on his site in order for his site to be blacklisted in China. Sure enough, within one week his site was blacklisted. He is soon going to China for business, and to say the least, he is slightly concerned for his welfare. This strategy seems a little bit drastic, though you can learn something from it.
Another strategy is to get your widget manufactured in multiple plants. Never give too much IP to any one provider. If you can organize it, assemble multiple parts in your home country. This keeps your IP spread out and makes it much more challenging for an individual manufacturer to copy you.
Patents Aren’t Cost-Effective Most of the Time
We took out a handful of patents in over 46 countries and now we are faced with the ongoing costs of maintaining these patents. Unless you have a secured commercialization strategy, funding pipeline, minimal moving parts, strong forecasting abilities, and the ongoing ability to instil investor confidence — you are going to find yourself in a very challenging financial situation.
For them to be effective, you really need a well planned and executed strategy. And you need to be damn certain that the technology you have is valuable. The ongoing correspondence costs alone will put a financial burden on most startups.
It’s important to have everything structured correctly. If you are running a business, then always structure your IP in a company. The process of moving around IP later is very painful. Each circumstance is unique in its own right, but something to consider is holding your IP in a company that is owned by a trust. This is definitely something that you should seek legal, accounting and financial counsel on.
Another cost to consider is the actual enforcement of IP protection. Patent filings aren’t worth the paper they are written on unless you can pay to enforce them. Many people are under the impression that the patent filing alone protects itself, but unfortunately that isn’t the case.
The Upside to IP Protection
Rarely people do not understand the real value of patents.
The first being that patents do hold quite a lot of perceptive value. When you tell someone that you have approved patents for the technology, then that person typically automatically places a higher value on the venture then if you did not have any secured IP. IP protection also give your investor confidence. Whether or not this is a false sense of security is another matter. There are several schools of thought on this subject and many investors will require the companies they fund to file patents on everything.
I know of one 1B dollar + medical company – who shall remain nameless – that has been sitting on patent pending for over 35 years. Their patent was rejected – although unethical – and they decided to keep the patent pending label on all their marketing, internal and external documentation etc. In the early days alone, the perception was enough to get them started on track to be a huge multinational company. The perception of a patent can go a long way, even if one was not approved or granted.
One patent attorney told me that one of the main reasons for patents, were to make it prohibitively expensive for the competitors to effectively compete. Thus a single patent on its own may not be enough to make a difference, yet a series strategically registered for the purpose of making it prohibitively difficult for competitors to compete can be of significant value. Though liquidity and access to capital to enforce your IP is always of great importance.
A patent does give you legal recourse in your own country, if you decide to go that route. While it can be a time-consuming and expensive process, you certainly have a chance at winning with competent legal counsel on your side.
However, in my opinion, the upsides are limited and the potential risks far outweigh them unless you know what you are doing, you have a rapid execution strategy in place and access to serious capital. The entire premise of a patent is to prevent IP theft in the first place, not provide a way to remedy the situation afterwards on your own dime.
Patents do buy you a 6-18 month lead time to enable you to build your brand around the IP until competitors reverse engineer the patent and work out ways around it. In some circumstances, especially for well-funded or established companies, this might be enough time to work with.
The aim should be to steer clear from existing patents thickets – and create your own portfolio of patent thickets for innovative and core technologies developed by your team – to protect your competitive position within the marketplace.
While they might be great in some circumstances, most companies will see far greater benefit from having a highly secretive and innovative R&D department that keeps everything sealed shut in-house. The fact is, there’s always a risk of IP theft no matter what. You just have to decide which method of prevention works best for your business.
Though IP protection does not only pertain to patents. I had a meeting recently with a Patent Attorney, who informed me that we should be adopting a much more comprehensive IP strategy well beyond patents. They then went on to tell us that it would not be cheap, indicating that it would cost around $100,000 to perform. I understood the value of doing such an exercise, though $100,000 for a startup company to spend would be a gross overcapitalisation on IP and by no means LEAN methodology. The real problem with this strategy wasn’t the cost, though it was having to explain to investors why the company does not have any registrable IP. This IP strategy is so forward thinking that most sophisticated investors still need to be educated on its value. Unfortunately, any time you have to educate an investor or convince an investor of something you are on the back foot.