Everyone has ideas. What matters is whether you turn those ideas into action.
That... and whether you protect the ideas you put into action.
Here's another in my series where I choose a topic, pick someone smarter than me, and we discuss. (There's a list of previous installments at the end of this article.)
This time I talked to Alexander Poltorak, founder and CEO of General Patent Corporation, an intellectual property firm that focuses on IP strategy, valuation, licensing, and enforcement. He's taught biomathematics at Cornell and physics at Touro, and he guest lectures at Columbia.
(In his case that whole "smarter than me" thing is a massive understatement.)
The topic: Patents are the new currency of a knowledge-based economy... so how can you protect your currency?
Jeff: "Patents are the new currency of a knowledge-based economy" is definitely a catchy phrase--I wish I had thought of it--but it also sounds a little like selling sizzle instead of steak.
Alexander: Quite the contrary. Take Nortel, the telecom giant that entered bankruptcy last year. Huge conglomerate, sold all of its subsidiaries, equipment, buildings, towers--all of its hard assets--for $2.5 billion.
They sold their patents for $4.5 billion.
Their patents were worth considerably more than their hard assets. Lesson to be learned: Patents are the new currency of the knowledge-based economy.
Patent vs. Trade Secret
Jeff: Shows how much I know about the value of intellectual property.
Basic question. How do I know whether my idea, invention, etc. is patentable or a trade secret?
Alexander: Let's start with a trade secret. That is relatively easy to ascertain. If you know something that others do not, it will remain a trade secret so long as you keep it secret.
In practicality that's not as simple as it sounds, because if try to enforce a trade secret you have to prove that you actually did take measures to keep your secret a secret. The burden of proof is on you.
You must be able to prove the documents where trade secrets are described were marked confidential and kept under lock and key. You must be able to prove facility access was restricted, files were locked, access to servers was limited, passwords were changed frequently, effective nondisclosure agreements were in place... because if the defendant can show that people could walk in and without difficulty see your "stuff" then you just lost your case.
A key to protecting a trade secret is making sure you follow procedures to keep it a secret.
Jeff: I sign non-disclosure agreements all the time. Sometimes I see the documents I sign go into a massive file with what appears to be hundreds of others. That doesn't sound particularly secret to me.
Alexander: Of course the goal is to limit access to your information, but sometimes that is not possible when you need to work with outside contractors, vendors, customers, etc. The key to a non-disclosure agreement is enforceability.
Never write your own agreements. Get an attorney who knows what he or she is doing to create your agreements; your ability to enforce starts with the quality of the original document.
Jeff: Going the trade secret route sounds a lot simpler than filing for a patent, so how do I know when I should seek a patent?
Alexander: A patent is quid pro quo for disclosure: You receive protection, and as a result the application is open to the public. You lose any secrecy you had.
Here's a simple rule of thumb: If you create a product or service that can be easily reverse-engineered, a trade secret won't last. Generally speaking, patent products and services you offer the public since they are open to the eyes of your competition.
Jeff: I worked for a book manufacturer and one of our engineers--a brilliant guy--designed and built some of our bindery equipment. Access to our facilities was extremely limited; in retrospect the fact the company filed for patents was probably unwise. Maybe it was an ego thing instead of a smart business move.
Alexander: It generally makes sense to keep something like a manufacturing process a trade secret because you can guard access to that process.
Again, if people can easily see it, patent it.
Jeff: Since most small businesses have limited resources I suppose it helps that the Patent and Trademark Office makes the filing process fairly easy. I have a friend who is working his way through the online process now.
Alexander: No offense to your friend, but writing your own patent application is a little like trying to do brain surgery on yourself while looking in the mirror.
People come to us with brilliant ideas worth millions of dollars... but they shoot themselves in the foot because their patent application isn't worth the paper it was written on. If you have a product worth protecting, it's also worth hiring a competent patent attorney to write and file the patent applications.
Enforcing the Rules
Jeff: The burden of enforcement lies with the owner of the patent or trade secret. We can't call the "Patent Police." If I think someone is infringing on my IP, is there value to sending cease-and-desist letters? I know entrepreneurs who do that all the time when they feel other companies have infringed on their copyrights. One is the king of writing "Stop now or I will sue!" letters.
Alexander: Patent owners frequently come to us claiming infringement. They already wrote a bunch of letters telling people to cease and desist and threatening to sue. That didn't work and now they want to file a lawsuit.
Often we have to tell them it's too late due to the legal doctrines of latches and estoppel.
Latches comes into play when you sit on and don't enforce your rights. Say you have a patent you know has been infringed upon. For seven years you've done absolutely nothing... and then you finally decide to file a lawsuit.
The defendant says, "Wait--where have you been until now? You just sat on your patent. Clearly you didn't care." Plus, there are practical considerations: Employees that could have testified are gone, documents have been destroyed, memories have faded....
It's very likely the judge will grant the motion for latches and you will not be able to collect past damages. (You may still be able to collect future royalties, though.)
Or say you have a patent you know has been infringed upon and you send a letter and threaten to sue if the other party does not cease and desist. When you threaten to sue and fail to follow through you give the infringing party reason to believe you decided to release your rights.
Then, if years later you decide to sue, the judge could preclude you from recovering past damages and future royalties under the doctrine of estoppel.
Rule No. 1: Vigorously enforce your rights. If you have rights worth protecting, never sit on them.
Rule No. 2: Never bluff. Never threaten anyone with an infringement lawsuit unless you have the intention and wherewithal to follow through on that threat.
The Big Company Advantage
Jeff: Say I'm a small company, you're infringing on my rights, and I don't want to hire a lawyer. I immediately send a strongly worded letter and I'm willing to sue if necessary.
Alexander: If I am a large company infringing on a patent and I get your letter, one simple thing I can do is file for a reexamination of patent. Now you will be forced to spend money and time proving your patent is enforceable. That can hold things up for a long time, and even if the PTO decides there is no substantial question of patentability, you basically have to start over.
Never send letters without speaking to a competent patent litigator. Patent enforcement is not a DIY business.
Jeff: That hardly seems fair. I developed the idea, I got a patent, I did everything right--but if you're a big company with plenty of resources you can still hammer me.
Alexander: The world of intellectual property is asymmetrical in a number of ways. Individuals and small companies hold 60% of all patents. Large corporations only hold 40%. Yet when it comes to monetizing those patents, large corporations generate 99% of all revenue from patents.
Another way IP is asymmetrical is that patent litigation is the single most expensive form of litigation: The median cost of a patent litigation is about $5.5 million dollars.
If you're a garage inventor you cannot afford patent litigation unless the car in your garage is a Rolls.
Jeff: Then if my rights have been infringed upon by a major corporation... I'm screwed.
Alexander: The crux of the patent system is a bargain between the government and the inventor: The inventor discloses the invention in return for protection.
Unfortunately most of the time you can't afford to enforce that protection. Besides the staggering money involved, you may become a target of a counter-suit; if you file a lawsuit against a big company you can bet they will counter-sue to force you into submission.
The patent system was designed to protect the little guy, but in reality patent litigation is the sport of kings. If Microsoft sues Motorola they are on a level playing field. When a small businessman tries to sue a major corporation, the field is far from level; they will engage in scorched earth litigation to spend you to the ground and make you go away.
Jeff: No matter how well funded, almost no small businesses have the resources to take on a major corporation. (Maybe the big boys know that?) I know entrepreneurs that have said, "Look, I know it's not right... but I just can't afford a fight. I'm better off developing something else and trying to hang on to that as long as I can... and then doing it again."
They see constant invention as a necessity since they can't afford to hang on to their IP rights for very long.
Alexander: It's a tough game but there are solutions. One, for example, is to engage a law firm on a contingency basis. Typically the contingency is one-third of the damages recovered. That approach creates a number of problems, though, one of which is still money: You will still be responsible for out-of-pocket expenses, which in patent litigation typically means $1 to $2 million.
Secondly, if you don't have any experience managing patent litigation or don't have full-time general counsel on staff that can manage the outside law firm, it's not going to end well for you. Law firms work best when closely managed by inside counsel that keep them on a short leash.
Jeff: Very, very few small businesses have inside counsel. I don't know any that do. And I'm not a huge fan of the contingency thing, if only because I associate "contingency" with late night "Call now if you or someone you know been injured in an accident" commercials.
Alexander: The best step is to engage a firm that partners with small businesses to help them enforce patents. For example, our firm funds and manages the entire process. It's all on our dime: We manage the process, hire the law firm, engage in licensing activities... we do 100% of the work and take on 100% of the financial risk... and of course we share in the rewards.
I founded a company called Rapitech Systems and took it public in 1986. Our technology was stolen and I couldn't convince our board to engage in litigation, so I stepped down and spent years enforcing and licensing those patents. That experience formed the basis of our business model.
While patent litigation is the sport of kings, we think defending the weak is the noblest of sports.
How It's Done
Jeff: Give me an example of successful patent litigation.
Alexander: Two brilliant people, Tony Agnello and John Paul, patented technology for wireless microphones. When their company went out of business they engaged in licensing discussions with other companies that built high-quality microphones.
Of course no one paid attention. A patent is just a license to sue, and a non-exclusive license is just a covenant not to sue. When a company sees someone who wants to license an invention and knows the person doesn't have the resources to sue... they typically don't take out a license.
So the inventors came to us for help. We looked at their patent and realized that an entirely different industry was also infringing on their patent: cellular communications. Cell phones are wireless devices... but the inventors had never thought about the fact the technology in use was the same.
So we sued the entire wireless industry in the U.S. We sued national carriers, regional carriers... we went after them all. After eight years of litigation we collected $60 million in damages and we licensed the entire U.S. wireless industry as well as the major cell phone manufacturers.
That's one example of how inventors can really strike gold when they develop something... and work with a firm that is able to see broader possibilities for what they develop.
Jeff: I tend to think of copyrights, trademarks, and patents as a way to play defense... but that's only one aspect.
Alexander: Most people think they need a patent to be able to practice their own inventions. A patent has nothing to do with what you do; a patent gives you the right to exclude others from making, using, selling, or offering to sell your invention.
Don't think you need to get a patent to do your thing.
Plus many entrepreneurs see patents as a tool, and something of an after-thought: A way to enhance their image or boost their credibility, or as an element that will help convince venture capitalists to fund their company.
A patent could be the single most valuable thing you own. Don't see patents as after-thoughts.
See patents as a source of revenue--because often they are.
Check out other articles in this series: