A patent provides an exclusive right, for a limited period of time, that can be used to prevent others from making, using, importing, or selling products and/or carrying out processes covered by the patent.
This is all well and good for a multinational corporation that has the means to police their patents and sue infringers, but where is the value for smaller innovative companies, such as startups or SMEs, which are unlikely to have the resources to do that? Obtaining patent protection can be expensive and uncertain, so what’s the point?
Investors will consider a company’s patent portfolio when conducting due diligence because they want to be sure that there are adequate barriers to competition to preserve their investment. In my earlier article, I discussed common strategy considerations for startups.
Seeking patent protection in as many different ways as possible around innovations, can add real value to a company because it can make it considerably more difficult for competitors to clear the way and operate in the same area of technology. It can present a significant barrier to entry if a competitor has to successfully challenge the validity of many patents.
Investors also want to be aware of any third party patent rights which may affect a company’s entry into the market (often termed a company’s “freedom to operate”). It may significantly affect a potential investor’s return if there are relevant third party patents, because it might mean that a certain technology cannot be exploited, or future profits may be offset somewhat by the need to make royalty payments to third parties if a licence is required.
For companies that are at the pre-revenue stage, patents may be one of the few objective indicators that a product or process differentiates from the competition. If a company has managed to obtain granted patents in important markets such as the US and Europe, despite scrutiny by patent offices, this can provide a certain level of reassurance about the uniqueness of the product or process.
In some circumstances, patents can even provide for a more direct form of investment. For instance, patents can be used as collateral (like any other form of property), to raise funds often without diluting ownership.
Of course, patents are only part of the package that investors will consider. First and foremost, there must be a marketable product or process addressing a significant unmet need. If there is no marketable product or process, any patents covering such products/processes will have little value. Investors also want to see a management team with the skills to grow the company and reach key milestones.
A common goal for many startups is to exit through a purchase by a larger company. In a similar way to investors looking to fund a company’s growth, potential buyers will scrutinise, amongst other aspects, a company’s patent portfolio. Any gaps in the patent portfolio which may offer opportunities for third parties, or any risks posed by third party patents, can ultimately scupper a deal or can at least weaken the negotiating position and significantly drive down the sale price.
Patents can also be sold as stand-alone assets, separate from the company itself. So, patent portfolios covering peripheral areas of research and development could be sold to help fund continued research into core areas.
A company can gain the benefit of their patents without having to make or sell a product, or carry out any process themselves. This can be achieved by licensing patents to a third party that may be in a better position to exploit them. The company (licensor) may then receive a royalty from the licensee in return.
For example, large companies may fund startups through their corporate venture funds, and licensing can be one of the mechanisms by which they provide such funding. Non-dilutive financing in this way may be beneficial if the owners do not wish to lose equity and wish to retain greater freedom.
Collaboration and cross-licensing
Patents can provide a platform or negotiating tool for enabling fruitful collaborations or agreements with third parties. A company’s patent portfolio may cover something a third party wishes to use to develop their technology, and vice versa. In this situation, a company could trade access to their patent portfolio for access to the patent portfolio of a third party, by cross-licensing.
So, having patents that are useful to third parties may open doors that would otherwise not be possible.
Patents, and even patent applications that have not yet been granted, can provide a deterrent to third parties considering operating in the same space.
A startup’s patent portfolio may not be enough to deter large companies which may have the means to challenge the validity of such patent in the courts, but they may be enough to deter smaller competitors who are not so well resourced.
Having patent coverage that affects a third party’s freedom to operate can be a real headache to smaller competitors and affect their ability to obtain investment.
If a patent has been granted for a product or a process, it is then possible to advertise the fact that the product or process is patented. This in itself may provide a marketing benefit as it help consumers’ perception that a product or process is technically superior over competitor products.
In some circumstances, patents can provide tax benefits to their owners. For example, the UK implements a scheme called the ‘Patent Box’ which was setup to encourage companies to keep and commercialise intellectual property in the UK. It allows companies to apply a lower rate of corporation tax to profits earned from its patented inventions.
Are patents always useful?
Despite the obvious benefits of patents to startups, it does not always make commercial sense to pursue patent protection. There are some circumstances in which patents may not be the right call for innovative compaies.
Pursuing patent protection ultimately means that the details of your invention are made public. This does not suit all business models. For example, it might be that keeping your invention secret, or at least some aspects of the invention secret, may be more effective. This may be applicable if, for example, the innovation lies in an internal manufacturing process and a resulting product cannot be effectively reverse engineered. Deciding to keep a trade secret has to be balanced with the risk of third parties being able to freely exploit the invention if they are able to successfully reverse engineer or they may be able to arrive at the invention independently.
From applying for, to obtaining a patent can be a lengthy process. For example, the average time to the grant of a European patent is about three to four years from filing. In certain markets, technology may change so rapidly that a patent has little commercial value once it has been granted. This is less likely to be the case in the pharmaceutical sector, for instance, where the process to bring a drug to the market takes a long time.
It is not possible to obtain patent protection for some innovations, particularly if they fall squarely in areas excluded from patent protection. This is often the case for business methods and software.
This article is for general information only. Its content is not a statement of the law on any subject and does not constitute advice. Please contact Reddie & Grose LLP for advice before taking any action in reliance on it.