Protecting and Monetizing Your Intellectual Property as you Scale-Up Your Firm - A general primer on intellectual property for you and your firm.

I had a discussion a long while back with a friend about ideas she had to develop software programs as part of a larger business process. These are notes that I sent her and which may prove helpful to you as you think through your own IP strategy.

In general there are several steps you can take to protect your intellectual property, and to think about monetizing and scaling it up into a possibly viable business model.

As a first step, I think it's important that you put your thoughts into a process flow format so that you can explain to me what you think your innovation in technology or software will do. There are legal requirements that the innovation must be original and novel. So, putting your thoughts into a flow chart or fish diagram will allow you to identify the particular points where you think your invention is actually novel and original. 

Once we review that and I have an understanding of your ideas, we can then sit down and look at the definitions under the law and see whether your sense of novelty matches the legal requirements. I can do a patent search for you and/or also look into various methods of protecting your software by copyright. 

That is the essential first step. You will be able to get financing, support, and developers much more easily if you have intellectual property that is protected.

As you prepare your documentation and especially the flowchart and diagrams, the following are VERY important considerations that will provide you with a strategic framework to think toward:

1. If you work for someone else as an engineer or software developer and the ideas you have are not related to work, then develop your ideas at home. NEVER develop, sketch, doodle, or ideate your own thoughts in the work environment (whether on the office computer, in the office, at your desk, on office materials, and so on). Use your own computer at home and away from the office.

2. If, however, you do have ideas that are unique to your employer, then you should check your employer's intellectual property policy for on-site inventions. Don't give them software improvements without getting an agreement signed by the legal department naming you as the inventor of the process and giving you some sort of compensation and recognition. The more patents you develop and copyrights you propose for your employer and the more that can get issued after filing, the stronger your position will be in your organization, the better your compensation. Protect yourself as you help your company.

3. Where process improvements and software are unrelated to your work and are your own, you should have a clear idea of where technology is heading in the next 10-30 years (ideas that were independently developed from the work you do with your employer or from the knowledge you acquired in graduate school). If you have an understanding of the trends in the market you seek to develop (or even create), then consider the following steps:

a. Develop an additional flow chart so that you can explain to me what the trends are and how your innovation and/or software fits into, complements, shifts, distorts, or changes that trend.

b. This flow chart will become the basis later on for your business plan, your roadshow to investors, and for sales pitches to potential customers. So make an effort to think of the ultimate object structure and marketing / sales / financing objectives.

c. On separate flow charts hone out details -- especially details that are unique against the market in general. Your thoughts about the improvements you make may be more than just one patent or copyright framework. Let's see if we can eek them out. Is there something there that we can identify as a trade secret? If so, you may want to take steps now to make sure you will be sufficiently protecting your trade secret that the company you found is able to maintain its competitive edge despite the expiration of any patents or copyrights we file. 

4. Once you have created some good drafts of these initial frameworks, let's sit down and have you explain them to me. After that:

a. I will then expand on the original basic patent and copyright searches. Here I will also start looking at trademarks. And, I will begin framing a trade secret management policy for you. At this stage I'll also provide you with some basic information so that you can start thinking about business formation, development, and expansion. I do this because I want you to also think about the long-run -- not just about getting your intellectual property protected. 

b. As I'm doing this, we will need to develop a "prior art list" - that is a list of journals, articles, and publications that you have reviewed and obtained either at the library, through your subscriptions, and at conferences that explain and show the foundations that led to your innovation. This will be important to show that indeed the ideas that will be subject to the intellectual properties are novel and original. Remember here that initial diagram you drew highlighting what specifically about your innovation is novel and original. It's at this step where we will be working on proving it.

c. As we do this, we will sit down and combine a + b to articulate in a few paragraphs what your innovations are compared to the prior art. This will likely be an iterative process -- but we should be careful not to delay the process too much. We don't want your innovations to become state of the art before you make them state of the art.

5. Now you will have a choice. I have supervised patent litigation in Germany, the United States, and Japan. I also have helped with drafting notices of infringement and non-infringement defenses and have conducted broad prior art searches in Europe (UK, Germany, France, Spain), Latin America (primarily Brazil and Mexico), the United States, Canada, and Japan. But I am not an attorney who is licensed to practice before the US patent and trademark office (USPTO). Your choice is: a. You can file a patent on your own, of course, or b. we can shop around for a patent lawyer to file your patent. There are pluses and minuses to each -- and they involve costs and control. We'll discuss these issues when you get to that stage. This part of the process will take time. As we get the patents filed and issued, that will be the time you and I will start thinking about what business structure you want to adopt, where you want to site your facilities, and how you want to finance the project. 

6. Assuming your patent(s) get issued, we will then have a very good framework to discuss monetizing your ideas. Be forewarned that a measure of success is competitor envy. If you do it right, you will be cannibalizing their products and may even prove a threat to their viability. It's for that reason that we need to make sure that whatever you develop is your own independent creation. This is also why we need to be sure that your ideas are novel. We wouldn't want your employer or the graduate program to come back and say that the patents are theirs (see steps 1 - 3) -- weapons that a competitor has at its disposal if you are not already independent.

7. Monetizing your ideas will involve:

a. Developing a business plan

b. Developing a sales strategy

c. Finding customers who would be interested in receiving prototypes and wouldn't mind the tweaking, improvement, and innovation process as you bring the product(s) to scale

d. Considering angel financing and venture capital.

I am not only a trained attorney. I have government administration, non-profit, and business school training and experience too. I've also worked in international manufacturing and in small-scale mom and pop companies. So, I can help you with everything you will need to have a really good start-up and get your business going.

That's a broad sketch. Depending on all the minutiae, the entire process to initial business ramp-up should take about 2 years; maybe less if (1) you have done all the work to prove that your innovation is novel and original and (2) you already have a vision for a client base (and we should talk about that too in the context of our discussions -- because it may help you to focus the development of your intellectual property). 

At a certain point, you will also have to make a decision about scale -- will you want this to be "your" business (do you want to be a Steve Jobs or Bill Gates) or will you want to sell your ideas (do you want to become the founder of CISCO who was bought out but spent her money building charities that provide her with a respectable income and meaning). Understanding where you want to carry your invention, will help you make good decisions about how you want to handle it now.

So, now you have your patent filed and issued and you're getting clients and getting a cash flow stream. You've also maybe hired an employee or two to help you with the administrative stuff and now you're thinking of scaling up. 

Aside from getting a reasonable cash flow, earning meaningful profits, and keeping your customer happy, there are many administrative, financing, accounting, and human resource things you have to think about. What many don't do in the scaling up phase, however, is think about their intellectual property -- or at least don't think of their intellectual property as an asset that has a use life and that is subject to being undermined by competitors.

Here I'll help you with how to think about your intellectual property on a long-term ongoing basis, how to protect it, and how to expand your portfolio as you are simultaneously building, growing, and expanding your business.

There are two legal concepts that you have to understand at the outset: 1. Patent Erosion and 2. Patent Exhaustion

1. Patent Erosion: Many intellectual property holders make the mistake of thinking that once their patent or copyright is issued, their monopoly is indelible. That is, that their invention carves out a whole area of practice and art from which they will inevitably be able to generate meaningful and sustainable cash flows over time. To some extent this is true. 

Once your patent gets issued, however, you can bet that your competitors are going to pour over its specifications and claims and will try and find ways to design around your patent. Say, you get a patent or copyright on a software that is able to return 1,000 data points. And, say that you are very confident that developing software that would return 1,500 data points would be meaningless; or, in any case, no one would be interested in it. In that case, your competitor may find a way to develop that software without actually using the technological innovation that you found to get there. 

That is, because your intellectual allows you to cannibalize your competitor's market share, you are providing your competitor with an incentive to find a way to at least undo the pain. So, inevitably, your competitor will look for ways to do the same or better through better or more efficient means. That's why just sitting around and doing nothing about your patent other than using it to continue to develop your product as is, will inevitably result in patent (and by extension, market) erosion -- not only through competitive marketing and branding efforts; but also through competitive patenting efforts.

2. Patent Exhaustion: The law on this is still in development and the theory of patent exhaustion bears some scrutiny, even today. Suffice it to say, the monopoly that you receive in your patent isn't unlimited. Just because you have a patent on the design of the first table ever invented, doesn't mean that you will be able to force everyone using tables to pay you royalties forever. At a minimum, the royalties you can collect will be a percentage of the sales made by anyone else who makes a table as you specify it in your patent. In the copyright arena, this rule also applies to allowing your suppliers to use the software to design a certain system. You won't be able to extract royalties from anyone incorporating the supplier's products into their mechanisms or products. So, you need to be very careful about how you set up your licensing program, whom you give the right to use your intellectual property, and how any products on the market use the intellectual property you designed. 

So what do you do? First off, even though it's relatively expensive, you should make sure that your business attorney is also aware of these issues so that the attorney can help you with setting up an in-house intellectual property monitoring system (that will eventually grow into an intellectual property department), that you are very clear on the uses to which you will put your intellectual property, and that you have a very robust licensing and royalty collection program in place. All three will help you also understand and document the value of your intellectual property, which could turn out to be important if you ever have to have your business valued.

A. Intellectual Property Monitoring: As the owner of a business that is reliant on intellectual property, you have to ensure that 2 functions are met early on. First, you need to make sure that any ideas relating to your business that your employees generate are retained in the company. Second, you need to make sure that you have systems in place to keep tabs on the competition and what they are up to.

First: Monitoring in-house Developments: In my preceding blog entry, I helped you to understand how to make sure that any ideas you come up with independently and that are unrelated to your work remain in your own hands. Now that you have your own business and your own intellectual property, the shoe is on the other foot. You now have to think about how to keep any ideas developed in your company in your company. 

This is actually not an easy task. For one thing, like yourself, your employees are human beings. They are thus open to the same resentments and emotional responses as others. So, your patent monitoring task is not only an administrative documentation task. It is an essential human resources management task. You have to ensure that your employees feel good enough about your business that they are willing to inform you of any ideas that they come up with which will help to develop and expand your business. What you want to avoid in the long-run is what happened to Atari. Atari had developed into a great software development and gaming company in the 1970s. But the owner began to suffer from hubris and started treating his employees very poorly. Over time, many were fired or left voluntarily. They went to their competitors or (like you) established their own businesses and began developing games and graphics software from ideas that they had kept to themselves as Atari eroded. Today, Atari operates its business in the nostalgic games market. At least in the public mind you couldn't say any longer that they are great innovators in computer gaming. Trust me, however special you think you and your technology are, you don't want to become an Atari. 

What you do want to become is a company where employees that end up leaving still feel some affinity. This is where your human resources department must be your strategic partner in the development of your competitive plans. You want to make sure that your hiring, retention, and dismissal policies are strong and positive enough, that you don't have too many employees bent on sabotaging your operations either while they are there or after they leave. Trust me also when I tell you that confidentiality and non-compete agreements only go so far when you don't treat your employees well (Seriously, why would you want to bank your human resources policy on confidentiality agreement litigation?).

When you treat employees with dignity and fairly, they are likely to contribute more to the positive development of your firm. To ensure that the incentives you provide your employees are noticeable and not merely eleemosynary (voluntary), you must set into place a process through which employees record all experiments, developments, and innovations. Not only in your product development and research departments but throughout your entire organization. The secretary who handles the computing systems may come up with a way to make his processes simpler. That innovation may be quantifiable and may be subject to a business process patent. Why not encourage the secretary to also make a contribution to the business that way? Innovation by cooperation and contribution is an innovative idea itself and is practiced by few corporations. But where it is practiced, it has led to long-term sustainability and growth (the corporations that have been operating for more than 300 years today think like that. To them, innovation is in their blood -- and it should be in yours too).

So, make sure that you have systems and processes in place where your satisfied employees are willing to make contributions to your firm's growth by contributing their ideas. Take heed, however, that the employee inventive process is subject to strict regulation in some countries. In Austria, Switzerland, and Germany, for example, the respective Employee Inventions Code (Arbeitnehmererfindungsgesetz) will govern how you can and can't document employee ideas, what you have to compensate as an incentive or bonus, and how your relationship with the employee should be if the intellectual property is actually filed. There are similar laws in most civil code countries and in the U.S. there is a healthy body of statutory and case law that governs the area. So, when we get to this stage, let's make sure that your processes are both effective and compliant.

Second: Monitoring outside Developments: Just because you have a robust in-house development pipeline doesn't mean that you're protected from erosion. You will also have to put someone into place to make sure that any innovations that your competitors (including universities and research facilities) come up with don't erode your ability to assert your patent. In other words, you don't want your patent to become that interesting prior art which you used to distinguish your innovation as novel or original. 

Your monitoring system should keep an eye on any filings relating to your patent in the patent office of the major countries in which you operate or plan to operate your business. That means, you have to keep tabs on what is going on in the US, Canada, Mexico, Brazil, Germany, France, the United Kingdom, Spain (though for European countries, the EU is moving toward a centralized patent office much like the USPTO ~ e.g. they are working toward federalizing intellectual property regulation), and Japan. If you are thinking of setting up shop in China, Singapore, Thailand, the Philippines, India, or other turnkey and manufacturing nations then you should also monitor those countries.

This isn't as expensive as it seems. PATDOC and similar computer platforms allow you to set up a tickler system that will generate results from search terms specific to the key terms of your intellectual property. Most foreign patents have at least some abstracts in English, French, German, or Japanese so at least you will be able to get an idea of the patent claims before you determine whether to have it translated. A patent translation will cost you anywhere between US$500 and US$1000 depending on the quality of the translator or agency. You are actually better off hiring an employee who speaks and/or can read foreign languages so that they can save you that translating cost -- or at least help you determine which filings are relevant and which not.

From this monitoring and review you will be able to make an assessment as to whether you want to file an opposition to the competitor's filings. Better to do it immediately upon filing than to wait ten years to find that the competitor has blocked your ability to innovate or, worse, has started to cannibalize that market which you created. 

You should also keep your eye out in the market for products that look and feel like they have incorporated your innovations. So, you should consider also getting someone who is an engineer or has a good sense of technology to parse competitors' products for infringement. That will allow you to be vigilant in protecting your patent monopoly; because if you don't have a relationship with the competitor, the patent will protect you from having them copy your innovation. That's essentially what infringement is ~ unauthorized copying. 

When you do find infringement, you have to send the infringing company notice that you are aware that they are misusing your innovations and technology by copying information you have claimed in your patent and described in its specifications. Once you send your notice, you have to give your competitor a certain time to respond - usually 30 days, though that time may be extended by mutual agreement. Your competitor will in most cases return a non-infringement letter to you, claiming that whatever you may think is your innovation is actually either not your innovation or that, in any case, they aren't infringing it. At this stage, in most cases, you or your patent attorneys will sit down with them and try and figure out a settlement -- or at least try and figure out how confident they are about their position. If you feel strongly enough about your intellectual property and you haven't achieved a settlement, you can now file a declaratory judgment action asking the court to declare that the competitor did indeed improperly use your protected innovations in their product(s). 

This process is costly at the outset. But handled, well, will allow you to keep tabs on the markets and market developments and will also protect your own intellectual property and company growth from erosion and loss. So, do it. Obtain whatever financing is needed. The payoffs can be astronomical (>whispering< Lemelson).

B. What Uses? You want to make absolutely sure that you don't disclose or put your intellectual property to use before you have clearly identified it as yours. Too often, people get so excited about their innovations that they run to the nearest research conference and disclose those innovations to the world. Or, they decide to start selling the product before they even get the particular innovations filed at the patent office. Do yourself a favor, incur the upfront costs and make sure that the unique stuff that you are creating is really and actually protected from being used by competitors who may have much more capital and market power than you. 

Once you get your patent, then you have to make sure that you use it. It's not sufficient to just have a patent and then sit around and wait a few years for someone to buy it from you or to license it. There's a certain time period where your patent will become fallow and may even lose its validity. Get some products on the market and sell them. Make the prototypes work. Demonstrate that you intend to protect the patented technology or copyrighted work. Make sure you have a trademark and trade secret policy in place that buttresses your claims to novelty and originality. This too will protect your intellectual property from erosion.

C. A robust licensing program: There are companies that just don't license their technology. That's not a bad policy where you want to secure your dominance in the markets and where you are certain that your patent portfolio is broad and robust enough that you will be able to withstand any challenges to your position. In most cases, however, dominant patent holders will by necessity invite infringement claims from competitors. Where this could be interesting for you in the dominant position, is where the claiming competitor has a portfolio in their hands that is or could be of interest to you. That would open the door to potential cross-licensing where you allow your competitor to use your patents and you in turn get to use your competitor's patents. 

Alternatively, you could actually decide that you don't want to invest the monies into manufacturing and production facilities. That is, you could prefer to hold the technology but allow someone else to put on the elbow grease. In that case, you can engage in outbound licensing in which case you will allow your contractor (and maybe even their subcontractors) to use your patented or copyrighted technology for a fee. That fee is known as a royalty. And usually it is an agreed-to percentage of the cost of units produced or of the profits from units sold. Here the tricky part is maintaining tabs on the competitor. While in many cases it comes down to trust, you want to make sure that you have an appropriate monitoring and auditing program in place and that that program is reflected in your licensing agreement. That program should allow you to visit your licensee's facilities so that you can have a gander at their books (both their financial and their managerial accounts).

Of course, you could decide as you are developing and growing your business that there is technology which you can't create in-house or that is out there and is essential to making your products even better than they are. There are companies out there that hold technologies that are essential to entire industries. This is the case with Dolby, for example, a company that has cornered the market for great sound. You can't really make a movie (however novel or original) without getting a license from Dolby to use their sound systems in your production. And there may well be companies like Dolby in your industry too. 

Remember that flow chart I told you to develop way back at the beginning of your venture when we were chatting about how to protect your new and original ideas? Well, you can continue to use that diagram throughout your business's life as it will help you to identify and keep track what is uniquely your technology and what technology you will need in order to secure your continued success. 

When you acquire such in-bound licenses, then you have to make decisions on how you will pay for them - whether you will make an upfront lump-sum payment or whether you will pay royalties as a percentage of your sales or as a percentage of the units you produce. There are some intricacies to licensing agreements that we need to discuss when you engage in negotiations and draft the agreement. We need to make sure that you don't inadvertently give away your ability to continue independent developments in certain areas and that you are given appropriate warranties as to the effectiveness of the technology you are paying for. 

And, finally, you can purchase any intellectual property that you need; or you yourself can sell your intellectual property to someone else. Here the documentation you have kept as to how you developed it and how you used it and defended it will be critical in the valuation. The better that you can show earnings streams from the patents, copyrights, and trade secrets that you hold, the more you can ask for your intellectual property. Just think how much the trade secret to the Coca Cola formula is worth. With all those years of cash flows, those secrets are worth a lot at this time. On the other hand, you don't want to get into Kodak's situation where the market for your intellectual property has eroded so far and deep that it becomes really hard to sell (or even value) your portfolio.

When selling intellectual property you will have to decide whether the transaction will be outright or whether you will carve out a portion that either you may not need or that proves so profitable to you that you want to retain. The same applies when you are purchasing intellectual property. You should make sure you know what you are buying and that you have a clear understanding of the transaction terms. Do yourself a favor and have an attorney with some experience in the field draft and negotiate the agreement terms. I would be happy to help you with this too when the time comes.

Well, there you have it: A general primer on intellectual property and your business. You can contact me anytime for further details. 

*Disclaimer Note: Please consult with me in my professional capacity or with your IP attorney before taking any steps suggested in this post. Your situation will likely be peculiar to your own business circumstances and therefore my suggestions may or may not be applicable in your particular case. I therefore assume no liability for any steps you take without first consulting legal counsel.