Intellectual Property: a guide for start-ups


Philip Barnes
Investment Executive
Published:
intellectual property

 

What is Intellectual Property?

Intellectual Property (IP) can at first appear to be a slippery concept. In essence however, IP refers to creations of the mind, involving thought, creativity and intellectual effort. Once created, IP ownership is little different from owning other types of more tangible property, in that it can be bought or sold or even used as security against a debt.

Intellectual Property Rights (IPRs) such as patents, trademarks and copyright exist to enable you to assert and protect your ownership of that property. They also provide the legal basis from which to take action against someone else who infringes your IPRs by stealing or misusing them.

 

Why should you care about it?

Large mature corporations often have vast property portfolios and huge capital equipment inventories. Their value can also be embodied in extensive order/debtor books and a dominant market position.

Start-ups by contrast often work from rented premises and the company has only a few laptops and desks to its name. Consequently, the most valuable components of a start-up are likely to be its staff and its Intellectual Property.

Given the central place of IP in a young companies’ embodied value, it is important to be mindful of both its creation and protection as you develop your first products. This IP, and the IP rights you obtain around it, can become an important defensive moat to protect the competitive advantage and market position of a fledgling company.

IP can also become a source of revenue without the need to actually build anything. Many companies generate more of their revenue from licensing their IP to others than they do from selling any products themselves.

In addition to providing and protecting a revenue stream now, IP is also important to the way your business is viewed by potential investors. A strong IP portfolio will give an investor confidence that you can protect your market position and hence provide a good return on investment.

Furthermore, the innate value of the IP can provide investors with comfort that, should the worst happen and the company folds, there is at least a potentially realisable asset that can be licensed or sold to recover some of the losses. Investors who provide debt-based funding will sometimes accept a charge over the company’s IP as security for that debt.

 

Who owns it?

IP rights are all about ownership and so it is important for start-ups to be clear, at least internally, over what they have created and what they own.

The 1977 Patent Act enshrined in law the fact that an employer own IP generated by its employees in the normal course of their employment. There are however some caveats to this situation that it is important to be aware of.

  • In the case of technologies arising from Universities, students are usually not employees. Therefore, if a student has contributed to an invention, it will be important to obtain an assignment of their rights in the IP.
  • Inventions that have been developed in whole or in part with the assistance of research grant funding may be subject to additional IP ownership conditions that were stipulated by the grant awarding body.
  • If you commission another person to create a copyright work for you, the legal owner of copyright is the person that created the work and not you the commissioner. It is therefore important that assignment of IP is covered explicitly in terms of engagement with, for example, contract software developers.
  • If an invention was co-created by 2 or more inventors it can be a valuable exercise to agree the proportional contribution of each person early on. It is normally much easier to agree this at the outset, rather than after someone has offered you £10 million for the patent rights!

 

Key types of Intellectual Property

There are four main classes of IP rights:

  • Copyright
  • Designs (registered and unregistered)
  • Trademarks
  • Patents

 

There are also other, more specialist forms of IP rights aimed at protecting particular classes of invention.

  • Database rights (Protects collated and structured information)
  • Plant breeder’s rights (Protects new strains produced by selective breeding)
  • Semiconductor topographies (A form of design right specifically for semiconductors)

 

Some of these rights are registered and some are not.

In addition to these, there is a further form of IP whose importance is often overlooked. Trade Secrets (or know-how) include any information or knowledge that has value to your business, that is not generally known and that is subject to efforts to preserve its confidentiality.

While virtually every business has at least some trade secrets, they are inherently fragile because they protect information and resources that are secret. This means that once the secret is exposed, all of your protection evaporates instantly. It can also be more difficult to take legal action against infringers of trade secrets because of the difficulty in demonstrating ownership and misappropriation around a property that is so intangible.

There is however a significant upside to trade secrets. Firstly, they are free and require no maintenance or upkeep. Secondly, they are not subject to the public disclosure required in the patenting process. This means that you can theoretically retain absolute control over the information indefinitely, rather than the 20 years afforded by the patent system.

A notable example in this regard is the recipe for Coca Cola, which has been maintained as a corporate trade secret for more than 100 years. Similarly, the recipe for WD40, the Water Displacer discovered by Norm Larsen in 1953 on his 40th attempt, has been kept secret within the company that bears its name ever since.

 

Copyright

Copyright protects the expression of original literary or artistic work, such as novels, songs and newsprint. It will be immediately apparent that originality, and conversely degree of similarity, is a difficult concept to define in statute. Consequently, in the case of disputes, originality will ultimately be decided by the courts.

A notable example of just such a case was seen in March 2015 when a Los Angeles jury agreed that the recording artists Robin Thicke and Pharrell Williams had copied Marvin Gaye’s music in creating their song “Blurred Lines”. The pair were ordered to pay $7.4m in damages in a case that hinged on the dividing line between musical similarity and outright theft of IP.

  • Copyright protection arises automatically, giving you the holder the exclusive right to control both the reproduction and the adaptation of your work.
  • Copyright applies to any medium. This means that you must not reproduce copyright protected work in another medium without permission.
  • The term of protection in the UK for an original written work lasts for the life of the creator, plus 70 years from the end of the year in which he/she died.
  • You are however allowed to take short extracts of works for non-commercial research/academic use.
  • In the case of written works, the author or creator of the work is the first owner of any copyright in it.
  • Where a written work is made by an employee in the course of their employment, the employer is the first owner of any copyright in the work.
  • As a company it is important to think about what type of licence you want to assign to a copyrighted work before uploading it to the internet. You can’t make licence conditions stricter once it has been released in the public domain.

 

Registered Designs

Registered Designs protect the overall visual appearance of a product or a part of a product. For its registration to be valid, a design must be new and have individual character. As with Copyright, the presence or absence of individual character will be judged by the courts in the case of infringement disputes.

Designs that are dictated solely by the product’s function are excluded from protection. This is for good practical reasons, such as enabling third party manufacturers to legally create spare parts for existing branded equipment (e.g. car brake discs). Also excluded from protection are “offensive designs” and certain protected emblems and national flags.

  • Design drawings are a crucial part of the application for a Registered Design. These must present an accurate and complete picture of your design. If your design is three-dimensional, your illustrations should include a series of views from different angles to show the overall appearance. Depending on the complexity of your product, it may well be necessary to employ a professional draftsman for this purpose as there are quite specific rules on the allowable formats for drawings. Failure to get this bit right can lead to a failed application or, if granted, difficulty in enforcing your rights through legal action.
  • To keep your registered design in force, you must renew it on the 5th anniversary of the registration date and every 5 years after that up to a total of 25 years.
  • If you do not apply for a registered design, your creations may still receive some protection through unregistered Design Right or Copyright, but your means of legal redress will be more limited.

 

Trade Marks

A Trade mark is a sign which can distinguish your goods and services from those of your competitors. This sign can be in the form of words, logos or a combination of both. If you have a registered trade mark you can put the ® symbol next to it to warn others against using it. However, using this symbol for a trade mark that is not registered is an offence.

A registered trade mark may put people off using your trade mark without your permission and makes it easier to take legal action against anyone who does so. Whilst trade mark protection can be obtained more cheaply than a patent, start-up businesses should consider pragmatically the value a trade mark will really bring to them in the early years before they have built value in their brand.

  • Trade marks must be distinctive for the goods and services you provide, i.e. they can be recognised as signs that differentiate your goods or services from someone else's.
  • Trade marks can remain in force for ever. However, to keep your trade mark in force, you must renew it on the 10th anniversary of the filing date and every 10 years after that.
  • Marks will be excluded from trade mark protection if they merely describe your goods or lack distinctiveness.
  • Trade marks are registered according to classes that correspond to categories of commercial use (e.g. pharmaceuticals, vehicles, footwear etc.) so the fact that a mark is in use in one class, does not necessarily bar its use in an unrelated class. You can search trade marks by class using the free TMclass search tool.
  • Before you commit to paying a trade mark attorney for an official trade mark availability search it is well worth doing some web searching yourself. This will quickly identify if a mark is in use in a similar field to your own. If however you don’t find it in use that does not necessarily mean it is available.

 

Interestingly, trade marks can become genericised and protection lost in the UK and US if the mark or sign becomes customary in your line of trade. This was the case for Hoover, whose trade mark was genericised due to the term “hoovering” becoming a common English usage instead of “vacuum cleaning”. Even the behemoth Google has been concerned about extensive use of the phrase “to google something” for the same reasons. Indeed the company has engaged in strenuous efforts to counter the possibility of genericisation by challenging “improper” use by media outlets and convincing dictionary authors to treat the term “Google” as a trade mark, not a generic noun or verb. It is perhaps somewhat ironic that in these cases the company’s trade mark protection is jeopardised by the overwhelming market dominance of their own product.

 

Patents

A granted patent is in essence a bargain between a government and an inventor. In return for publicly disclosing the nature and precise workings of an invention, the government grants a fixed term trade monopoly to the inventor.

The intention of this legislation is to encourage innovation, by assuring the inventor a favourable market position in which to recoup the efforts and resources that have gone into creating the invention. It is also intended that the requirement for disclosure prevents duplication of effort in industrial R&D, although the lightning pace of development, and concomitant hot competition in fields such as semiconductor research and biotech, has still led to numerous cases of “market it first and fight the patent battles later”.

Whilst this may be a viable legislative strategy for a giant such as Samsung or Apple, it will likely be an impossible legal battle for a start-up to win. Thankfully, in these circumstances, some strong IP can make you a valuable acquisition target for one of the leviathans if the costs and aggravation of the legal challenge will outweigh the cash cost of buying you.

Patent protection can be gained throughout most of the world and certainly in all of the developed trading economies. Patents are valid for up to 20 years from the date of the first filing as long as they are not revoked and all renewal fees are paid on time.

It is important to bear in mind that a patent is exclusively a negative right. Whilst it may give you the legal right to stop someone else working your invention, it does not necessarily give you the right to work your invention if you might infringe someone else’s IP in doing so. This situation is known as “Freedom to Operate” and can be a very important factor for technology businesses in sectors that are heavily patented.

Inventions must pass three key tests to be considered patentable:

 

1. It must be novel relative to the existing “state of the art”. (Anything pre-dating the filing of your patent application is termed prior art.)

The state of the art refers to the peak of general development or common usage of a device, technique, or scientific field achieved at the current time. In practical terms, this rule means that there mustn’t be, now or in the past, anything else quite like it and also that it has not previously been disclosed.

Before committing cash to the process it is a worthwhile exercise to conduct some basic searches of your own. This exercise can be conducted via simple web searching to identify similar products, but it would also be a good idea to conduct a search on one of the freely available patent search tools such as Espacenet, The Lens and Google Patent.

Disclosure in this sense means putting it into the public domain by written publication, oral presentation or indeed simply talking to friends about it in a public coffee shop. Discussions with your co-inventors or patent attorneys does not count as disclosure and nor does disclosure covered explicitly by a confidentiality agreement. Bear in mind however that investors will expect a non-confidential summary of you proposal and will not normally be keen to enter into confidentiality agreements before you have told them anything about the business.

 

2. It must be capable of real world industrial application or have a technical effect.

The technical effect rule means for instance that a mathematical method is not patentable, but an electrical filter designed according to this method could be. The fact that manipulation of information rarely passes the technical effect test is the main reason for the difficulty in patenting most software.

 

3. It must involve an inventive step that is not obvious to a person skilled in the art.

There are two key features to the inventive step rule. The person skilled in the art is a fictional person, considered to have the normal skills and knowledge in a particular technical field, without being a genius or exhibiting creativity. The non-obviousness principle then questions whether the invention is an adequate distance beyond the state of the art. If it would have been obvious for this fictional person to come up with the invention, using the prior art as a starting point, then the particular invention is considered not patentable.

Some subject matter is excluded a priori from patent protection:

  • A discovery, scientific theory or mathematical method
  • Immoral or anti-social subject matter
  • The presentation of information (Although may be covered by Database Rights)
  • Naturally occurring plant & animal varieties
  • A scheme, rule or method for performing a mental act or playing a game
  • Methods of medical treatment (in the EU)

 

Patent prosecution

Making your UK provisional patent filing gets you a Priority Date. This is the official date (and time) at which you staked your claim to that invention. Anyone else filing a similar invention after that point is second in line and your own filing could become prior art that blocks their patent.

From the point of making this priority filing, you have one year (the priority year) in which you can add additional supporting evidence to exemplify your patent specification. You cannot however introduce new material into the claims of your patent. This can often be a very important year for IP-based start-ups.

It is sometimes the case that the patent will be filed before you have had chance to fully exemplify all of your claims, perhaps because you are worried that a competitor will file their patent before you. The priority year is thus a chance to get all of the key supporting data and evidence together in order to more successfully prosecute the patent.

During the priority year you will receive your search report from the patent examiner assigned to your case. In this the examiner will detail all of the similar inventions and prior art that their searches have uncovered and provide their first judgement on whether you have patentable material or not.

At 12 months, in order to keep your patent prosecution going, you are required to make an International Application based on the provisional filing. A common route for UK inventors is to make what is known as a PCT filing (PCT is the Patent Cooperation Treaty; a piece of EU legislation that harmonised Intellectual Property processes across Europe). Your PCT filing will sometimes be exactly the same text that was filed originally, although often it will have been altered to reflect additional data collected during the priority year or changes to the wording of claims in response to the examiners comments.

At month 16 you will receive your International Search Report and the written opinion on patentability from the International Examiner. This is followed closely by international publication of your patent at month 18. It is at this point that your patent filing enters the public domain so, if you are having second thoughts about disclosing the invention, the patent must be pulled before this point or anyone will be able to see it. During this phase your attorney will potentially have repeated interactions with the patent examiner, particularly if the examiners objections are complex and intractable. This can lead to a significant amount of billed time and expense.

At the 30 month time point your patent will enter the National Phase of prosecution. It is in this phase that you stipulate exactly which countries you are seeking protection in. Further questions and objections will raised by the National Examiners until you have satisfied/exhausted them and they issue you with an intention to grant. This means that, as long as you pay any remaining fees, your patent will be granted and your certificate will be in the post.

It should be borne in mind that the examination phase of patent prosecution is enormously variable in length, ranging from <1year to >5years.

 

Costs vs benefits

First the good news… It is still free to file a patent at the Intellectual Property Office (see here for their online tools for businesses). There are however significant costs to consider.

You will likely require a Patent Attorney to draft the patent specification for you. Some inventors are very skilled in drafting their own patents in their own specialised fields, but this is not the norm. Drafting fees can vary widely, dependent in part on the complexity of the patent specification to be drafted, and hence the time taken. There is also a significant variation in charges between firms.

For a typical patent filing you should work on roughly £2-3k for drafting and filing a UK provisional patent application. These costs do however ramp up significantly during the course of prosecuting your patent through to grant.

At 12 months post-filing, you are required to make an International Patent Application. This will often involve some redrafting of your patent specification in light of search results and to add any additional supporting data that has been gathered during the priority year. There is also a greater degree of backroom administration to deal with in relation to International Applications and this stage can easily cost £4-6k.

At the 30 month time point you will be required to enter the National Phase of prosecution where you prosecute in the individual territories in which you want protection. Unsurprisingly, this means that your attorneys will have to interact with numerous National Intellectual Property Offices, responding to questions from the examiner and redrafting claims to satisfy objections. Depending on how many territories you wish to pursue at this stage, the costs can be easily in excess of £25k. A further important cost of National Phase prosecution is translation costs. For some languages, high-quality technical translation can cost as much as your attorney fees.

Once the patent has been granted you will have to pay renewal fees to maintain your patent protection. You must renew your patent on the fourth anniversary of when you filed for it. You then need to renew every year on the ‘due date’ - the last day of the month in which you first filed. Missing these payments will result in a late payment fee or, if the situation remains un-remedied, loss of your rights.

As stated earlier, a patent is purely a negative right that provides for a trade monopoly. There are however no “Patent Police” and it is down to the owner to detect and take action against third parties who infringe your IP. This can of course entail significant legal fees to effectively defend and enforce your patent rights.

For start-ups, without huge legal muscle behind them, good sector scanning and attendance at trade shows is key, so that you know who is doing what in your field. Image searches can also prove useful for detecting misappropriation of your IP. If you do detect someone infringing, it can often be surprisingly productive to contact the infringer and offer them the opportunity to take a royalty-bearing licence.

It cannot be denied that the costs of maintaining a large IP portfolio can be prohibitive, even to a large organisation, so only inventions with innate commercial potential or strategic value should be considered for patent protection by start-ups. It is a sad but often quoted statistic that more than 95% of filed patents never make any money. Start-ups should not however see this as a reason to avoid filing patents and other IPRs, just a strong imperative to pursue the right IPRs.

 

Conclusion

Intellectual Property can often be viewed as a dry and impenetrable subject for many people, perhaps particularly those with a creative, entrepreneurial spark. The most important thing for start-ups is to be aware of the potential for creating IP that has commercial value, to recognise it and act on it when the situation arises. To some extent, acting on it, will really mean knowing when you need to take advice.

Some academics and industry commentators have claimed that IP laws stifle innovation. In my view, it is vital to provide innovators with the opportunity to successfully commercialise and be rewarded for their creative efforts. Pursued in a pragmatic and measured fashion, protecting your IP can provide an essential foundation to a high-growth company.