Move Over Letterman: Top 10 Most Common IP Management Mistakes for New Companies

Many issued patents are not commercially valuable because the scopes of their submitted claims are particularly narrow, and can be relatively easily avoided by determined competitors. Thus, when submitting new patent claim language, applicants should broadly define novel concepts that include potential design-arounds by other parties. Although this legal blocking strategy sounds easy enough to state as an objective, in fact, the serious exercise of analyzing future competitive and industry directions can be an extremely difficult task. This is particularly the case as such analysis often requires sophisticated market understanding, as well as technical and engineering vision.

3. INTERNALLY MISMANAGED PATENT INFRINGEMENT 'WILFULNESS' EXPOSURE.

Under U.S. patent law, one's awareness of, or willful state-of-mind about, the existence and infringement of a competitor's issued patent may significantly affect subsequent legal liability. Thus, if a party is proven to be a willful infringer of a known patent, then, for punitive policy reasons, economic damages may be awarded to the patent owner of up to three times the actual damage amount. This treble-damage exposure is so substantial that company management should be careful to avoid creating evidence of internal communications, such as e-mails, that may be construed later to indicate such willfulness. Additionally, in many cases it may be appropriate for companies, as a matter of policy, to discourage looking at issued patents owned by other entities so as to avoid awareness of potentially infringed patents. Where personnel already have knowledge about a suspect patent, company policy should require management to take careful steps to refer the matter to competent patent counsel for appropriate analysis and opinion.

4. RELYING SOLELY ON COPYRIGHTS FOR SOFTWARE PROTECTION.

Copyright protection in the United States and many other countries arises co-instantly with creation of the work, and at virtually no cost, to protect software technologies, such as computer programs, electronic databases, and graphical display screens and related media. In fact, copyright protection is often quite a suitable means to secure rights in digital media, such as video and audio creative works, and is often effective even without compliance with copyright registration and notice requirements. Copyright protection, however, is legally vulnerable to the discovery of the underlying ideas and functions of the copyrighted software through reverse-engineering efforts by competitors. Products of such reverse engineering may be found not to infringe the copyright in the work from which they were reverse engineered if the end product does not literally copy the original code, but merely embodies an understanding of the underlying ideas and functions. Where reverse engineering is a concern, patent protection may be more appropriate to secure the novel algorithm, methods, or computing apparatus.

5. INADVERTANTLY TAINTING IPRS WITH THIRD-PARTY CO-OWNERSHIP RIGHTS.

During the typical course of joint-development engineering projects, ideas may originate from many sources, such as advisors, consultants, employees, and even customers. This collaborative scenario sets the stage for creating intellectual property rights that may be co-owned by multiple parties. Unless the rights of such joint owners are specified upfront, for example by contract terms, then there is a problematic possibility that certain parties may, at a later date, not only assert their partial ownership interest, but actually attempt to offer licenses to those IP rights to other third parties ' or even competitors.

6. IGNORING THE IMPACT OF NEW 'FESTO' U.S. SUPREME COURT RULING REGARDING PATENT AMENDMENTS.

On May 28, 2002, the U.S. Supreme Court, in Festo Corp. v. Shoketsu Kinzoku Kogyo Kabushiki Co., Ltd, 535 U.S. 722 (2002), substantially changed the legal effect of amending patent claims, particularly upon the effective scope of amended claims. This judicial change cannot be ignored without possibly impairing the commercial value of many issued U.S. patents, especially where applicants, during prosecution at the PTO, introduce explicit arguments that distinguish prior-art cited by the patent examiner. The Festo decision, and related subsequent federal cases (without getting into the subtle legal and policy complexities associated with the doctrine of equivalents) clearly narrow the claim scope of many patents wherever the applicants proposed routine amendments during the course of obtaining their patents in order to distinguish the claimed invention from cited prior-art references.

7. UNDERESTIMATING THE IMPORTANCE OF TRADE SECRETS AND CONFIDENTIALITY.

Patent protection may not be officially granted until years after filing of the patent application, and copyright protection may not be applicable to protect functional aspects of various technologies. Thus, trade secret protection may serve as a realistic alternative ' a solid backstop against competitive piracy or other misappropriation of company know-how. Early disclosures, for example, through customer marketing presentations, may irreparably hurt a company's right to file domestic or international patent applications. Thus, in order to obtain effective trade secret protections, the diligent use of appropriately crafted nondisclosure agreements and in-house policies and systems to secure confidential and proprietary information must be a priority for company management.

8. OVERLOOKING LEGITIMATE OPPORTUNITY TO SET UP OFFSHORE LICENSING TAX SHELTERS.

Early-stage startup companies and entrepreneurs often neglect to consider offshore strategies for mitigating federal tax exposure. Such international tax strategies are especially relevant when foreign licensees of intellectual property rights are contemplated as part of the company business plan. In many cases, it is particularly beneficial to deploy one or more corporate entities offshore before, rather than after, licensees are identified, in order to minimize taxable exposure associated with the value of the transferred license rights.

9. RESPONDING SLOWLY TO USPTO OFFICE ACTIONS.

Because the U.S. patent rules now provide 20 years of patent protection after the U.S. filing date, it is important to expedite claim amendment and the application prosecution process; otherwise, the applicant's enforcement period is effectively eroded by unnecessary delays in the process. Accordingly, applicants should endeavor to respond in a timely fashion, expediting all office action responses and facilitating communications with patent counsel whenever possible. Additionally, the new patent rules actually apply a time penalty that deducts from an applicant's enforcement period, where applicants have contributed to delays during patent prosecution.

10. OVER/UNDER-SPENDING ON LEGAL FEES TO PROSECUTE PATENT APPLICATIONS.

In the real-world context of current economic conditions, and especially in Silicon Valley, startup companies and entrepreneurs who are strapped for cash may negotiate for substantial fee discounts from patent counsel to prepare and file patent applications. However, patent applicants should be careful to ensure that it is the most qualified legal counsel ' in terms of both technical and business experience ' that are selected and engaged to work on critical company inventions. Bottom-line pricing should be just one of a number of significant factors considered in selecting patent counsel.

Dennis Fernandez is a managing partner at Fernandez & Associates LLP, Menlo Park, CA (http://www.iploft.com/).

1. TOO LATE TO FILE U.S. AND INTERNATIONAL PATENT APPLICATIONS.

Unfortunately for many good technology companies, it may be too late to file for patent protection. The current U.S. rule generally provides applicants with a one-year grace period during which a patent application must be filed after certain public or private disclosures of the invention. Such disclosures may arise, for example, from a mere 'offer for sale' of the technology, even if the product has not yet been built or prototyped. In comparison, the foreign rule, which applies to many industrialized jurisdictions, such as Japan and various European countries, does not give applicants the benefit of any grace period after a public disclosure has occurred. Thus, it is legally compelling for applicants to consider filing for patent protection as soon as possible after invention. Although in some situations there may be some special exception that allows for a late filing, it is not advisable for applicants to count on those exceptions.

2. LEGAL SCOPE OF CLAIMED INVENTIONS TOO NARROW.

Many issued patents are not commercially valuable because the scopes of their submitted claims are particularly narrow, and can be relatively easily avoided by determined competitors. Thus, when submitting new patent claim language, applicants should broadly define novel concepts that include potential design-arounds by other parties. Although this legal blocking strategy sounds easy enough to state as an objective, in fact, the serious exercise of analyzing future competitive and industry directions can be an extremely difficult task. This is particularly the case as such analysis often requires sophisticated market understanding, as well as technical and engineering vision.

3. INTERNALLY MISMANAGED PATENT INFRINGEMENT 'WILFULNESS' EXPOSURE.

Under U.S. patent law, one's awareness of, or willful state-of-mind about, the existence and infringement of a competitor's issued patent may significantly affect subsequent legal liability. Thus, if a party is proven to be a willful infringer of a known patent, then, for punitive policy reasons, economic damages may be awarded to the patent owner of up to three times the actual damage amount. This treble-damage exposure is so substantial that company management should be careful to avoid creating evidence of internal communications, such as e-mails, that may be construed later to indicate such willfulness. Additionally, in many cases it may be appropriate for companies, as a matter of policy, to discourage looking at issued patents owned by other entities so as to avoid awareness of potentially infringed patents. Where personnel already have knowledge about a suspect patent, company policy should require management to take careful steps to refer the matter to competent patent counsel for appropriate analysis and opinion.

4. RELYING SOLELY ON COPYRIGHTS FOR SOFTWARE PROTECTION.

Copyright protection in the United States and many other countries arises co-instantly with creation of the work, and at virtually no cost, to protect software technologies, such as computer programs, electronic databases, and graphical display screens and related media. In fact, copyright protection is often quite a suitable means to secure rights in digital media, such as video and audio creative works, and is often effective even without compliance with copyright registration and notice requirements. Copyright protection, however, is legally vulnerable to the discovery of the underlying ideas and functions of the copyrighted software through reverse-engineering efforts by competitors. Products of such reverse engineering may be found not to infringe the copyright in the work from which they were reverse engineered if the end product does not literally copy the original code, but merely embodies an understanding of the underlying ideas and functions. Where reverse engineering is a concern, patent protection may be more appropriate to secure the novel algorithm, methods, or computing apparatus.

5. INADVERTANTLY TAINTING IPRS WITH THIRD-PARTY CO-OWNERSHIP RIGHTS.

During the typical course of joint-development engineering projects, ideas may originate from many sources, such as advisors, consultants, employees, and even customers. This collaborative scenario sets the stage for creating intellectual property rights that may be co-owned by multiple parties. Unless the rights of such joint owners are specified upfront, for example by contract terms, then there is a problematic possibility that certain parties may, at a later date, not only assert their partial ownership interest, but actually attempt to offer licenses to those IP rights to other third parties ' or even competitors.

6. IGNORING THE IMPACT OF NEW 'FESTO' U.S. SUPREME COURT RULING REGARDING PATENT AMENDMENTS.

On May 28, 2002, the U.S. Supreme Court, in Festo Corp. v. Shoketsu Kinzoku Kogyo Kabushiki Co., Ltd , 535 U.S. 722 (2002), substantially changed the legal effect of amending patent claims, particularly upon the effective scope of amended claims. This judicial change cannot be ignored without possibly impairing the commercial value of many issued U.S. patents, especially where applicants, during prosecution at the PTO, introduce explicit arguments that distinguish prior-art cited by the patent examiner. The Festo decision, and related subsequent federal cases (without getting into the subtle legal and policy complexities associated with the doctrine of equivalents) clearly narrow the claim scope of many patents wherever the applicants proposed routine amendments during the course of obtaining their patents in order to distinguish the claimed invention from cited prior-art references.

7. UNDERESTIMATING THE IMPORTANCE OF TRADE SECRETS AND CONFIDENTIALITY.

Patent protection may not be officially granted until years after filing of the patent application, and copyright protection may not be applicable to protect functional aspects of various technologies. Thus, trade secret protection may serve as a realistic alternative ' a solid backstop against competitive piracy or other misappropriation of company know-how. Early disclosures, for example, through customer marketing presentations, may irreparably hurt a company's right to file domestic or international patent applications. Thus, in order to obtain effective trade secret protections, the diligent use of appropriately crafted nondisclosure agreements and in-house policies and systems to secure confidential and proprietary information must be a priority for company management.

8. OVERLOOKING LEGITIMATE OPPORTUNITY TO SET UP OFFSHORE LICENSING TAX SHELTERS.

Early-stage startup companies and entrepreneurs often neglect to consider offshore strategies for mitigating federal tax exposure. Such international tax strategies are especially relevant when foreign licensees of intellectual property rights are contemplated as part of the company business plan. In many cases, it is particularly beneficial to deploy one or more corporate entities offshore before, rather than after, licensees are identified, in order to minimize taxable exposure associated with the value of the transferred license rights.

9. RESPONDING SLOWLY TO USPTO OFFICE ACTIONS.

Because the U.S. patent rules now provide 20 years of patent protection after the U.S. filing date, it is important to expedite claim amendment and the application prosecution process; otherwise, the applicant's enforcement period is effectively eroded by unnecessary delays in the process. Accordingly, applicants should endeavor to respond in a timely fashion, expediting all office action responses and facilitating communications with patent counsel whenever possible. Additionally, the new patent rules actually apply a time penalty that deducts from an applicant's enforcement period, where applicants have contributed to delays during patent prosecution.

10. OVER/UNDER-SPENDING ON LEGAL FEES TO PROSECUTE PATENT APPLICATIONS.

In the real-world context of current economic conditions, and especially in Silicon Valley, startup companies and entrepreneurs who are strapped for cash may negotiate for substantial fee discounts from patent counsel to prepare and file patent applications. However, patent applicants should be careful to ensure that it is the most qualified legal counsel ' in terms of both technical and business experience ' that are selected and engaged to work on critical company inventions. Bottom-line pricing should be just one of a number of significant factors considered in selecting patent counsel.

Dennis Fernandez is a managing partner at Fernandez & Associates LLP, Menlo Park, CA (http://www.iploft.com/).