Last week there were a couple of high profile patent cases decided with potentially large implications to two growing technology staples – VOIP and MP3s. Verizon obtained a judgment of infringement against Vonage, a judgment that if enforced will at the best case cause Vonage to pay royalties to Verizon. And, at worst, put Vonage out of business. Meanwhile, another judge determined that Microsoft was infringing upon certain patents relating to MP3 creation and distribution. The judgment? A whopping $1.5 billion.
I am reminded whenever I see these news items of a conference panel I attended a number of years ago, when a group of VCs stated clearly that “patents don’t matter” to a software business. That might have had some currency when most software businesses didn’t pursue patents aggressively. However, that’s just not the case now. Quite simply, players both large and small, and the lawyers that serve them, are aggressively pursuing intellectual property protection and assertion as a business tool, if not a profit opportunity. This is a distinct turn of events – inventors have always used intellectual property rights as a way to get compensated for their efforts, and inventors have often sought to use patents as a way to stifle competition against their businesses. The Wright Brothers for example spent years asserting that they patented the airplane….. But, for most market participants patents were a means to an end – a successful business – rather than an end in themselves.
What we are seeing now, more and more frequently is that patents are being pursued as a business tool in their own right. This has resulted in an explosion in the number of patent filings handed by the US Patent Office. The largest technology companies are in many cases pursuing ever more expansive intellectual property programs, not only seeking to protect their current businesses, but to also “protect” future businesses. It has also resulted in venture capital fund like organizations, and lawyers, seeking to acquire key patents from failed businesses solely for the purpose of future enforcement. To capture an old cliché “it’s a jungle out there”, or more succinctly, it’s a gold rush.
What is an emerging entrepreneur to do?
The most important thing is to understand the distinctiveness that surrounds your business. By this I mean, if your business is one that depends upon technology, what makes it unique – an idea? A process? A combination of existing ideas? How will you keep and capitalize on your business’ uniqueness? A value proposition of quality of service? Or, perhaps a product that is faster, better and cheaper than prevailing solutions. The universe of possibility is very broad, but on a case-by-case basis each successful business has unique attributes that should be protected from misappropriation by others (i.e., free use). Notice that I did not recommend that your first step is to go to a lawyer – figure out what is distinctive about your business first, and how it relates to your business strategy. Only then is a conversation with a lawyer useful – a good lawyer will know what type of intellectual property protection to seek for your distinctiveness (if any), but he is not the best person to determine what is distinctive and relevant – you are.
As a practical matter, you will be much more likely to successfully protect intellectual property if you seek to protect it before it is widely known or sold commercially. This can create a conundrum for an entrepreneur, since paying a lawyer is less painful when you have business income to pay them. However, in the current intellectual property environment, you might not have a choice. The good news is that there are a number of excellent IP lawyers in DC that are used to working with entrepreneurs and managing their legal costs.
Recently, I was reminded of this when I saw a large company practicing an idea that an entrepreneur I know had developed five years ago. At the time, he didn't have the money to pursue a patent and sold his product without protection. His business failed, but his business idea was a good one, and it is now being employed by others. Did they develop it independently? Would he have gotten a valid patent if he filed? Who knows. But, I bet you that every time he sees his business idea on TV he must wonder.....
As an investor in technology companies, I would never invest in a company which does not have a clear IP position and strategy for protection and assertion. The level of development that I expect varies by the stage of enterprise – I would expect a growing business to have its IP rights in place and protected, and an ongoing strategy to protect future rights. For the earlier stage business I would expect at the minimum a baseline IP strategy, and if not some initial filings, at least near term plans and some comfort on the likelihood of consummation of the initial strategy. Of course, implicit in all this is that I wouldn’t invest in a business that wasn’t distinctive or didn’t have the ability to protect its distinctiveness.
The net, net to this discussion is pretty simple. Intellectual property rights are a primary way for a business to create a legally enforceable monopoly around a business. If you don’t act to make this happen early and often, you should assume that somewhere else a competitor is doing exactly that. It is pretty rare that any idea is so unique that no one else in the world is thinking the very same thing. Often, the person who gets to assert an intellectual property right is the one that protects it the best. If it is a jungle out there it clearly is better to be preditor than prey.