Fallout of the Supreme Court’s Recent Alice Decision: Is Software Still Eligible for Patent Protection? (Part 2 of 2)

In Part 1 of this series, we examined the Supreme Court’s recent decision in Alice Corp. v. CLS Bank and how courts and the Patent Office have started to limit the scope of software patents as a result. In this second and final post, we’ll look at how an entrepreneur in the software space might be able to protect her intellectual property in light of this new guidance.

Software Implemented Inventions Can Still be Patented

Despite what some anti-patent advocates may have hoped, Alice did not invalidate all software patents, and software inventions can still be patented. In fact, the Alice decision, at most, delineated a boundary beyond which a computer-implemented idea becomes too abstract to be patented, without something more. Nor did the court hold that software inventions necessarily constitute abstract ideas and are therefore ineligible for patenting. In fact, nowhere in the court’s opinion is the word “software” even used. Without a doubt, many inventions that embody systems and methods implemented in software will continue to be awarded by the Patent Office and upheld by the court system.

The Scope of Patentable Software is More Limited

With the good news comes the bad for software inventors hoping for a new patent. The scope of patentable software inventions is now decidedly more limited than it was before Alice. Gone are the days where an inventor could program a generic implementation of Bingo and receive a patent for it. While the Supreme Court has not set any hard-and-fast rule on what, exactly, is considered “abstract,” we have an idea of the general shape of the boundaries: any program that simply takes a long-existing idea and generically implements it in code is too abstract to pass the Alice patent eligibility test. If you take your computer Bingo program, and mentally strip it down to its essential functionality, is it really just a Bingo game on a computer, or is it something more? Perhaps there is additional functionality that make it more than just Bingo. Maybe you’ve programmed some unique features within the code that take advantage of the hardware on a specific platform and make the program run more smoothly. If you have these sorts of features built-in to your program, even computer Bingo may be patentable under the second step of the Alice test.

 Carefully Consider Your Options Before Filing a Software Patent Application

Finally, as an entrepreneur, you should think very carefully about identifying the particular and novel aspects of your software before filing a patent application. Your attorney can help you narrow and identify these features, but in general, the following considerations are prudent:

  • Think about what, specifically, makes your software unique. Does it leverage a unique algorithm to create performance improvements? Is there a function that has never been accomplished before? Does the user interface create a new experience? If the novel aspects of your software currently exist, especially if they exist in a non-digital format (like the game of Bingo), is there something “extra” that makes the invention more than just converting it into a digital format? For instance, implementing Bingo on a generic computer is not patentable, but is there something really unique about the user interface that makes the Bingo card easier to interact with? Does the program take advantage of the memory architecture in a unique way to more efficiently store and retrieve data? Try to identify these features in as much particularity as
    possible, even before you sit down to develop the patent application language.
Under the new patent eligibility guidelines for software implemented inventions, patents must claim something more specific than functionality carried out by well-known programming techniques on general purpose computers.

Under the new patent eligibility guidelines for software implemented inventions, patents must claim something more specific than functionality carried out by well-known programming techniques on general purpose computers.

  • When you and your attorney do begin drafting the patent application, consider identifying the novel algorithmic aspects of the software and including flow charts or even representative source code or pseudo-code in the filing. This will help to demonstrate to the examiner that your code is more than just implementing an idea on a generic computer, which can be accomplished in a near-infinite number of ways. Including specifics about the algorithm (or several examples of a possible algorithm) in the application will give you the flexibility during the Patent Office review to narrow the scope of your claims and could potentially save the application from dismissal under an Alice rationale. Since the legal ramifications of Alice have yet to fully play out, this is an attractive way to preserve some (albeit narrow) patentable ground if the courts or the Patent Office further restrict software-enabled inventions.
  • Consider your overall business goals and, perhaps, reconsider the need to pursue a strategy of patenting. You may not need a patent to protect your competitive advantage. Implementing a strategy of keeping software a trade secret may be a viable alternative in some situations, and copyright generally protects unauthorized copying of software. The expense and hassle of obtaining a patent may not be worth the ultimate reward.


Fallout of the Supreme Court’s Recent Alice Decision: Is Software Still Eligible for Patent Protection? (Part 1 of 2)

In June 2014, the Supreme Court struck down a patent on a software implemented invention, perhaps narrowing the scope of software patents we will see in the future.

In June 2014, the Supreme Court struck down a patent on a software implemented invention, perhaps narrowing the scope of software patents we will see in the future.

The Supreme Court, Patent Eligibility, and “Abstract Ideas”

In June 2014, the Supreme Court issued a much-anticipated patent decision in Alice Corp. v. CLS Bank. The question was whether the claims at issue, involving a method for mitigating “settlement risk” between two parties in a financial exchange by using a computer system as an intermediary, are patent-eligible under 35 U.S.C. § 101. Justice Thomas, writing for a unanimous court, answered that question with a definitive “no.” But even though this particular computer-implemented method was struck down, are other software programs still eligible for patent protection? That’s a trickier question.

35 U.S.C. § 101 limits patentable subject matter to “any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof.” Laws & products of nature, physical phenomena, and abstract ideas are generally considered unpatentable subject matter. With the rise of software and software-based inventions, the line between abstract ideas and new and useful processes became somewhat unclear. Note that §101 addresses whether a particle technology is eligible for patent protection. Section 101 does not address whether an invention is new, nonobvious, useful, or sufficiently described. Those requirements are addressed in separate sections of the Patent Act and represent their own unique hurdles to patentability. Therefore, the question presented by §101 (and addressed in the Alice case) is, even assuming a particular invention is new, nonobvious, useful, and sufficiently described, is this the type of creation that should be considered for the powerful protection of a patent.

For a time, courts generally refused to invalidate software patent claims under the statutory language of § 101. In 2010, however, the Supreme Court unanimously held, in Bilski v. Kappos, that a patent claiming a software method for financial hedging against price fluctuations was invalid under § 101. Alice continued this line of decisions for the Court, confirming the Supreme Court’s position that “basic tools of scientific and technological work” should not be monopolized by a patent-holder. Alice communicated to lower courts that § 101 should be used to invalidate software and business methods that are so abstract that the award of a patent would “tend to impede innovation more than it would tend to promote it.”

In order to accomplish this goal, Alice puts forth a two-part framework, based on its previous decisions in Bilski and Mayo v. Prometheus, to determine whether a patent application describes an “abstract idea,” and if so, whether it still contains enough inventive material to meet the § 101 standard.

First, the court considers whether the patent claim is “directed to an abstract idea.” While on some level, every invention embodies at least one abstract idea, if the claimed idea is so broad such that awarding a patent would impede more innovation than promote it, it is likely to meet this first step. Examples of abstract ideas include fundamental economic practices like the ones at issue in Alice and Bilski, certain methods of organizing human activities, an idea of itself, and mathematical relationships/formulas.

Second, if the patent claim is directed to an abstract idea, the court examines whether anything in the patent “transform(s) that abstract idea into a patent-eligible invention. In other words, if there are features of the invention that go above and beyond simply implementing an abstract idea in software, it may still be patent-eligible. Improvements to the technology, improvements to the functioning of the computer elements and other “meaningful limitations” that go beyond simply implementing an idea on a computer are likely to qualify an invention in this way.

 The End of Patents for Generic Ideas Implemented on a Computer

The U.S. Patent and Trademark Office (PTO) took little time in heeding the new guidance from the Supreme Court. Less than a week after the Alice decision, the PTO issued new guidance to its examiners in applying the Alice decision. PTO examiners now employ the two-part test set forth in Alice to evaluate potentially abstract ideas, and if there are no “meaningful limitations” on an otherwise abstract idea, the PTO examiner is very likely to reject the application as non-patentable subject matter under § 101.

Similarly, courts have wasted no time in implementing the Supreme Court’s guidance. The U.S. Court of Appeals for the Federal Circuit, which receives all appeals on patent matters, has invoked Alice in a number of recent cases to invalidate software and business method patents. District Courts hearing patent disputes, too, have seized the opportunity to invalidate claims that are too “abstract” to be patented. Some recent examples of inventions too “abstract” to be protected by a patent under the Alice rationale include:

  • “[A] process of organizing information through mathematical correlations and is not tied to a specific structure or machine . . . taking two data sets and combining them into a single data set” Digitech Image Techs., LLC v. Elecs. for Imaging, Inc., 758 F.3d 1344 (Fed. Cir. 2014)
  • “[C]reating a contractual relationship—a ‘transaction performance guaranty’—that is beyond question of ancient lineage,” implemented by a generic computer. buySAFE, Inc. v. Google, Inc., 2014 U.S. App. LEXIS 16987 (Fed. Cir. Sept. 3, 2014)
  • “[M]ethods and systems for ‘managing a game of Bingo,’ . . . ‘solv[ing a] tampering problem and also minimiz[ing] other security risks’ during bingo ticket purchases” using a computer. Planet Bingo, LLC v. VKGS LLC, 2014 U.S. App. LEXIS 16412 (Fed. Cir. Aug. 26, 2014)
  • “[A] computer program that allows the user to create meals from a database of food objects according to his or her preferences and dietary goals, to change those meals by adding or subtracting food objects, and to view the dietary impact of changes to those meals on a visual display” DietGoal Innovations LLC v. Bravo Media LLC (Div. of NBC Universal Media, LLC), 2014 U.S. Dist. LEXIS 92484 (S.D.N.Y. July 8, 2014)
  • “[A]sking someone whether they want to perform a task, and if they do, waiting for them to complete it, and if they do not, asking someone else. . . . performed ‘in connection with a computer system.’” Eclipse IP LLC v. McKinley Equip. Corp., 2014 U.S. Dist. LEXIS 125529 (C.D. Cal. Sept. 4, 2014).

So what does all of this mean for an entrepreneur with a potential software invention? Check out Part 2 of this series.


FTC Sues Amazon: Lessons for Startups Seeking to Monetize Through In-App Purchases

FTC Complaint

As has been widely reported, on July 10, the Federal Trade Commission filed suit against for allegedly failing to do enough to prevent unintentional in-app purchases by children.

Background on Consumer Protection by FTC

In its complaint, the FTC accuses Amazon of violating Section 5 of the FTC Act, which provides:

Unfair or deceptive acts or practices in or affecting commerce [ ] are [ ] unlawful.

The FTC Act defines “unfair” practices as acts that:

“cause[] or [are] likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition”

The FTC’s website refers to Section 5 as the FTC’s basic consumer protection statute.

The FTC’s recent actions with Apple, Google, and Amazon, show the FTC is primarily concerned with the following aspects of company’s seeking to monetize through in-app purchases when children may be using the app.

(1) making sure account holders understand the nature of in-app purchase and the full scope of what an account holder is agreeing to when they download an app and enable in-app purchases;

(2) technological restrictions imposed at the time of an in-app purchase to reasonably prevent a child from making a purchase the account holder does not intend to make (e.g., a second entry of a password, or having to enter credit card information); and

(3) the notice provided to the account holder when and in-app purchase is made.

FTC’s Complaint Against Amazon

According to the FTC’s Complaint,, billed parents and other account holders for children’s activities in apps that are likely to be used by children without having obtained the account holders’ express informed consent.

Some commentators believe the “express informed consent” standard is too rigid and deprives an app designer of the ability to make its own design choices in deciding how to fairly engage with consumers.

The FTC’s “Express Informed Consent” Standard

Some commentators believe the “express informed consent” standard is too rigid and deprives an app designer of the ability to make its own design choices in deciding how to fairly engage with consumers.

In its January settlement with Apple, the FTC defined “express informed consent” as requiring an affirmative act communicating informed authorization of in-app charges that:

(1) is made promptly in relation to in-app activity;

(2) discloses material information related to the billing, including:

  • for a specific in-app purchase: the activity related to the charges; the specific amount of the charge; and the account to be filled; and
  • for potential future in-app purchases: the scope of the charges (including duration and apps to which consent applies); the account to be billed; methods by which an account holder may revoke or modify the scope of consent

(3) takes reasonable steps to verify that the person providing consent is the account holder;

(4) for consent related to potential future purchases, consent must be obtained at least once for each mobile device.

Current Lessons for Startups Related to In-App Purchases

The following are take-aways from the FTC’s recent activity related to in-app purchase:

1) Stayed tuned and see if Amazon prevails.  Amazon believes the FTC’s requirements are too stringent.  If federal courts agree, then the FTC will have to revise its policies concerning in-app purchases.

2) Use your “Terms of Use” to provide clear notice to account holders about what in-app purchases are available and (if applicable) that such purchases can be made without re-entering credit card information.  A clear warning to parents should also be provided if the nature of the app is such that children are likely to use it.

3) Reasonable restrictions on in-app purchases should be imposed.  The restrictions must be balanced with reasonable design and business considerations.  Possible restrictions include: (i) re-entering a password in order to make an in-app purchase; (ii) entering a different password; (iii) having to re-enter at least a portion of credit card information;  or (iv) asking identifying questions or using recognition technology on phones.

4) Provide prompt notice to an account holder of an in-app purchase and/or provide some ability for account holders to stop or reverse a purchase.

5) If you do not intend for children to us the app, take steps to prevent them from doing so, and make this intent clear in your terms of use.




The Rift Between Companies: Oculus v. Zenimax

ZeniMax Media and Oculus are embroiled in a dispute over the intellectual property rights incorporated in the Rift product.

ZeniMax Media and Oculus are embroiled in a dispute over the intellectual property rights incorporated in the Rift product.

Have you heard of the Oculus Rift (that loveable virtual reality company swept off its feet by Facebook)? How about legendary game designer John Carmack? If you haven’t by now, you absolutely should have! In any case, here’s your major takeaway: Beware the Employer! The situation playing out between Oculus and ZeniMax Media is an interesting one, and it is a useful lesson in what not to do. While we wait for this to unfold (either in the courtroom or behind closed doors), let’s see where things went wrong and learn from Oculus’s potential mistakes.

Our Legal Setup

On May 1, 2014, ZeniMax Media (the parent company of Carmack’s former employer, id Software), sent letters to Oculus and Facebook claiming rights in at least part of the IP in the headset. In other words, ZeniMax believes it owns rights in IP created by Carmack during the course of his prior work for ZeniMax’s subsidiary, and that some of that IP is embedded in the Oculus Rift headset.  On May 21, ZeniMax initiated a lawsuit against Oculus in the Northern District of Texas. The focal point of Oculus’s problems stems from two documents: John Carmack’s employment agreement (and other ZeniMax/id personnel as well) and a Nondisclosure agreement entered into between Oculus cofounder, Luckey, and Zenimax Media.

Employment Agreements: Be Cautious about who helps you

Entrepreneurs, if you seek someone’s help, be sure to have them take a look at their employment agreement! Almost always, an employment agreement will include provisions that immediately make the company the owner of rights in inventions created by the employee in the scope of his employment. Sometimes, there may be an out if the work is unrelated or outside the scope of the Employer’s work or agreement. However, that may be difficult to prove.

Prior to this whole mess, Luckey, a hardware developer had begun the development process on the “Rift” virtual reality (VR) headset. In 2012, John Carmack began corresponding with Luckey and asked for a prototype of the Rift headset to tinker with. This is where their trouble begins. In the complaint, ZeniMax constantly states that it was developing VR technology with Carmack heavily involved in that research. As a game company, ZeniMax researched VR technology specifically for game development. There exists some question as to whether or not they sought to bring a viable consumer hardware project to market.

Carmack’s specific employment agreement reads:

Employee agrees that all Inventions that (i) are developed using equipment supplies, facilities or trade secrets of id Software or the Company… or (iii) relate to the Company’s business or current or anticipated research and development will be the sole and exclusive property of the Company (ZeniMax) or its designee from the moment of their creation and fixation in tangible media…

In other words, even if Carmack did not use his employer’s resources in working on the Rift, his employment contract would still purport to transfer rights to the employer if the Rift relates to the employers “current or anticipated research and development.”  Additionally, Carmack and other ZeniMax employees are said to have used company resources and research to make both hardware and software (including the software development kit or SDK) improvements to the device.

According to ZeniMax, “Carmack made breakthrough modifications to the Rift prototype based upon years of prior research at ZeniMax.” When Carmack and his crew made improvements, the resulting intellectual property had been assigned to ZeniMax via the employment agreements. The complaint constantly tees up that ZeniMax (Carmack with id Software in particular) had been working on VR hardware and software research. However, record exists where Carmack states that this was his pet project.  [Is there something missing in the prior sentence?]

In any case, if the court sides with ZeniMax, these improvements become their property, including the SDK. Carmack had quickly taken to Twitter to protest saying that nothing he has ever worked on was patented. But that might not be the only issue. The code he wrote, which is automatically protected by copyright, became property of ZeniMax (under ZeniMax’s interpretation of the law and facts). Accordingly, it might be the case that ZeniMax owns certain parts of the code used in the Rift.  If ZeniMax was the owner of Carmack’s rights in code he developed, then Occulus would have had to reverse engineer its code, without incorporating any of the copyrighted content from the ZeniMax-owned code.  It might also be the case that Luckey and ZeniMax became co-owners in the software.

Nondisclosure Agreement: Now that it’s not yours, it’s not yours.

Under ZeniMax’s argument, the technology became confidential information and trade secrets of ZeniMax. This is what gives ZeniMax some ammunition (or rather a actionable claim). Their research and proprietary information that was confidential and not readily attainable had been used in the Oculus Rift. Oculus was using it to profit to the tune of a cool $2 billion from Facebook. This could constitute misappropriation, meaning ZeniMax’s proprietary information was stolen. Helping to solidify their claim, ZeniMax points to the NDA entered into between the Company and Luckey.

It was under this agreement that Carmack showed Luckey the improvements made to the Rift. This contract is what governed the relationship between Carmack’s team, ZeniMax, and Luckey. The definition of confidential information includes the work done by the employees of ZeniMax. If these facts are correct, Luckey would likely not be able to use the information without the permission of ZeniMax (for purposes other than those outlined in the NDA). If ZeniMax’s secrets are disclosed, they potentially lose any trade secret protection. Multiple times in ZeniMax’s complaint, the Oculus team is painted as having no software background and no particular VR experience. If these facts are true, this would help ZeniMax demonstrate that they did not reverse engineer the tech (an acceptable method of discovering trade secrets). Multiple email chains affirmed the notion that they needed Carmack. Only days after demonstrating the Rift improvements, Oculus LLC was formed in the state of California.


ZeniMax’s complaint does not paint a favorable picture of how Oculus handled its negotiations with ZeniMax. The only facts are those from the complaint, and we’ll have to wait for more to come to light to know the truth. It is understandable that an entrepreneur will desire to protect and profit from an idea they believe to be there own. But even if there is not a clear owner of intellectual property rights in an idea, an entrepreneur maybe able to secure clear title to important intellectual property by negotiating a business arrangement with others involved.  ZeniMax’s allegations outline what not to do in negotiating over intellectual property rights.  ZeniMax alleges the negotiations broke down in large part due to the Oculus team. According to the complaint, originally, Oculus was to grant ZeniMax some share of equity in the LLC. According to the complaint, Oculus demanded a worldwide exclusive license over the IP disclosed by ZeniMax pursuant to the NDA. Furthermore Oculus demanded marketing support from ZeniMax and 10,000 free copies of Doom 3 BFG edition (a game capable of showing off the Rift) for the Kickstarter campaign. In return, ZeniMax would receive 2% equity interest subject to a 3 year vesting schedule. Vesting would be dependent on Carmack’s ongoing involvement in the project. Oculus also proposed tht ZeniMax could pay an additional 1.2 million for another 3%. However, that term was eventually dropped.

In 2013, negotiations in total broke down. ZeniMax would eventually prohibit Carmack from working with Oculus. As a result, Carmack left the company to become the Oculus CTO. They then began poaching former members of Carmack’s team despite noncompetition provisions in his employment agreement specifically prohibiting this.  Again, this is all based on ZeniMax’s unproven allegations.  However, this provides an example of how aggressive negotiating posture and subsequent aggressive hiring decisions can inflame a situation and lead to litigation.


Clear title to fundamental intellectual property is typically critical to a startup’s success.  While Oculus was able to achieve a favorable exit, their outcome is likely the exception to the rule.  ZeniMax’s complaint in its recently filed litigation provides numerous examples of mistakes startups can avoid making in working with individuals employed by others or subject to NDAs.


LLC Formation: Why Filing Your Articles is Not Enough

While it might be simple to technically establish an LLC, several important documents are required to properly organize as a company with clear membership, governance, and IP ownership.

While merely filing Articles of Organization might be sufficient to establish an LLC, several important documents are required to properly organize as a company with clear membership, governance, and IP ownership.

Entrepreneurs are often attracted to organizing as a limited liability company (“LLC”) due to the perceived ease and cost-savings of formation.  In most states, one can (technically) establish an LLC by filing a single document and paying a small filing fee.  For example, in Michigan, one can establish an LLC by filing the Articles of Organization and paying a $50 fee.  While filing the Articles of Organization may technically establish an LLC, more is needed in order to properly organize an LLC.  This post examines the additional steps needed to properly organize a multi-member LLC.

Information Contained in Articles of Organization

The Articles of Organization are a simple one-page document that provide the following:

  • the name of the company;
  • the duration of the company, if other than perpetual (this is typically left blank for tech startups);
  • the name of the registered agent and address of the registered office;
  • the name of the “organizer” of the LLC.

Most states do not require any documentation other than the Articles of Organization (or that state’s equivalent publicly-filed document) in order to establish an LLC.

Information NOT Contained in Articles of Organization

Importantly, the Articles of Organization do not provide any of the following information:

  • who holds equity in the company;
  • how much equity any single person holds in the company;
  • who makes what decisions on behalf of the company;
  • what happens if a member leaves the company; and
  • who owns the IP created by members of the company.

At the most basic level, the absence of information about who is part of the company is particularly troubling.  If a founder does nothing more than file the Articles of Organization to set up a company, there is no conclusive document indicating who is part of the company.  Without more, individuals could point to vague oral or email statements to claim that they are entitled to some equity interest in the company.

Your State’s Default Governance Provisions May Not Be Appropriate

Most states have LLC statutes that provide default provisions for how LLC’s operate.  In the absence of additional documentation, such as an operating agreement signed by all members, these default provisions will control the operations of the LLC.  While it might be tempting to rely on these default provision rather than taking the time (and perhaps expense) to think through and establish company-specific provisions, founders should be wary of their state’s default provisions.  These default rules are unlikely to reflect exactly the way the founders intend to operate their company.  For example, in Michigan, section 450.4502 of the Michigan LLC Act provides that (unless otherwise specified in an operating agreement) each member is entitled to one vote in making company decisions.  In other words, even if interests in the LLC are divided 80/20 between two founders, they would each be entitled to one vote.

Additional Documents Needed for an LLC

The above deficiencies are why entrepreneurs should view LLC formation as requiring a suite of formation documents rather than the one-page Articles of Organization.  Specifically, a startup organizing as an LLC should use at least the following:

Operating Agreement - An Operating Agreement should be signed by all members of the Company.  Therefore, it confirms whether or not an individual is a member of the LLC, and how much equity that person holds.  The Operating Agreement should also specify at least: how decisions are made (e.g., what % of vote is required, and by whom, for the company to take certain actions); how membership interests can be transferred, if at all; and how profits/losses are allocated and/or distributed between members.  For most tech startups, it is common to create “Units” of membership interest (similar to stock in a corporation), which are established in the Operating Agreement.

Restricted Unit Agreements - If a startup seeks to impose “vesting” it is common to implement the vesting via a Restricted Unit Agreement entered into between the company and each individual member actively working with the company.  This prior post discusses the concept of vesting.  While the Operating Agreement may grant a member a certain percentage interest in the company, and the number of units that correspond to that percentage interest, a Restricted Unit Agreement will grant the company a repurchase option that lapses over time (i.e., the vesting schedule).  The Restricted Unit Agreement should be clear about specifying what action triggers the company’s repurchase option (for example, a termination of service, or a majority vote of the members of managers of the company).  Of course, whenever vesting is imposed (and the company’s repurchase option is less than the fair market value of the equity at the time of repurchase), holders of equity should pay attention to their 83(b) elections as discussed in this prior post.

Proprietary Information and Invention Agreement (“PIIA”) - PIIA’s should be signed by each individual member actively working with the company.  A PIIA assigns to the company rights in any intellectual property created by an individual during the course of their work for the company.  PIIA’s also include confidentiality obligations requiring the individual to maintain as confidential any of the company’s sensitive information.

IP Assignments -  If an individual (such as a founder) has been working on the startup prior to the company formation, then it is likely that individual holds intellectual property rights that need to be assigned to the company.  Because most PIIA’s are designed to cover intellectual property created during the course of an individual’s work for a company, they might not adequately cover pre-existing intellectual property.  Accordingly, IP assignments should also be used to cover any intellectual property created prior to company formation.

Proper Organization is Important Even for Startups Planning to Convert to a C-Corp

As discussed in this prior post on entity conversion, it is common for startups to initially organize as an LLC but later convert to a Delaware C-corp when they plan to raise capital from sophisticated investors.  For a startup contemplating this conversion, it might be tempting to forego the above organization documents, merely filing the Articles of Organization to establish the company as an LLC.  This is not wise, however.  Among other concerns, most state conversion statutes require a specified vote of the members in order to approve a conversion of an LLC into a Delaware C-corporation.  In MIchigan, for example, section 450.4708 of the Michigan LLC Act requires that all members approve a conversion unless the operating agreement provides otherwise.  Accordingly, absent an operating agreement, all members of the LLC would need to approve the conversion into a new corporate form.  However, absent an operating agreement, it is also difficult to conclusively know who is a part of the company (e.g., who the members are).  This lack of information would be ripe for an individual to later claim they were part of the LLC, but not included in the approval of the LLC to a C-corp.  Therefore, even when a startup is planning to convert from an LLC to a C-corp, they should first properly organize as an LLC so that the conversion process is clearly approved by a well-defined set of members under well-defined governance procedures.


With the above documents in place, it is now clear: which individuals are part of the company and how much they own; which members make what decisions on behalf of the company; that the company owns the intellectual property related to its business; and what happens if a member’s service for the company terminates.  None of this information would be clear if a startup merely files the Articles of Organization, and doesn’t take additional steps to properly organize itself.  Using the correct documents to properly organize will lessen the risk of potential disputes down the road, especially if the LLC later converts to a Delaware C-corp and seeks outside investment.


Let Your ELF Help You File in Michigan

By setting up a Mich-ELF account, entrepreneurs can quickly and cheaply make their organizational filings in Michigan via e-mail.

By setting up a Mich-ELF account, entrepreneurs can quickly and cheaply make organizational filings in Michigan via email.

As addressed in this prior post, entrepreneurs in Michigan typically decide between a Delaware C-Corp and a Michigan LLC for their choice of entity.  With either choice, entrepreneurs should be aware of an easy electronic filing option in Michigan available by establishing a Michigan “ELF” account.  With an ELF account, startups seeking to organize as a Michigan LLC can quickly file their organizational documents via email.  Startups organized in Delaware, but transacting business in Michigan, will need to be authorized to transact business in Michigan as a “foreign entity” and can also file their application via Michigan’s ELF service.  This post serves as a guide to setting up, and using, one’s MICH-ELF account.

Establishing a MICH-ELF Account

To set up a Michigan ELF account, one must complete and submit a Michigan ELF application ( CSCL/CD-901).

ELF Application

To complete this form, one needs the following information:

1) Name, address and phone number of the MICH-ELF applicant

2) Fax number for return of document;

3) Type of credit card (VISA, VISA Electron, and MasterCard are accepted);

4) Credit card number, expiration date, name of cardholder, and billing street address and zip;

5) Contact person, phone, and fax number if other than applicant.

The completed ELF application should be faxed to (517) 241-6445.  Note that this ELF application should not be submitted with any other documents.  Your Articles of Organization or Application for Authority to Transact Business will be submitted in a separate filing after you receive your ELF filer number.  Michigan will reject your application if you submit your ELF application with other filings.

Questions Related to the ELF Application

Although the ELF application is relatively straight forward, some questions do arise.  One common question is who to identify as the applicant.  If one is organizing a Michigan LLC, there will not yet exist any entity when one is initially setting up the ELF account.  Nonetheless, Michigan customarily will accept the future company name as the applicant name.   Identifying a founder as the applicant is also acceptable.  For foreign entities, it is likely best to identify the foreign entity name as the applicant.  If you are an attorney filing an ELF application on behalf of the client, it is best not to list yourself as the applicant.  This is because when Michigan faxes your ELF account confirmation (see below), the only identifying information on the confirmation page will be the new ELF filer number and the name of the applicant.  If the applicant name is the attorney name, and that attorney commonly files ELF applications, there will no way to tie the confirmation page to a particular client without contacting the state.

For the contact person, it is likely best to identify someone who can quickly respond to questions from Michigan.  This will likely be the person handling this initial organization — either one’s attorney or a key founder.  Note that the contact person listed on the ELF application can be different than the Resident Agent that one will identify on their Articles of Organization.  So, the contact person is not signing up for any additional responsibilities on behalf of the company, other than questions related to one’s ELF account.

Your ELF Confirmation

Michigan typically processes ELF applications in less than 48 hours.  You will receive a fax from the state, similar to the following:

ELF Confirmation Page 2

It is important to store this document (or at least the ELF Filer Number), because one will need to include the ELF Filer Number in all future filings with the state.

Making Filings Using an ELF Account

An ELF Account permits one to make organizational corporate filings via email.  Corporate filings can be emailed to or faxed to (517) 636-6437.  Note that this is a different fax number from the one used to establish the ELF account.  A MICH-ELF cover sheet (CSCL-CD900) should be used with all ELF corporate flings.  The standard MICH-ELF cover sheet is shown below.

Elf Cover Sheet

Upon making an ELF filing, Michigan will automatically charge the credit card account associated with the ELF account.  Accordingly, it is important to update one’s ELF account when a business credit card is initiated.

Note that the ELF cover sheet is the only document that should include your ELF Filing Number.  Do not include the ELF Filing Number on the Articles of Organization themselves.  A common mistake is to for a filer to place their ELF Filing Number in the unmarked box on the right side of the Articles of Organization.  If you do this, Michigan will reject your filing and require that you remove the number.  Leave this box empty.

ELF Articles of Org


The Michigan ELF account process can save entrepreneurs time and money.  Email filings are simple and lead to more timely approvals from the State of Michigan.  Setting up your ELF account (and keeping your ELF Filer Number) can ease the headaches around organization, conversions, financings, or other occasions when timely filings matter.


Visiting Your Competitor’s Web Page: Should Entrepreneurs be Concerned?

Competitor Website Pic.v3

Entrepreneurs, you can check out your competitors. But it’s likely they’re watching you watch them.

Data Collection and the State of the Internet

Data collection is an integral and expected practice of the internet. In fact, many companies, both established and new alike, rely on it for their continued existence. Data serves a critical role in either their marketing strategies or monetization strategies. Or in some cases, both. This data provides useful information essential to adjusting and tailoring a company’s business strategy. Both websites and third-party advertisers collect data.  This data includes IP addresses, location, and web history. Since the practice is unlikely to go away, the question becomes “as an entrepreneur, should I be worried about visiting my competitor’s website?” The good news is that there are some things that can be done to minimize the information a competitor learns about you from your visit to their website. This blog post will cover: 1) some of the technology involved, 2) examples from Facebook’s data usage and privacy policies, and 3) some suggestions going forward.

Technology involved

Numerous free or low-cost tools exist for a company (such as one of your competitors) to ascertain the affiliation of visitors to the company’s website.


Cookies are small text files created when a user loads a website. Every time the user returns to the site, the browser sends this file to the site’s server. Both websites and ad servers create cookies on a site. Important for our purposes, cookies inform how and when ads are shown.  You can learn more about cookies here.

Pixel tags

Pixel tags are small blocks of codes on a webpages that allow websites to read and place cookies. The resulting connection can include information such as the person’s IP address, the time the person viewed the pixel, and the type of browser used.  You can learn more about pixel tags and how Facebook uses them here.  

Web Analytics

Services such as Quantcast, Google Analytics, KISSmetrics provide extensive data. They include demographic information (age and gender), location information, time on site, and other metrics. IP addresses by themselves will give away a user’s location and network information. For instance, visit IPInfo’s free geolocation databases.  Users are greeted with IP address information on the right-side of the screen (IP address, country, region, city, and time). These services can be free or paid, and therefore, there aren’t significant barrier to entry. A basic (yet still comprehensive) version of Google Analytics is available for free.

Examples from Facebook Data Use Policy and Practices

As it has become a part of many people’s daily habits, Facebook may become a problem for the cautious entrepreneur. First, Facebook may increase your competitors screen time as a user’s information and web traffic affect advertising. Second, it may tip off your competitors as to your presence.

Facebook is rather explicit (but not entirely straightforward) in its online policies. Facebook’s privacy page states that they receive data from and/or about “the computer, mobile phone, or other devices you use to install Facebook apps or to access Facebook.” This information may include your “IP address or mobile phone number, and other information about things like your internet service, operating system, location, the type (including identifiers) of the device or browser you use, or the pages you visit.” Facebook additionally receives data whenever you visit other websites, games, and applications that use the Facebook platform or use a Facebook social plugin.

Certain information on Facebook WILL ALWAYS REMAIN PUBLIC UNLESS DELETED. For our purposes, this includes name, user ID, and networks.

Facebook’s cookie policy

Facebook may read a cookie so they can show you ads that may be interesting to you on Facebook or other websites. They also use a cookie to learn whether someone who saw an ad on Facebook later visited the advertiser’s site. Similarly, Facebook partners may use a cookie or another similar tech to determine whether they’ve shown an ad and how it performed. Information may be shared with partners.  More more information, wee Facebook’s cookie policy here. 

Facebook Page Analytics

For a Facebook page, you can see how many people your post reached, how many people clicked it and how many people clicked it, commented on it, or shared it with their friends. The Facebook Pages feature allows administrators (or rather your competitors) to identify the location of users who have seen “any content associated with [their] page.”  

What does this all mean for the entrepreneur?

The problem for entrepreneurs is two-fold. First, you may be tipping off your competitors about your presence (and your interest in your competitor). Second, you may be increasing your competitor’s web traffic.

In the first instance, as explained above, by merely visiting your competitor’s website, your competitor is likely capable of learning your location, gender, and age (inferred age group. Furthermore, your competitor might be able to identify your network.To combat this, you may consider using the TOR browser.  The TOR software prevents tracking by “bouncing your communications around.” Your internet traffic is carried over a network of different relays, which are hosted by volunteers globally. According to the TOR site, “it prevents somebody watching your Internet connection from learning what sites you visit, [and] it prevents the sites you visit from learning your physical location.”[5]

Private browsing does not anonymize your data. IP addresses and other related information may still be collected. Private browsing only prevents cookies from being stored once the browsing window has been closed. However, a private browsing session will not read cookies from other sessions.

The second situation is not nearly as avoidable. Increased visits to a competitor’s website will increase web traffic. The cookie stored from that site will inform Facebook and other advertisers that you have viewed that site. As a consequence, it will then serve up more ads related to that site/product. Additionally, the more visits a page receives, the more likely it is to show up in search results and other advertisements in general. If you want to research your competitor, this consequence is almost inevitable.


Data collection is here to stay. As privacy policies change, entrepreneurs should be mindful of their internet behaviors, and they should remain up to date on policies. While you can cover some tracks, some things are unavoidable and are the cost of doing business.



The Perils of Contracting Through Third Party Websites

MichelleSargentBlogPicThe internet has a wealth of resources for start-ups, from legal and venture financing blogs to form documents and state entity-formation pages. There are also many pitfalls to leveraging the internet that unknowing and uncounseled start-ups may not identify. One of these is the use of third-party websites to enter agreements.

For example, a start-up wants to use a contractor to develop some code for their mobile application. The start-up finds a website that allows parties to post a project that needs completing and has users make bids to win the project. (There are many such, or similar, websites, such as,, and The start-up posts its project, and an unknown individual somewhere in the internet world is contracted to complete it.

On its face, this is an easy and low-cost way of finding work for hire. But what may the start-up not consider: Is its intellectual property protected? Is any intellectual property created by the worker assigned to the start-up? What happens if there is a dispute about the completion or quality of the work? What is the worker’s classification for employment and tax purposes?

1.  Worker Classification

Any time a company wants to bring in somebody to do some kind of work for the company, the company must address how to properly categorize the worker for employment and tax purposes. As this blog has previously discussed, in a January 31, 2013 posting by Tasha Francis on Hiring Tips for First Time Entrepreneurs, there are important ramifications to getting the classification correct. And the correct classification may not be the one that matches the start-up’s financial capabilities or expectations. In using third-party websites to locate workers, the classification problem is magnified because (1) there may be no explicit agreement or provision stating how the worker is classified, and (2) it is possible the website loosely uses terms such as “employer” and “employee”—even when categorizing independent contractor relationships.

The purpose of these websites is to allow companies to hire remote, unknown individuals who specifically market and offer their services through the website to perform a specific project, on a specific time schedule, for a specific fee. This seems to create a quintessential independent contractor relationship. Many of these websites’ terms of service, however, explicitly refer to the company seeking services as the “Employer.” And the generic terms of service may not describe the nature of the relationship between the two parties contracting for work—unless the parties independently choose to enter into a separate independent contractor services agreement (the terms of which may not conflict with any terms in the terms of service). Although a start-up may ultimately be protected by the actual nature of its relationship with these electronically engaged workers, the terminology and lack of a defined relationship is just one of many ways relying on a third party may undermine the company’s legal rights and relationships.

2.      Intellectual Property

For many emerging companies, their intellectual property is the company’s main—and potentially only—valuable asset. And seeking to protect this IP is often one of the first steps taken by lawyers representing start-ups. Yet, when an uncounseled start-up engages through a third-party website, it is highly unlikely any of the typical IP assignment or proprietary information protections are contained in the default terms of the relationship.

Now we will return to the company that retains a contractor to develop a mobile application. On the one hand, the company must send proprietary information to the contractor describing its business, what its vision is for the mobile application, specifics for its user interface, the types of users it envisages, etc. Without any nondisclosure agreement, this proprietary information will not be protected from the contractor disclosing it to other parties, or developing the information in third-party products. On the other hand, the contractor will be writing code and developing an interface that will be an integral part of the company’s platform and business plan. But without any intellectual property assignment provision, any copyright and other intellectual property in the work performed by the contractor will not belong to the company. Although it may seem distant to the start-up now, any outstanding, unassigned intellectual property gives individuals a future opportunity to come back and seek something from the company.

It is highly unlikely that a third-party website will contain default provisions sufficient to protect existing company IP or to assign any contractor-created IP. On the contrary, many of these websites include express disclaimers that they are merely acting as a portal and are not subject to liability for any claims under any IP laws. It does not, however, include any IP assignment language from contractors to users, or any default nondisclosure provisions. Therefore, unless a start-up independently identifies the need to draft a separate and independent agreement assigning any IP and protecting the confidentiality of any of its proprietary information, it leaves potential holes in its IP protections.

3.      Dispute Resolution

So what if the relationship created on this third-party website goes wrong, what can a start-up do? Here, there are two main considerations: Does the third-party website impose any dispute resolution conditions on users? And should litigation arise, where would it take place?

A brief survey of the terms of service of several of these third-party websites reveals the existence of mandatory dispute resolution or arbitration provisions. What do these mean? Say the start-up is unsatisfied with the quality of the work performed by a contractor and wants to renegotiate the rate it has agreed to pay for the services based on the poor quality: First, the parties may be required to attempt to independently negotiate and resolve any disputes. They may also, however, be prevented from renegotiating the fee for a project after it has begun. Therefore, the parties would be required to submit the dispute to the third-party website, which may grant itself the full power to resolve the dispute, including the determination of the documents that can be submitted in support of the dispute. Alternatively, the parties may be required to submit to arbitration in which the third-party website selects an arbitration team that makes a binding, irreversible decision on the dispute. In many of the terms of service for these websites, there are no express provisions providing for litigation between users. And insofar as the purpose of the website is to bring together individuals globally to provide services, there is the distinct potential that contractors may be judgment-proof—either geographically isolated or financially unable to be hailed to court in a foreign country to face charges for breach of contract or copyright infringement.

And what if the start-up wants to raise a dispute with the third-party website? There are the obvious broad disclaimers of all kinds of warranties, limitations of liability, and indemnification requirements. But the terms and conditions can also establish that the agreement is subject to foreign law with irrevocable and exclusive jurisdiction in foreign courts. For uncounseled start-ups, the potential pitfalls of being unable to dispute a contract—because litigating abroad is unfeasible—were probably never considered.

These provisions and examples reveal the unforeseen liabilities of entering into agreements through third-party websites. Even for start-ups that may benefit from legal advice in order to draft separate agreements dealing with IP and worker-classification issues, it is likely that the third-party website’s terms and conditions will seek to limit the effect of these agreements to the extent they may be inconsistent with the website’s terms and conditions. And so even extra-website attempts to contractually change dispute resolution procedures may be ineffective. Nonetheless, there are differences in the terms of service across these websites, with some providing for more default, start-up friendly provisions or options to protect IP, classify workers, or dispute services, and at the very least, start-ups may want to consider digging deeper before selecting a third-party service.


Patent Trolls – The White House Makes a Move in the Right Direction

The White House launched a toolkit in February to help startups search government databases on patent trolls and patents.

The White House launched a toolkit in February to help startups search government databases on patent trolls and patents.

Patent Trolls – The White House Makes a Move in the Right Direction.

One of the worst issues that could befall an early startup is litigation. Litigation can distract a startup from its main priority – innovating and executing its business model.  Furthermore, litigation, or even threatened litigation, can scare away potential investors. For many tech and even non-tech driven startups, some of their litigation may be initiated by “patent trolls.” Rather than seeking to place their technology in the hands of the public, patent trolls’ primary business model is to collect licensing and settlement fees through the power of a potential patent infringement suit or even initiate suit in some cases. A patent troll will typically stockpile patents only for potential litigation purposes. As patent trolls have continued to frustrate the business objectives of startups and their investors, the United States Patent and Trademark Office (USPTO) and White House have recently taken steps to make it easier to fight patent trolls.

In February, the White House launched a toolkit to help startups search government databases on patent trolls and patents. Many of the costs associated with fighting a troll come even before you gear up for litigation. First, time and money is spent attempting to learn the identity and nature of the entity that just sent your startup a cease and desist or demand letter.  Second, ascertaining whether a patent infringement threat has merit is difficult without the assistance of a patent attorney.

This refocus of resources and time is more costly to a startup then it would be to a larger company. Whereas a large company may decide to just close a certain business line to avoid suit, a startup’s future may rely on a single business line in the early stages. Also, unlike a large company, startups don’t have the luxury of spending company dollars to battle litigation. Typically, a startup budgets all of its early capital to fuel it until the next round of funding; hiring new employees, research and development, rent, and marketing are among the few costs that startups can afford with investors dollars.

Handling a Potential Patent Troll’s Cease and Desist Letter.

One issue with receiving a cease and desist letter is the difficulty in determining whether a patent troll or a more “reputable” entity is attempting to enforce its rights in a patent. The hope of the White House is that the new toolkit will streamline this process of “discovery” for cash-strapped businesses.

Prior to even analyzing an asserted patent (and therefore possibly engaging a patent attorney), a startup can learn much about the nature of a patent assertion. The following are steps you could take prior to bringing on a patent attorney to learn more about the threatening entity, its motivations, strategies, and capabilities:

1.   One of the first steps you should take in dealing with a potential patent troll’s cease and desist letter is to determine who the driving force behind the letter is. Many letters are sent by lawyers and do not identify the actual entity that owns the asserted patent(s). Learn as much about the entity as possible;

  • Review and utilize the new patent toolkit and search issued by the White House, which can tie asserted patents to the underlying entity.
  • Perform a Google search to learn additional information about the entity’s past activity.
    • Look for any blogs or stories; long standing patent trolls will typically have a lot of voiced opinions of them on the web. Many trolls are painted in a negative light and will be blasted by blogs across the web.
  • Have they been involved in past suits? What was the outcome of those suits?
    • If you find out that the troll sends hundreds of cease and desist letters but has never engaged in suit, you may be in luck. Some trolls issue letters with only the hope that some respond with potential settlements. They understand that they probably won’t win an infringement suit and hope to collect on any potential settlement.
  • Is the letter boilerplate? This can often be a telltale sign of a troll engaging in wide-ranging assertions, but perhaps not following through on any.

2.   Next, a recipient of a cease and desist letter should analyze the merits of the patent infringement claim. This will help you determine whether your startup may indeed be infringing. Determining whether a product or service is indeed infringing may not be as straightforward as it sounds. You should focus on what the claims define in the patent. The test is whether your product or service satisfies each and every limitation of a single claim of the patent. This process often requires someone experienced in construing patents to determine the specific meaning of the words used in the patent. You can search for patents through the USPTO’s website or through Google’s patent search.

Finding Help                                                                                            

Several law schools, law students, and lawyers have worked together to form the Law School Patent Troll Defense Network. App Developers AllianceThe network provides free legal services to app developers and other small business entrepreneurs that are threatened by patent trolls. Another form of help might come from others in your position. Sometimes multiple recipients of a common cease and desist letter can pool resources, as a cost and time saving mechanism, to analyze a patent. Also, shop around, some patent attorneys will have initial meetings for free and offer some initial impressions on a patent.


With President Obama emphasizing tackling patent trolls, hopefully they will become an issue of the past. Until then, your startup should initially take any cease and desist letter it receives seriously. Entirely ignoring a cease and desist letter is typically not the best option.  A startup will typically need to disclose any threatened litigation to investors.  If a startup has received a cease and desist letter, it will want to be able to explain to investors that nature of the letter, what the startup has done about it, and why the letter is without merit.  Investors want the cash they put in to spur growth and innovation, not cover hefty legal bills. Accordingly, investors will be weary of funding a startup that may have to battle a troll in litigation or that can’t credibly explain why such a battle is highly unlikely.


The Costs of Obtaining Patent Protection

Patent Cost Figure Updated

While the cost of obtaining a patent can be substantial, knowing what those costs are and when they are incurred can allow startups to appropriately fundraise and budget.

A patent can provide an entrepreneur numerous advantages. The most obvious advantage is a patent’s right to exclude (35 U.S.C §271(a)) that prevents a potential competitor from using the patented technology. Consequently, potential investors have greater confidence in investing in the new business.  However, obtaining a valid patent is a lengthy and costly process. [1] This post provides an overview of that process and the associated costs.

Provisional Application

As an entrepreneur having a great idea just starting a business, the cost of a full patent application can be daunting. A potentially cheaper alternative is to first file a provisional application. [2] If the startup is fortunate enough to have the Entrepreneurship Clinic, or another pro bono service provider, representing it in drafting a provisional application, it will only have to pay the United States Patent and Trademark Office (USPTO) the provisional application filing fee, which is $65 for a micro entity. [3] The USPTO does not examine provisional patent applications.  If the provisional patent application sufficiently describes and enables the technology that is eventually claimed in the full application, then the date of the provisional filing will count as the filing date for the full application.

Full Application Preparation and Filing

After filing the provisional application, the startup has 1 year to file a corresponding full application. A full application will likely cost significantly more than a provisional application because it must have formal drawings, claims, and other aspects requiring substantive input from a patent attorney.  Depending on the amount of time and effort placed in one’s provisional application, a full application will likely cost in the neighborhood of $10,000 to prepare. Accordingly, the filing of a provisional application often starts the clock ticking for an entrepreneur to raise funds to finance the preparation and filing of a full application.  Of course, the entrepreneur also has to pay the USPTO $365 for the filing fee, search fee, and examination fee. [4]

Patent Prosecution

In the unlikely event that the application is granted and issued without any examiner rejecting the application nor any need to amend, the entrepreneur will simply pay the $240 issue fee; and the patent will expire twenty years from the full application filing date conditioned on the payment of maintenance fee. If the patent gives the startup competitive advantages over its competitors, paying the maintenance fee of $400/$900/$1,850 due at 3.5/7.5/11.5 years after issuance should not be a problem.

However, no matter how well-drafted the application is and how innovative and nonobvious the technology is, the entrepreneur should not expect the PTO to grant the patent without making any amendment to the application. After all, the average pendency of a patent application from filing till issuance is more than 30 months. And, examination lasting for more than 10 years is not unheard of. [5] During examination, the examiner will likely reject claims on various grounds, such as the invention is not new (35 U.S.C §102), the invention is obvious (35 U.S.C §103), and the application does not satisfying the enablement and written description requirements (35 U.S.C §112). [6]

Fortunately, not all is lost when an application is initially rejected by the examiner. When the examiner issues the first rejection, the applicant can argue to rebut the rejection or can amend the claims without adding new matter to the specification.  A second rejection may be final though. When facing final rejection, the applicant can petition for reconsideration. And if the reconsideration is denied, the applicant can appeal to the Patent Trial and Appeal Board, previously known as the Board of Patent Appeals and Interferences. [7] The back and forth of rejections and amendments may cost the applicant in the range of $5,000 to $20,000 in attorney fees.

Foreign Applications

In order for an entrepreneur to obtain patent protection overseas, the entrepreneur has to consider filing a foreign application claiming priority to the US application under the Paris Convention within one year of the filing of the first US application, whether the first US application is a provisional or a full application. An entrepreneur has to file such a foreign application in each country where patent protection is sought. This is a costly process, in part because of translation cost, filing cost, and the cost of foreign counsels for each application in a foreign country. Also, such foreign filings are required before the US patent is even granted and is likely before the entrepreneur even receives the first office action from the PTO.

An alternative is for the entrepreneur to file an international/Patent Cooperation Treaty (PCT) application claiming priority of the US application within one year of the filing of the first US application.  Under the PCT, the applicant then has another eighteen months (nineteen for some countries) to evaluate whether and where to file national phase of the international application, thus delaying the associated costs. The entrepreneur may also be able to raise more money in the eighteen month period. One disadvantage of this alternative is that the additional cost of the international application (which is close to $1,000).


[1] Furthermore, the exclusionary right a patent grants requires a company to resort to litigation to recover monetary damages and to obtain injunction stopping competitors from infringing the patent. The US government will not proactively enforce a company’s patent rights. In addition, the exclusionary right a patent grants is not an affirmative right to practice an invention. It is possible, especially in the field of software inventions, that a company may have a patent on an improvement of an existing technology and yet is still unable to practice its invention without infringing another patent. The company is said to have a subservient patent and the patent on the existing technology is called a dominating patent.

[2] See The Risks of Using Presentation Slides as Your Provisional Patent Application for a discussion of what not to do when filing a provisional patent application.

[3] The blog assumes the startup qualifies as a micro entity for the rest of the post. The micro entity status entitles the startup to receive 75% discount for most of the USPTO fees. See Current Fee Schedule – Effective January 01, 2014 for all the current USPTO filing fees.

[4] The blog post assumes a utility patent is filed.

[5] For example, the first patent with Google as the assignee, aka the owner, was filed in 1999. It was only issued in 2013 as US Patent US 8,538,886. Even though a patent will expire 20 years from its application date, the patent term may be extended by “Patent Term Adjustment” because of certain USPTO delays. In the case of US Patent US 8,538,886, there is no patent term extension though.

[6] See Is Your Idea Patentable? for a discussion of what is and is not patentable.

[7] The renaming was necessary because interference proceedings are no longer available under the America Invents Act.