–By Jameson Q. Ma and Dinesh N. Melwani, Bookoff McAndrews PLLC

Law360, New York (June 26, 2013, 1:09 PM ET) — High-tech startups typically invest significant resources in the research and development of new products. In addition, certain products (e.g., medical devices and pharmaceuticals) are subject to government regulation, requiring even further investments for securing approval prior to commercialization. Startups, however, often overlook the importance of making concurrent investments in building patent portfolios to protect innovative concepts, or in freedom-to-operate analyses to ensure that commercial products do not infringe the rights of third parties and subject the growing company to costly legal battles.

Without patent protection, once a startup reveals the specifics of its products, for example through marketing or sale, any member of the public is free to copy or reverse engineer those ideas for their own commercial advantage. Indeed, third parties often enter emerging markets, selling lower cost competing products developed without the upfront research and development and/or regulatory investments required by the original innovator.

Further, even if the startup’s ideas are patentable, its path to market may be blocked by patents held by other companies. Early knowledge of such impediments may help the startup to develop suitable workarounds prior to costly investments in, e.g., manufacturing.

Protecting Your Investment — Building a Patent Portfolio, Early

As soon as possible, high-tech startups should develop a strategic patenting plan that is tailored to protect investments and enhance value. This plan should be revisited periodically, as changing market conditions and/or company goals could affect the role patents should play in a company’s business plan. Startups should also attempt to patent as many alternatives and variations as possible, in order to thwart design-around attempts by potential competitors seeking to avoid the startup’s patents.

The best ideas, and particularly the commercially successful ones, attract significant attention not only from consumers, but also from potential competitors. Additionally, as the America Invents Act has harmonized U.S. patent law with the rest of the world by creating a “first-to-file” system, startups should file patent applications early and often to ensure that their ideas and market share are protected. Any delay in filing patent applications may result in a loss of potential rights to an earlier patent application filer. A startup can even be prevented from practicing improvements on its originally developed technology if a competitor conceives of and patents such an improvement prior to the startup protecting such improvements.

Therefore, it is often advisable that companies file patent applications on incremental product improvements and on innovations before it can determine if those innovations are commercially relevant. While such a strategy may prompt concerns about wasting resources on potential noncommercially viable technologies, mechanisms available at the United States Patent and Trademark Office may help alleviate such business concerns and keep patent-related costs to a minimum.

For example, most startups may qualify for small-entity status, entitling them to a 50 percent reduction in many USPTO fees. Additionally, provisional patent applications can act as a cost-effective placeholder. A provisional patent application can be filed for a small fee (as of this writing, the provisional filing fee is $130 for a small entity), and will preserve the startup’s rights for up to one year from filing. In that intervening year, the startup can mark their products “patent pending,” seek additional funding, and delay patent filing costs, while reassessing the commercial potential of technologies disclosed in the provisional applications. Applications directed toward technologies with little or no perceived commercial value can be dropped in lieu of more valuable applications. However, as will be discussed below, there still may be value in pursuing as many patent applications as resources permit.

The AIA also has provided startups with an additional tool for quickly developing patent assets. Track 1 prioritized examination allows patent applicants, for a fee, to have their applications examined to a final adjudication within about one year of filing, which is significantly faster than the two or more years currently being experienced by applicants. The current small entity fee for requesting Track 1 examination is $2,000. Though the Track 1 fee appears to be relatively large, the Track 1 program provides a company with a quick path for obtaining patent protection for, e.g., soon-to-launch commercial products, thereby deterring potential competitors from entering the market.

Track 1 also may be of particular value to startups seeking second or subsequent rounds of investment, as granted patents are more highly valued by investors than provisional applications. In addition, often times Track 1 expedited examination of an application may result in an overall reduction of the costs associated with prosecuting that application to patent grant.

Avoiding Landmines Before It’s Too Late — Securing Freedom-to-Operate

While building a patent portfolio is a critical element to a startup’s success, so is ensuring a freedom-to-operate in the markets the startup will enter. Startups should commission outside patent counsel to conduct an FTO search and analysis to ensure that there are no patents that will impede the startup’s ability to sell its products.

An FTO search and analysis is specifically designed to uncover granted patents and pending patent applications that may cover the startup’s developed products, even if such patented technologies have not been commercially realized. That is, even though the startup may have developed a solution that is not yet available commercially, there is a possibility that a third party has secured patents having claims covering the startup’s technology. This can occur if the third party is still in the process of developing a technology, has passed over the patented technology in lieu of an alternative, or, as in the case of many large companies, has mined their engineers for potential ideas for the purpose of developing a large, robust patent portfolio.

To be the most effective, the FTO study should be conducted before significant resources are invested in final commercial designs. If the analysis is conducted too late, the startup already may have invested substantial resources in developing and launching its product. A company in this position may have spent significant money building an inventory of potentially infringing products and/or may lack capital to develop a suitable design-around. This unfortunate sequence of events can be prevented by early, strategic patent counseling and FTO analysis.

Early FTO analysis can uncover potential patent roadblocks while the startup still has the time and resources to adapt. The solution may be a cost-neutral substitution, or a higher cost substitution that the startup believes would still result in a profitable product. If no feasible design-arounds to an uncovered patent exists, licenses may be sought from the third party patent holders to allow the startup to move forward with its commercial designs.

A license is a contractual agreement between a licensor (e.g., the patent holder) and the licensee (e.g., the startup) that grants the startup the right to practice technologies covered in the licensor’s patent. The terms of the license will dictate the cost to the licensee. Licenses can be exclusive, nonexclusive and/or limited to a particular field of use, often a field not commercialized by the licensor.

During license negotiations, the startup may leverage its position to create a mutually beneficial agreement. The terms of the license agreement between a patent holder and a startup may include a low up-front cash payment coupled with a percentage of the startup’s future sales of products covered by the licensed patent. Such an agreement allows the startup to acquire the necessary freedom-to-operate for a low up-front cost, while giving the patent holder an opportunity to reap sizable rewards, should products utilizing its patented technology be commercially successful.

Patents — A Safety Net?

Startups also should consider the opportunity to generate additional revenue streams from their patent portfolios. Thus, companies should strive to patent as many technologies as they can, within their budgetary constraints, even if such technologies may not relate to the company’s intended commercial products. For example, a startup’s developed technologies may have substantial value in unforeseen industries, and may serve as blocking patents that the startup can subsequently license or sell to a third party.

Further, a sad reality is that even the most carefully crafted and well-executed business plans fail for a variety of reasons. Rapidly shifting market conditions and/or other unforeseen circumstances will doom certain products. Technologies in robust markets may simply lose the market share battle to alternatives (think VHS and Betamax, or Blu-ray and HD DVD). Patents may act as a final safety net for these technologies. The patent portfolios held by these companies, particularly those portfolios that captured a company’s earliest iterations may be highly sought after by competitors in the same space. In this way, companies with unrealized business potential but strong patent portfolios may recoup at least a portion of their investments or even make a profit by licensing and/or selling their patents.

Through the development of early, strategic patenting plans, startups can help secure market exclusivity by deterring potential competitors from entering their markets. FTO analyses also may help uncover legal impediments to the commercialization of products while there is still time for the startup to create design-arounds, secure licenses, and/or explore other solutions. Further, a robust patent portfolio may help generate additional revenue streams and act as a safety net, should a startup’s products underperform in the marketplace.

Jameson Ma is an associate and Dinesh Melwani is a partner in Bookoff McAndrews’ Washington, D.C., office.

The opinions expressed are those of the authors and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

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