IP PORTFOLIO DEVELOPMENT STRATEGY FOR TECHNOLOGY START-UPS

October 1, 2015

Richa Singh

INTRODUCTION

Once upon a time, thousands of years ago, a Guru exacted the thumb of a young Nishadha tribal prince who, rejected by the Guru, surreptitiously self-trained himself in the art of archery by modeling a clay image of the Guru and practicing before it. To Guru Drona’s surprise, Ekalavya outshone his star pupil, Arjuna and the Guru demanded of Ekalavya his right thumb as Guru Dakshina. Drona’s cruelty in asking for Ekalvaya’s thumb is debated to this day. But, there are several other aspects to this story, for instance, the question of intellectual property rights, which are just as important to businesses today as they probably were to Drona. Drona, Guru of the Kurus, acquired his skills, knowledge and goodwill through his time, efforts and severe penances. There were select few in his singular school of military arts. Though a rival superior to Arjuna, not only was Ekalavya the prince of a camp hostile to the Kurus but also, in Drona’s opinion, lacked the strength of character that Arjuna displayed. Drona refused to share his IP with an enemy, rival and person unfit to share a trade secret with and ensured through the Guru Dakshina that Arjuna would remain the unchallenged archer.

In today’s world, intangible assets and intellectual property (“IP”) are increasingly beginning to redefine competition in a dramatic way. IP constitutes the core wealth of a technology company. While it is, therefore, crucial for a technology company to develop an IP strategy that forms an integral part of its overall business strategy, it is sometimes surprisingly easy to neglect to do so or unsurprisingly difficult to know where to begin.

TYPES OF IP

Broadly, the categories of IP rights that a start-up needs to protect are as under:

Patents: A patent is a right granted for a specified period of time to exclude others from making, using, selling, offering for sale or importing an invention without the consent of the patentee. In India, any new product or process involving an inventive step and capable of industrial application may be patented. In a very recent development, the Indian Patent Office has issued guidelines to enable patentability of software and business methods.
Trademarks: Any mark capable of being ‘graphically represented’ and of distinguishing goods or services of one person from those of another may be registered as a trademark and includes devices, brands, headings, labels, tickets, names, signatures, etc. and even unconventional marks such as sounds marks. Domain names, too, are entitled to trademark protection. India recognizes well-known foreign trademarks and provides both statutory as well as common law protection to trademarks.
Copyrights: A copyright is an exclusive right granted to an author or creator to copy and use his original, ‘creative’ work. Books, songs, films, softwares, logos, for instance, are all copyrightable.
Trade Secrets: Proprietary information or trade secrets viz., methods, techniques, formulae, skills, expertise, etc. that give competitive business advantage may be contractually protected, for instance through Non-Disclosure and Confidentiality agreements.
Designs: In India, designs that, as applied to articles, are aesthetic in nature viz., shape, look, colour, pattern, etc. and which a customer judges based solely on visual appeal are entitled to registration. A design cannot include any trademark or property mark or copyrightable artistic work.

IP PORTFOLIO

In developing its IP portfolio, a start-up must assess its overall business goals to determine whether its requirements would be best served by an approach that is offensive, defensive or strategic or a combination of any or all of these.

Offensive Portfolio

The offensive approach to patenting serves to create and establish monopoly and protect the core technology or product of the company by excluding others, through legal action, from using the invention and to generate revenues from royalties through grants of licence for the patented invention. The period of exclusivity provides time to gain return on investment and strengthen market hold. During this period of exclusivity, trademark protection helps develop brand recognition and goodwill that supports and complements the patent in its earlier stages and outlasts expiry of the lifecycle of the patent.

Defensive Portfolio

The defensive approach is a risk mitigation strategy primarily aimed at protecting core technology or current product of the company from potential infringement lawsuits by obtaining or purchasing an array of patents that are most likely to cover its core technology or current product. The collection of patents could act as a deterrent against potential infringement claims or come handy in strengthening the bargaining power of the company by enabling it to counter-sue or negotiate a quick settlement or more favourable licensing terms.

Strategic Portfolio

A strategic approach is governed by considerations such as collaboration opportunities and cross-licensing (i.e., companies granting licences to each other to use their respective patents, copyrights or trademarks) or better valuation of the company for the purposes of acquiring venture capital or in the cases of initial public offering or mergers or acquisitions. In cases of collaboration with third parties or cross licensing, a patent portfolio could enable a company to prove its technological unique selling proposition and thereby strengthen its power to negotiate more favourable terms.

FINANCIAL AND STRATEGIC CONSIDERATIONS

It is prudent for a start-up to conduct a patent, trademark, copyright and design search at the very initial stage so as to ensure novelty of its idea and to avoid potential infringement of third party rights.

It is the IP strategy that needs to be based on the business strategy of the company and not vice versa. One must consider, for instance, some of the factors as under in weighing the advantages and disadvantages of pursuing a patent:

patents can be expensive as well as time consuming, particularly given the fact that patent protection is territorial;
whether the usefulness of the patent could be diminished by the time the patent is actually obtained, especially considering the increasingly rapid pace of change and evolution in technology;
the value the patent is likely to bring to the company;
potential contribution of the proposed patent to create and sustain entry barrier to the business of the company;
general IP practice and strategy of the industry in which the company operates including the strategy of both established companies and start-ups;
the patent portfolio of competitors; a third party may, for instance, hold a patent that is broader than the invention covered by the company’s proposed patent;
whether the company’s interests could be equally served by one or more forms of other IP protection such as trade secrets and trademarks.

When a start-up decides to pursue a patent, it would necessarily have to decide on the questions of where and when to apply.

Geographies

Patents are valid only for the jurisdictions they are awarded in. Further, countries differ in their laws and legal framework with respect to IP rights. For instance, India and other countries grant patents on a first-to-apply basis. However, the US follows the first- to-invent approach. Therefore, a start-up could begin with applying for patents in jurisdiction(s) of its operation and subsequently decide on additional countries. It might help to identify countries:

where the company’s customers, markets and competitors primarily are;
where it is viable for the company to file patent applications;
which have robust IP systems; and
where the company would be able to litigate and defend its patents.

Instead of filing patent applications in different jurisdictions, a start-up may consider filing a single application under the Patent Co-operation Treaty (“PCT”). While such an application would not, by itself, lead to an ‘international patent’ as it were, filing a local patent application under the PCT in one member nation would enable a company to obtain in any other member nation the ‘right of priority’ (i.e., precedence over identical application in said nation) if the latter application is made within 12 months of the ‘priority date’ (i.e., date of filing of local application). The company can then take up to 30 months from the priority date to pursue the patent directly before the national or regional patent Offices of the desired countries. Thus, a start-up can buy itself a good length of time to clearly assess geographies in which it would find pursuing a patent useful.

Timing

Protection of IP should be applied for at the earliest possible date. In almost all jurisdictions, disclosure of a technology or product before filing of patent disqualifies the invention from being patented and may constitute prior art. Delaying patent application and premature disclosure also expose a company to the risk of competitors patenting improvements to the company’s invention. Filing of a provisional patent application at an early stage would enable claiming of early priority date in future.

On the other hand, patent filing should not be initiated at a nascent stage where substantiation may become a challenge.

Trade Secrets

When an invention or a process does not meet the patentability criteria viz., client, vendor or supplier lists, it may be protected as a trade secret. However, even in cases where an invention is patentable, a company may decide to protect it as a trade secret rather than patent it. At times, protecting inventions as trade secrets while rapidly innovating may prove to be more cost-effective than patenting the invention.

Trade secrets not only are valid till as long as they remain secret but also are effective immediately. They are, however, susceptible to leaks and their secrecy is only as good as the rigour of the trade secret protection plan of a company. Such a plan must inevitably include watertight agreements with employees, suppliers, business partners, etc. Some illustrative key aspects of such a plan are as under:

ensuring that access to trade secrets is given only to the most trusted employees and business partners strictly on a need-to-know basis and that the access is always only to portions of the sensitive information rather than in its entirety;
stipulating in every employment agreement that all IP created during the course of employment would belong to the company and that the employee would assign all future IP to the company;
executing non-disclosure and confidentiality agreements with all employees, suppliers, business partners, etc.;
conducting regular workshops to educate employees about the importance of maintaining confidentiality of the company’s IP; and
regular monitoring to ensure there is no information leak.

It is judicious to give fair compensation to the employee inventor assigning the IP to the company and to obtain written undertaking from the employee admitting such receipt.

However, it must be borne in mind that trade secrets are much weaker than patents and do carry considerable risks such as being leaked or potential third party infringement lawsuits if a competitor patents the same technology or product.

OPTIMAL UTILIZATION

A good IP portfolio does not focus disproportionately on one form of IP protection to the neglect of all other forms that may bring distinctive value to the business of the company. For instance, a company’s software invention could be patented, the musical tone accompanying it could be copyrighted and the brand name of the company could be trademarked resulting in the company being better able to protect its invention by leveraging both exclusivity, and, goodwill and brand loyalty.

The importance of investing in maintenance and audit of the IP portfolio of a company can hardly be overemphasized. This would include the company periodically identifying and keeping a record of all IP owned, used or acquired by it, reviewing the value of existing IP, following-up on renewals, identifying and managing enforcement and litigation issues, reviewing adequacy of IP policies and procedures, etc.

CONCLUSION

Treating IP protection as business investment on which returns may be expected rather than protection for the sake of it would help a start-up fully leverage its IP assets, create value for the company and use the IP assets to advance the business goals of the company. It should make better business sense to appreciate IP protection as a broader concept than just the right to exclude others and create market barriers. A start-up should also consider the value to be derived from sharing information, collaboration opportunities, market access through licensing, franchising, etc. and creating revenue streams from non-core IP. The IP strategy most likely to succeed is one which balances costs and opportunities. Most importantly, a start-up should chart out its IP strategy at the outset and continue to review and evaluate it from time to time.

Author
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Richa Singh

Founding Partner, Varenya Law Offices.
Richa began her career as a real estate attorney. Having worked with leading law firms in New Delhi and Chennai for over seven years, she has developed extensive experience in advising domestic as well as multinational clients on M&A, de-mergers, joint ventures, technical collaborations and other corporate and commercial transactions.

She has also advised and represented a number of clients including PSUs in the oil & gas and energy sectors on various aspects of corporate and commercial laws.

Richa has previously worked with a law firm in London following her post-graduation in Corporate and Commercial Laws.

Richa is a regular contributor in the fields of Law and Policy