IP: 5 Pitfalls For Investors To Avoid

WHAT YOU NEED TO KNOW

• Investors must ensure any prospective portfolio company truly owns its IP – or risk losing the rights to core innovations.
• Overlooked contracts, like licenses, can restrict a company’s ability to monetize its IP and enter key markets.
• Different industries require targeted approaches to IP protection; what works for software may not work for biotech.
• When it comes to patents, quality matters more than quantity; don’t be fooled by an IP portfolio packed with weak filings.
• Securing IP rights abroad is critical to avoid losing control of valuable assets in key markets.

You’re in the business of finding – and financing – the next big idea.

Yet any return hinges on the potential to protect, monetize and defend these ideas, and without a comprehensive intellectual property plan, today’s investment can be tomorrow’s loss.

Consider the story of Phytelligence, a startup with a novel method for growing fruit trees faster and stronger. The company attracted nearly $23 million in investment from leading venture capital firms and generated significant buzz around a new variety of apple, the Cosmic Crisp, which The New York Times described as “the most promising and important apple of the future.”

The problem: The Cosmic Crisp became the subject of litigation between Phytelligence and Washington State University, as both parties argued over the ownership and commercialization of the IP.

Phytelligence closed shop, a real and stark reminder to investors that IP issues, if mishandled, can spell the end for even the most promising ventures.

To be sure, as an investor you know the IP is typically the most valuable asset a company owns. But you may not have the expertise to properly protect and defend your investment. It’s easy to make mistakes that complicate or even negate a company’s claim to ownership – and if a company loses these rights, it could mean significant losses for you, too.

What pitfalls can challenge even the most savvy investors?

Pitfall #1: Overlooking IP Ownership Verification

Investors need to verify a company owns its IP. Otherwise, when someone wants to acquire it later on, you might discover the company doesn’t own — and can’t sell — the innovations that make its solutions valuable.

Companies should obtain assignments from founders, inventors, related companies, and others. They should register those assignments with the U.S. Patent and Trademark Office or, for copyrights, the U.S. Copyright Office. Registering assignments puts third parties on notice of the owner’s rights.

Pay close attention to “work-for-hire” agreements with contractors. Work-for-hire agreements are a specialized contract related to certain types of copyright creation and may be ineffective at transferring ownership if they are not prepared correctly. Many of them say the company owns any work product. In the process, those agreements try to claim ownership of work that legally isn’t work for hire. Agree that any work product that isn’t work for hire will be considered assigned instead. Copyright only applies to creative works that have been fixed in a tangible medium, such as artwork, writing, software and the like.

To clarify ownership of patentable inventions, use specific assignment language in your contracts. And have the contractor agree to execute any necessary documents to effectuate that assignment.

If inventors are working for multiple companies, make sure that their other jobs can’t claim ownership of the IP. Look at their employment contracts, any state laws that might limit those contracts, and other relevant facts. For example, if the inventor did any of the work at another employer’s offices, that could endanger the company’s IP rights.

Pitfall #2: Neglecting to Review All Agreements Affecting IP Rights

Other contracts can affect a company’s ability to control its IP. Review those agreements to make sure there are no surprises.

For example, if a company licenses its IP to others, does that prevent it from entering certain markets or industries, and for how long? Or what if the licensee develops new IP related to the company’s innovation? Who owns it?

Understand how the licensing agreement handles termination. Some licenses expire after a specific date, but others run indefinitely. Or they let one or both sides decide to end the agreement without cause. See if any provisions continue after the agreement terminates, such as a confidentiality clause.

Open source licenses let companies access important tools and technology, but some include provisions that assign ownership of any new innovations back to the licensor. Even if the IP is open source, a company might have to pay for consulting or related products to get the full benefit of using it.

IP strategy can help protect a company’s interests. A company might need to reveal trade secrets to a licensee during an agreement. In that case, having a detailed nondisclosure agreement (NDA) is essential.

Pitfall #3: Failing to Account for Industry-Specific IP Strategies

Any IP strategy must take into account the industry-specific aspects of timing and duration of protection. For example, for biotechnology and medical devices, long-term protection is paramount, while software companies need earlier protection and may be less interested in longer timeframes.

While securing early filing dates is important in every industry, the ability for a competitor to come up to speed to replicate a technology in the software fields is much shorter because they don’t have the infrastructure costs that many other technology and science fields incur.

Pitfall #4: Misjudging the Registration Strategy and Portfolio Management

Some founders register every innovation they can — even if some ideas aren’t that valuable. Don’t be fooled by the size of a company’s IP portfolio. If it doesn’t include the essential aspects of a key technology, the company isn’t as valuable as it seems.

It also matters how the company protects its IP assets. An early-stage company might seek a provisional patent to secure its core IP quickly and affordably; a well-drafted provisional patent application is as effective as a full non-provisional patent application at locking in an inventor’s rights. Conversely, multiple poorly drafted patent applications may be less effective at capturing a company’s valuable inventions. The quality of the content is a much better indicator of the value of a company’s patent applications than the quantity of filings.

A company could use trademark status to protect a highly valuable brand or even register a copyright to protect its software. Inventions are not the only valuable type of IP; sometimes a company’s brands are its most significant IP assets.

Sometimes, filing isn’t the best choice at all. As part of patent registration, companies can be forced to reveal information that’s more valuable if it’s confidential. Instead, they should treat it as a trade secret and guard it with NDAs and other protocols.

Pitfall #5: Overlooking the Need for International IP Protection

Target companies should have IP protections in their home countries and key international markets. IP law can vary significantly from country to country.

In the U.S., trademark registration is usually granted to the first user of a brand. Registration makes it much easier to stop others from using your trademark. In other countries, use may not be required, and whoever is the first to register the mark may be the one that captures the rights.

International filings can be expensive, but it’s quite possible to reduce the costs and time required. After all, they don’t have to register in every country at once. They should prioritize regions that are part of their expansion plans. And use programs like the Patent Cooperation Treaty, the Madrid Protocol, and the Hague System to lock down IP ownership in multiple countries with consolidated applications.

Protect Your Investment

Even if an investor has extensive experience, it’s easy to miss the gaps in a company’s IP portfolio. Addressing these issues lets investors safeguard their investment and maximize its return.

That’s why it’s important to ensure clear ownership of the relevant IP and see how its agreements limit or prevent future use. Founders should also tailor the company’s IP strategy to its industry, current and future markets, funding, and stage.

AEON Law takes a business-savvy approach to advising investors and companies. We’re adept at guiding clients through the maze of IP rights, especially as they plan for international engagement; our team understands the intricacies of other nations’ IP systems, and we maintain ongoing relationships with a global network of in-country law firms.

Venture capital firms and angel investors also appreciate that we killed the billable hour: Our fixed-price model eliminates surprises and simplifies projections.

Contact us today to learn how to boost your ROI with smart IP.