Does a company have to file for a patent to add value or attract investors?


In various meetings I have had with patent attorneys and participation at USPTO events in Washington, D.C., I perceive that the filing for a patent from these meetings is the most critical investment a company must make in any business strategy.  As an earlier blog alluded to, I would reply that the filing for a patent is not the most important requisite for attracting investors – revenue is key.

There are many patents that have been registered but never had any commercial value.  My favorites are the many patents that have a different twist to the mouse traps.  Just searching through the treasure troves of granted patents, anyone can find many types of mouse traps, some so complicated, that boggle the mind.  But when I go to shop for a mouse trap, I only find one or two types of mouse traps that have been in marketplace for decades.  Now is there a better mouse trap?  I don’t think so. Yet the USPTO has granted several patents that seemingly do appear to offer better technologies.  Now I believe that it is the “first to market”, regardless of the patent, that seizes the majority of the market share.  With or without a patent, the first mouse trap has established itself. And, based on the economics of distribution, that is, the limited store shelving has distributors set a limit of what can be sold out there in the types of traps.  Therefore, you conclude that, regardless of a patent filing, you have to concede that a product that sells is more important than a product with a patent that does not sell. The company must show revenues for that product and the sooner it shows revenues, the faster it can attract investors.

Can a regular startup afford to file for a patent? I read somewhere that Steve Jobs has hundreds of patents in his name.  And, if anything demonstrates the value of a patent is the legal success Apple has had against Samsung.  But Apple has substantial financial resources to file for patents and to defend them.  I have no doubt that the litigation against Samsung must have cost Apple millions in legal fees.  To defend a patent there are substantial legal costs. Patent lawyers rarely undertake these cases on contingency.   Maybe they know something that their clients did not know when they filed for their patents. A granted patent filing may not be protectable.

Filing for patents is not inexpensive either. The average technical patent filing costs about $50,000 to file, manage, and perfect.  First, you have to identify a patent lawyer who is experienced in filing for your particular technology. Second, you have to explain your technology to the attorney.  Third, that attorney has to search in the on-line USPTO archives to see whether a similar filing has been made already. Fourth, you have to spend countless hours with that attorney in drafting the preliminary filing. Finally, after the filing is made, you await whether there is a challenge when the filing is published.  And then you wait a few years for the final grant. In between that time, an examiner might challenge the filing.  (Examiners are in-house attorneys employed by the USPTO to review and approve the filings.  Besides the law degree, they have undergraduate degrees in the sciences and are experts in the field. If the filing relates to physics, that examiner will have a background in physics as an example.) And that might warrant a response and/or a modification of the patent filing. With the hourly rate for patent lawyers exceeding $400 per hour, staff support, disbursements, and filing fees, you can then conclude why a patent filing is not cheap.

And soon the U.S. will follow the rest of patent filing world with the rule that first to file takes precedence in the protection of the patent. Historically, the intellectual property has been protected by the first person to invent.  There is an old movie about Alexander Graham Bell (portrayed by Don Ameche) who, to knock out a former patent filing, proved that he designed the first phone on the back of a dated love letter. So many companies will face added pressure to file patents.

Given this process, you need to balance the need to file for a patent or rely on other forms of protection – trade secret, copyrights – to create intellectual property.  And you have to apply economic cost benefit analysis. Can your company afford to file for a patent and delay the marketing of your product? Will the delay cost you the market opportunity – the store shelf rule? On the other hand, with a patent, is the product is so unique in the eyes of an examiner that it deserves the pause to market the product? Can you trade your operating capital to pay for a patent filing? On this last question, I have observed that the pharmaceutical industries, medical devices, manufacturing, and other similar industries have both the types of products and means to file for patents. My big question is whether software code can continue to be filed as patents.

On the other hand do startups have to file for a patent? Since I am always concerned about cash flow as an executive and general counsel, it all depends on what kind of product you are marketing and whether there is a need to file for a patent.   The general counsel has the final say whether to employ outside counsel.  I would make the final determination whether to seek patent lawyers on my cost-benefit analysis. In my experience with startups, I would prioritize the cash flows over IP protection, unless failure to create IP would have a severe impact on the revenues.

Based on my experience, there are other ways to sell your product with some kind of intellectual property right.  Now Coca Cola’s does not have a patent, but protects its formula with a trade secret.  And with its brand and manufacturing prowess, it can protect its market share without a patent.   So Coca Cola is an excellent example that contravenes patent lawyers assessment that you need a patent to be successful and attract investments.   Branding suggests trademarks – an intellectual property, and trademark filings are relatively inexpensive. One can copyright software. Or you can maintain a trade secret.  In other words, intellectual property is not exclusively a patent filing.

Again, I suggest my cost benefit analysis: is it the kind of product which has a unique feature that will pass the review by the USPTO examiners? Does the company have the budget to hire patent attorneys? Do you need to bring in revenue as soon as possible? Can you afford to delay the marketing of the product? Are there other ways to create intellectual property without a patent so that the product can be marketed? If you can answer these questions honestly, then you can make the right decision.  Most importantly, focus on bringing revenue to the table.

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About Juan Ramón Zarco, SVVGP 胡安•雷蒙•扎尔科

Juan Ramon Zarco, 胡安•雷蒙•扎尔科, Silicon Valley Ventures Growth Partners llp, Hygieia Healthcare Technologies Company, AllRest Technologies LLC, Crimson Growth Partners LLP, jrzarco2001@yahoo.com, is an experienced as CxO, General Counsel and Secretary to public and private companies with global operations. Established track record of producing practical, revenue-focused solutions. As Counselor and Secretary, demonstrating vision, integrity, and sound business judgment, to CxOs. Managed complex, strategic transactions, M&A, contracts support, PE Financing, IPO, SEC compliance, Corporate/HR governance, IP licensing, Budgeting, Staff, outside counsel management, International market access strategies, Domestic & foreign government relations and advocacy. Creative in designing and implementing market access strategies. Practices law beyond conventional model with low-overhead and project-based fees. Effective at managing departments, formulating marketing strategies, balancing budgets, and implementing cost-saving measures. Extensive in-house and private practice experience, advising clients on commercial, corporate, international business, and technology law and policy. http://www.docstoc.com/video/89135472/make-your-business-an-international-presence; http://www.youtube.com/watch?v=fx5gijf3yoc For Sprint, he managed iDen international development in Southeast Asia, Middle East, and Africa, and contractual issues with Verizon. In Private Equity, he worked with Pegasus in vetting international investment deals and interim President for portfolio companies, such as Data Foundation, a data storage company, handling marketing, strategy, fund raising, and accounting. Before Pegasus, Mr. Zarco, as CLO and V.P. of Corporate Development, played a principal role in the structuring, international expansions for 2 telecom companies, U.S. Cable Group and Viatel, Inc. in financing and M&A deals exceeding $200 million. Mr. Zarco earned a J.D. from NYU Law School, M.B.A. from Cornell, and B.A. from Williams College; is fluent in Spanish, Portuguese, French, and German, with working knowledge of Russian, Arabic and Japanese.
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3 Responses to Does a company have to file for a patent to add value or attract investors?

  1. rocketcityip says:

    I agree with you that start-ups, and anyone for that matter, should carefully consider the costs and benefits in deciding whether to obtain patent protection. I am a patent lawyer, and I practice in almost all aspects of intellectual property. Because of the costs involved, I usually advise my start-up or small business clients especially to scrutinize their strategic need for a patent, e.g., whether it’s just to attract investors, or whether there is some magic in their invention. I respectfully disagree with you about the costs, however. It’s understandable given your experience, but it is possible to obtain a patent for less than $20,000 over the course of three years, which is roughly how long the patent process takes. Cost depends on several factors, including the technology and the complexity of the invention. But, there are many patent attorneys or agents in smaller (read: less expensive hourly rate) markets, and I am an example. Further, I recommend to start-ups that they should ask the attorney if he/she would consider a flat fee arrangement for services. This can help keep the legal fees in check, and allow the client to keep to a budget fairly reliably.
    My background includes serving as in-house counsel for a tech start-up that spent enormous amounts of money on legal fees for outside counsel for patent work, using big-name firms in large cities that billed $500-$1000/hour. The conventional wisdom was that investors wanted to see not only the patents, but also the big firm names on those patents. While there were investors, I don’t know if the patents ever made any money for the company.
    I just wrote about almost the same issue: rocketcityip.wordpress.com
    Great Post!
    George

  2. In response to a commentator on total costs for patent filing, my numbers originated from my experience as General Counsel and from having assigned patent work to top tiered law firms in NYC and Washington. DC. $50,000 was my benchmark several years ago. I don’t know what it is today. In fact, one of my DC firms charges $50,000 a month as retainer. And those legal costs vary according to the complexity of the filings and the technologies. But given ANY costs, I do believe that a company should weigh the legal costs versus the economic opportunity costs.

    And further to the issues regarding patent filing costs, companies can now outsource filings to India that reduce a patent filing to $10,000 or thereabouts.

  3. re: out-sourcing to India. the same or better costs can be realized by “out-sourcing” patent preparation and filing to, say, just as an example, Alabama. An unscientific poll of myself and a few of my colleagues here reveals an average cost for preparation and filing is about $6,000 to $7,000 for an application of medium complexity.

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