INTELLECTUAL PROPERTY

WHY IT IS NEEDED

The fastest growing startups in modern industries, such as ICT, pharmaceuticals, media and creative industries, rely on the knowledge-based products where the key resources are of an intangible nature: new technologies, new business processes or systems, strong brands or unique algorithms. All these resources depend on high-level specialist knowledge and skills, they are hard and expensive to develop, but relatively easy to copy /adopt when developed by someone else. Therefore, the control of critical knowledge-based resources is enabled by the intellectual property (IP) protection. The creators want to eliminate or minimise the possibility of “free riding” by the fast imitators. Every startup has to consider how it will protect its IP that will determine its future business potential and market value. Although no form of IP protection is perfect (they require time, money and provide no full guarantee of exclusive ownership or business success), they are a necessary question to consider by any startup at the early stage of development.

1. Know advantages and limitations of each IP protection form

There are four main ways of protecting the intellectual property (IP) of your startup:

  1. trade secret
  2. copyright
  3. trademark
  4. patent

You have to analyse carefully what is the best way of protecting your IP. It may depend on the nature of the work to be protected and the maturity of your business. Each form of IP protection has it strengths and limitations.

Trade secrets

Trade secret is one of the cheapest ways of protecting your intellectual property. The trade secrets can cover such strategic business resources as customer lists, survey results, algorithms, recipes, drink formulas, product pricing or prototypes. Trade secret cannot be registered with the authorities, but can be kept unavailable to the public (and competitors) by other legal and organizational means.

To be protected as a trade secret, it must fulfil the following conditions:

  • possess an economic value;
  • not to be generally known or readily ascertainable and
  • there must be efforts to maintain secrecy.

The employees and partners can be asked to sign the confidentiality / non-disclosure agreements[1] or post-employment restrictive covenants (i.e. employees cannot apply the trade secret in their future job for a specific period).

The main advantages of protecting your IP as trade secret (especially compared to patents):

  • no registration costs (though the costs of keeping information confidential can be quite high, especially if it involves litigation);
  • unlimited duration of protection as long as the secret is not revealed to the public (patent protection usually lasts  up to 20 years);
  • few formalities with external parties, no need to disclose your secret information to the government authorities;
  • the effect is immediate (i.e. at the moment the fact of trade secret is established and adequate protection measures undertaken).

The main limitations of trade secret as legal form of IP protection are:

  • you will not prevent competitors from “reverse engineering” your innovative product, and you can claim no ownership or exclusive rights to commercial use of the product / technology (you have to rely on patents for this sort of protection);
  • it may be very hard to prevent innovative idea / technology from entering the public field, especially in the today‘s highly open environment (e.g. internet) – once it is accessible in the public domain, no legal rights to the trade secret can be claimed;
  • proving that competitor stole your trade secret may be difficult (due to abstract interpretations) and costly (long litigation processes);
  • competitor can patent what you consider as your trade secret (if it is patentable), then you lose all control over your perceived innovation.

Copyright

Copyright is used for protecting the authorship of original works. It is probably the most commonly used instrument for IP protection in the media-related industries and their “tangible” products (e.g. music, films, books, software, apps, artistic works). The copyright holder has exclusive rights to the work and all related activities (e.g. selling or modifying the work). No one is allowed to profit commercially from the copyrighted item without the owner‘s permission. The work has to be original and needs to have clear authorship that is possible to prove. Copyright can be claimed from the moment an author‘s product is created in tangible form / media.

However, the scope of protection by copyright is rather limited. You can protect the “expression of an idea” (copyright), not the idea itself, i.e. it does not mean that the same idea cannot be replicated by others in different contexts (“inspired by…”). For example, other people can quite easily adopt the template of your original website design and you will have a hard time claiming the ownership of an idea based on the copyright. The commercial use of overall similar design is usually not considered a copyright infringement.

The startup should consider whether the copyrighted website, domain or logo could also have a trademark protection.

Trademarks / service marks

Trademarks / service marks are used for protecting the company‘s name, logo, slogan, or domain name. It is often used at the early stage of start-up formation in order to prevent others from using the same or confusing similar names / taglines. Having a distinctive and memorable name / logo plays an important role in the development of strong corporate brand. Trademark protection is a relatively cheap way to protect your name, logo or domain as critical assets that make your company distinctive to the customers, partners and investors. Trademark can be a powerful marketing tool that contributes to your market identity, makes it harder to copy.

The trademarks include not only the text (company name) and symbols (logo), but can also cover shapes, colours, sounds, scent, shape, packaging, etc. Unlike other forms of IP, trademarks do not expire after a certain period of time, but it has to be “used” commercially (if you register trademark and leave it unused, you will not be able to claim your right to it).

Probably the greatest hassle when registering the trademarks is dealing with the different government agencies. It is important to note that trademark protection varies from one country to another. For example, there are 25 different national legal regimes inside the EU (only Benelux countries have one common regime inside the EU). The trademark protection is usually limited to a particular territory. Even registration of trademark may not be necessary in some systems of the “common law” (e.g. USA, Australia) – here you can claim this right from its commercial use. However, formal registration (though not mandatory) is helpful because it reinforces your claim for ownership.

Before registering the trademark, you have to consider the international markets you plan to expand into in the near-medium future. Filing for trademark protection may be particularly important when entering the large markets (e.g. USA, Germany) or markets with a counterfeiting tradition (e.g. China, Vietnam). You may not have enough resources for registering your trademark in all smaller markets, but you can do it at a later stage if your company matures and becomes truly international. You can also make use of so-called Madrid Protocol that enables you to file for international application of your trademark through your national trademark office. It makes the whole process of international registration a bit less complicated and less expensive.

Patent

Patent is a set of exclusive rights granted to an inventor by the government authorities to exclude others from making commercial use of innovation for a specific period of time. Patent is an asset that can be sold, bought, rented or leased. It is one of the most popular means of IP protection used by the technology startups.

The utility patents are used for protecting the original ways of “how the stuff works” (i.e. process, machinery, manufacturing, composition of matter, improvement of existing idea, recipes, algorithms). The design patents protect the visual, aesthetic side of the product.

The key question here is – what can be patented? There are general rules telling that in order to patent, the invention must have the following 4 properties:

  • Subject matter must be patentable, i.e. it cannot be an idea per se, but an idea that is embodied in a process / method, machine, manufactured article, new composition or new variety of plant.
  • The invention must be new, i.e. you need to prove that the invention to be patented cannot be found in the public domain. If one publishes the invention in the academic paper, one has to file the application for patent within one year; otherwise, no one can file for patent at the later stage, even the inventor himself / herself.
  • The invention must be useful, i.e. you cannot solve an invention that does not contribute to solving any problem. Thus, you have to prove its utility.
  • The invention cannot be obvious, i.e. the invention must be recognised by the experts in the field as reaching beyond the prior knowledge, not just a substitute or combination of the basic elements in the patented system.

The duration of patent may depend on what is being patented, but usually the duration will not be more than 20 years for utility patents and 14 years for design patents (e.g. in the U.S.), unless you apply for getting the patent reissued (only for the utility patents). The patent allows an inventor to take legal action against anyone who copies and makes commercial use of the patented invention without his/her legal consent. It is the most widely used instrument of IP protection in such industries as pharmaceuticals, biotechnology, semiconductors, chemicals and electronics.

The main benefits of patent protection are:

  • Patents are the strongest form of IP protection. They are formalised, exclusive to owner and can be used for limiting the competition for a set period.
  • You can sell / license the rights to use your patent and expand your business into other markets
  • Your business becomes more attractive to the potential partners and investors once you have a patented IP with a potential market value. The value of your start-up will be much higher thanks to the patented IP when business is sold.

However, there are several important aspects to be taken into consideration when relying on patents for IP protection:

  • The process of patent application and registration takes time and can be quite costly. An early stage company may not always afford it. Getting the patent registered will usually cost a start-up more than 10.000 euros. There are various costs associated with the application, registration and litigation procedures (that can be necessary to protect the ownership). There are some potential solutions to this limitation. An early stage companies can profit from its small entity or micro-entity status that would get the application costs reduced by 50 to 75 percent (for small entities and micro-entities respectively). You can also save some money by filing a so-called “provisional patent application” that will buy you some time, usually one year before proceeding with more expensive non-provisional patent application.
  • You will lose the opportunity to patent your invention if you do not file for protection within 12 months (depending on a country) of its public release. You have to be careful that your competitors do not file for patent protection at an earlier date. In most cases, it is usually the first submission that is granted the patent rights.
  • The patent protection covers only particular territory (country) where it is registered – if you want to expand to other markets, you will need to register for patent protection in each country. Again, it is quite expensive and time consuming. There are costs associated not only with getting the patent, but also maintaining it (e.g. you will have to pay the patent fees every year in order not to lose the patent rights). You will need to devote many resources to defending your patent, including the far-away markets. The vast majority of patents are operating at a loss.
  • You will have to disclose all the IP-related information (including the technical details how it works) and make it publicly available. The competitors will be able to see all the details of your innovative idea. Rich competitors may have enough resources to copy “legally” your idea, while you will have too limited resources to catch up.
  • In some countries, not to lose the patent right, you will have to show that the patent is put to a commercial use, which puts an extra pressure on your business.
  • In some dynamically growing and highly profitable industries (e.g. ICT) the large companies / industry leaders may have an incentive to steal your patent in order to build a competitive and highly profitable product, and still remain in the profit zone even after paying the fine.

[1] More about nondisclosure agreements: https://www.forbes.com/sites/allbusiness/2016/03/10/the-key-elements-of-non-disclosure-agreements/#7f24aa01627d

2. Decide which form of IP protection you should choose

As mentioned above, each legal form of IP protection has its own advantages and disadvantages. Not every innovative idea can be subject to all forms of IP protection. Some forms (e.g. patents) require greater financial and time resources compared to others. Achieving formal protection of IP may not be enough, but may require many expensive and time-consuming efforts afterwards (e.g. ensuring the trade secret protection).

Some inventions or processes in your organization may not meet the patentability requirements, so they can only be protected as trade secrets. However, the trade secrets are difficult to prevent from being copied and spreading in the market place, you will have little effective leverage over your employees, partners and competitors. You will need to be in touch with many people during the growth process of your start-up, so signing the confidentiality agreements at every meeting may not be the best choice.

On the other hand, trying to patent your inventions is an expensive and time-consuming way. It will provide you with the strongest legal form of IP protection, but it may not enough to build a profitable business. It is due to the ongoing expenses and time-consuming efforts to defend the patent, and aggressive competitors with more extensive resources that will use of other means of getting the edge over you in the marketplace.

Getting the trademark and copyright is an overall less expensive and time-consuming form of IP protection (compared to patents), but they cannot be relied upon for claiming your exclusive ownership of the most important technological and business processes (e.g. that you can claim with the utility patents).

You have to analyse the specific situation regarding the IP protection in your business by answering the following questions:

  • What form of legal IP protection can I objectively be awarded? Should I focus on protecting my brand (i.e. using the trademark protection)? Does my product have any unique features to claim a unique and tangible authorship (i.e. rely on copyright protection)? Is my core product / technology specific to the company and can it be really kept closed from the public domain as a trade secret? How ready am I to spend resources on protecting the trade secret?
  • Is my invention patentable? Do I have enough time and resources to proceed with patent registration, and patent maintenance / defence? Do I have enough resources to register and protect my patent in all my key markets? If not, where do I get these resources? Will the patent (if awarded) improve the value and attractiveness of my start-up in any important way?
  • Are there any other ways for protecting my intellectual property from the key competitors?

 

Due to the above-mentioned limitations, the legal forms of IP protection may not always be the best mechanisms for protecting the key resources of start-ups. The firms set up different market entry barriers of non-legal nature to protect themselves against the competitors. More often than not, they complement the above-mentioned forms of IP protection, and are usually even more effective:

  • Investing into a valuable and distinctive brand appreciated by the customers (while applying for trademark protection at the same time).
  • Building over time the economies of scale that increase the level of production efficiency that no competitors can match without huge extra effort.
  • Profiting from the first-mover advantage in the market by becoming a natural monopolist in a specific regional market with little incentive for the competitor firms to enter.
  • Building the strong platforms and achieving network effects by attracting the majority of customers into their business, who profit from interactions with each other, and being “locked-in” in the same corporate ecosystem.
  • Creating a network of exclusive buyers and suppliers based on the legal contracts that make competitors hard to replicate.
  • Adopting your product and business system as de facto or de jure industry standard in the specific area.
  • Your firm must become an attractive employer with innovation-friendly organization culture to attract and retain the high-level specialists, who would have no incentives to leave for your competitors.

To sum up, there are many other ways of protecting your most valuable business assets (including the IP) that go beyond patents, trademarks, copyright and trade secrets. They should be regarded as valuable complements rather than substitutes.

3. Check practical information about European patents

If a startup finally decides to protect the invention it should apply for European patent. It can provide protection in about 40 European countries with just one application (if there is no intention to expand and the company is orientated only to national market it is still recommended to apply for national patent). When exapanding startup has carefully considers what foreign markets company wants to enter. This decision will determine countries where company wants to have the protection. The procedure of getting both European and National patent is quite long process. National patent can take approximately 24 months, while European grant procedure can take 3 to 5 years.

It is advised that applicant would start with national application. The prices of national patent can differ in European countries. For example in Lithuania, patent filling can cost around 1500 Euros and it will cover such actions as:

After successfully completing this step, company has 12 months priority right to apply for European patent[1]. European patent application can be filled online or at the European Patent Office in Berlin, Hague or Munich. The application must have the following parts:

  1. request for the grant – you can find the forms necessary to apply for European patent here: epo.org/forms
  2. description of the invention that applicant wants to patent. It has to be described in a sufficiently clear and complete way so that an expert in the field could practically implement it.
  3. claims, i.e. clear definition of what technical aspects are being patented as novel.
  4. drawings, i.e. the visual aspects of the invention also have to be presented.
  5. abstract (more information: https://www.epo.org/law-practice/legal-texts/html/guidelines/e/f_ii_2_3.htm).

To get the European patent to the grant (final) stage it can cost about 5300 Euros. However, keep in mind that applicant must pay a certain fee on a yearly basis to extend the patent protection.

European Intellectual Property Rights Helpdesk (https://www.iprhelpdesk.eu/search/node) provides a lot of cases that might be worth reading:

[1] Read more “How to get European patent: guide for applicants”: http://documents.epo.org/projects/babylon/eponet.nsf/0/8266ED0366190630C12575E10051F40E/$File/how_to_get_a_european_patent_20170803_en.pdf

THE RESULTS

Upon completion of this chapter you:

  • have got acquainted with the forms of intellectual property protection: a) trade secret, b) copyright, c) trademark and d) patent;
  • know the strengths and limitations of each IP protection form;
  • by answering the key question you can decide which forms of IP protection are necessary for your startup;
  • know what needs to be done and how much does it cost to apply for European patent.