What use is a patent if you can’t afford to enforce it?

Matthew Lord

By Matthew Lord

As patent attorneys working with start-ups, we are often asked: “What can my start-up do to protect its innovative IP if we can’t afford to enforce a patent? Is it even worth spending the money to get a patent?”

First of all, it depends what you mean by “enforcing” the patent. If by “enforcement” you mean suing another person or company for infringement in court, and going through a full trial, then yes that can be very expensive, and more than most start-ups can afford. However, “enforcement” need not necessarily mean suing an alleged infringer in court. In fact, in our experience it is actually quite rare for patent infringement disputes to end up in court. Usually these disputes are settled out of court, meaning that the cost to both sides is drastically less than the cost of full litigation. And, as part of a commercial settlement, the patent owner will often obtain a benefit (e.g. a one-off payment, or an ongoing royalty stream, or some other commercial advantage) from the other side that they would not have been entitled to without a patent.

However, the real point to highlight here is that, for start-ups especially, patents can actually be much more useful for reasons, and in ways, that don’t involve directly “enforcing” the patent at all.

Protect your Intellectual Property

As an example, consider a completely hypothetical start-up (let’s call it BaGii) responsible for a new airbag design for cars which is safer and more reliable than current airbags. The situation that BaGii will find itself in at some point (as many start-ups do) is that they may well have a fantastic idea, and they may have even developed it into a brilliant product, but in order for their product to become successful (or before it can even see the light of day) the product will need to be taken on by at least one major industry player, in this case one of the major car manufacturers. So BaGii will need to approach major car manufacturers to “pitch” its product to them.

If BaGii doesn’t have a patent (or at least a patent application) protecting its invention, then what is to stop the much larger and more powerful car manufacturer from simply taking the idea and running with it themselves? The answer is, probably, very little. So a patent (or at least a patent application) can be one of the few things that a start-up like BaGii can use to protect itself in this situation. It is something of a fallacy that large companies would take the idea anyway, and rely on their financial superiority to dissuade or exhaust the start-up’s attempts to enforce the patent. In our experience, large reputable companies rarely, if ever, act in this way. Even a company with enormous financial reserves can suffer hugely from the media backlash that might result if they are discovered to have blatantly ripped off an idea belonging to a smaller start-up.

Further, a larger and more powerful manufacturer, when rejecting a partnership arrangement with a small start-up concerning a patented business opportunity, must always weigh the risk that the start-up will later license or sell its patent rights to another large and powerful manufacturer that is in competition with the first manufacturer. So with a simple assignment or license contract, the patent rights of a start-up can immediately become the patent rights of a major multinational with huge litigation resources. Patent rights generally demand respect, even when such rights are initially offered by a small start-up company with limited resources for patent litigation.

In addition, it is common for large companies to have policies in place whereby they will not sign confidentiality agreements when they receive a “cold call” approach from a start-up. So, if BaGii were to obtain a meeting with a major vehicle manufacturer, it wouldn’t be at all uncommon for that manufacturer to refuse to sign any kind of confidentiality agreement beforehand. Therefore, it is extremely important that BaGii has at least filed the necessary patent application(s) before the meeting occurs; otherwise the disclosure of the information about BaGii’s invention(s) at the meeting may constitute a public disclosure which may jeopardise its ability to seek protection for the invention in the future.

Be attractive to potential investors and help raise money

Another way that patents can be extremely useful for start-ups is in relation to raising money. In our experience, there are generally three main things that a potential investor will look at before deciding to invest in a start-up:

  1. Do they like the product or idea? They will generally only invest if they do.
  2. Do they have faith in the team the start-up has put together and their ability to execute? Again, the investor will generally only invest if they do, or perhaps they will try and install some of their own people as a condition for investment.
  3. What kind of security or other protection is in place that will help protect their investment?

It is in relation to this third issue that patent protection can play a major role. Patents are often one of the very few things about a start-up that a potential investor can independently and objectively assess in terms of the protection that it will provide for their investment. In fact, whilst it would be very uncommon for an investor to invest in a start-up on the basis of patents or patent applications alone, especially if the other issues discussed above are not to their satisfaction, nevertheless the existence of a patent or a patent portfolio can often play quite a significant role in helping a start-up to gain funding.

To help illustrate this point, consider our hypothetical start-up BaGii again. In order for BaGii to develop their product in the early days, it will almost certainly be necessary to undertake extensive research and development of the product, and all of this will need to be done before BaGii is anywhere near ready to approach major vehicle manufacturers to pitch for partnership or funding. However, this kind of research and product development is still very expensive, and would therefore likely require some kind of funding. A patent portfolio protecting BaGii’s key innovations would be extremely valuable in helping them to secure this funding, and indeed funding at this stage could be the difference between the start-up’s survival or failure.

License your patent and collect royalties

Let’s assume now that BaGii manages to successfully develop its product, and partner with a vehicle manufacturer to have the product installed in new cars. The next challenge is how to scale up. The reality will likely be that, once it agrees to supply airbags to a major vehicle manufacturer, BaGii’s need to supply the required quantities of the product may rapidly outstrip its internal manufacturing capabilities. This in turn may create a huge challenge for BaGii. However, if BaGii holds patents for its inventions in the key markets where airbags are manufactured, sold and used, then the company may be able to meet this challenge and ensure that demand is met by offering licenses to existing airbag manufacturers in those countries. These manufacturers, who would otherwise be BaGii’s competitors, may be willing to take a license to use BaGii’s technology so that they can in turn sell airbags produced under the license directly to vehicle manufacturers, paying BaGii a royalty in order to do so.

So, as the above example demonstrates, a carefully developed patent portfolio can be used by a start-up to provide an ongoing revenue stream. It can also provide the start-up with the ability to exploit the invention in volumes or in countries/markets where they may not have been able to otherwise.

In conclusion: “what use is a patent to a start-up that can’t initially afford to enforce it?” In our view, potentially huge benefits are available.

For any enquiries about filing and using patents, trade marks or designs, contact us on +61 (0)7 3011 2200 or mail@fak.com.au. You can also follow all of our IP updates at www.linkedin.com/company/fisher-adams-kelly.