Provisional Patent Applications Provide Lasting Intellectual Property Protection

A provisional utility patent application, as opposed to a non-provisional utility patent application, is not reviewed by a patent examiner at the United States Patent and Trademark Office (USPTO), and therefore will not directly lead to the grant of a patent. So, why do we care?

Often entrepreneurs launch their startups with a concept or a prototype of an innovative product. Their business goal is to commercialize the invention. Before the product is ready to be introduced to consumers or an interested acquirer, it has to go through a stage of commercial viability testing or technical improvements. During this period of time, startups face the dilemma of how to protect their intellectual property (IP) assets with limited capital and human resources. The decision whether to file a costly non-provisional patent application is complicated by uncertainty about the patentability of the invention, a patent’s added value to the startup and the commercial prospect of the product. Under this scenario, a provisional patent application is a sensible alternative providing benefits that a non-provisional patent application may or may not have.

Priority Date

Currently the US adopts a first-inventor-to-file system in regard to right to patent. Without patent protection, an invention is subject to the risk of being copied or claimed by another party. Available to utility and plant patents but not design patents, a provisional patent application can be used to establish the priority date of an invention, the same as a non-provisional patent application. The priority date is the earliest filing date of a patent application and used to determine the right of priority over an invention through prior art search and obviousness examination. If a non-provisional patent application is filed within one year after the filing of a provisional patent application, the non-provisional patent application can claim the benefit of the priority of the provisional patent application filing date. Startups may use the one-year grace period to research the market potential for or make further improvements to their product. In addition, startups may file multiple provisional patent applications and claim the priority dates of all of them in a single non-provisional patent application.

One requirement for the priority date claim is that the later filed non-provisional patent application must be adequately supported by the description in the provisional patent application. Also, a provisional patent application cannot claim the benefit of the priority date of another provisional or non-provisional patent application. On the other hand, the patent term of a utility or plant patent is based on the earliest filing date of a non-provisional patent application.

Patent Pending Status

The filing of a provisional patent application will allow startups to use the status label “patent pending” to describe their product, the same as a non-provisional patent application. The “patent pending” status not only will afford IP protection to the invention, but also may carry advantages in various business undertakings such as marketing, venture capital financing, valuation of the company, and deterrence of potential competitors.


The cost of filing a provisional patent application is much lower than that of a non-provisional patent application for several reasons. First, since a provisional patent application is not examined, it will not incur USPTO fees in prior art search, patent examination and communications. The basic filing fee is low. For example, the electronic filing fee of a provisional utility patent application for a small entity, such as a business organization with fewer than 500 employees, is only $70.

Secondly, the examination process of a non-provisional patent application usually entails back-and-forth communications between the USPTO and attorneys that could drag on for a couple of years and result in significant attorney fees. In total, the process of obtaining a patent may cost up in the tens of thousands of dollars. Finally, entrepreneurs will have to spend time and energy working with attorneys throughout the patent examination process. All of this may strain the capital and human resources of an early stage startup.

Scope of Disclosure

Different from a non-provisional patent application, a provisional patent application does not have to include any claims, which makes it simpler to write and easier to avoid the problem of narrow characterization. A claim defines the scope of protection and therefore tends to limit patent right to an invention. If the claims are written in overly narrow terms, competitors may be able to design around a patent making it unenforceable. Therefore, it is generally recommended to use broadening statements and alternative languages in patent application drafting.

A recent ruling, The Regents of the University of California (“UC”) vs. The Broad Institute (“Broad”), from the Patent Trial and Appeal Board (PTAB) of the USPTO illuminates the importance of the scope of disclosure in patent applications to an inventor’s right to patent. This dispute involves a genome-editing technique called CRISPR-Cas9. The CRISPR-Cas9 system, similar to a cut and paste tool in a word processor, may be employed to modify the genome of an organism by permanently deleting dysfunctional genes or inserting beneficial ones, thus holding enormous potential for applications such as developing therapeutics for intractable human diseases or pest-resistant plants.

In this case, UC’s non-provisional patent application, which was filed earlier than Broad’s and based on four provisional applications, described the CRISPR-Cas9 system in prokaryotes−single-cell organisms without cellular nucleus, such as bacterium, while Broad’s patents demonstrated CRISPR-Cas9 in eukaryotes−multicellular organisms such as humans, animals and plants. PTAB declared that the two parties claimed distinct subject matter in their disclosures. Given CRISPR-Cas9’s potential in changing the landscape of biomedical innovation and both parties of this dispute have established startups to commercialize the technology, the PTAB ruling was widely considered a huge win for Broad.


The Basics of Patent Licensing

Part I: Is there an IP licensing opportunity?

Are you an inventor or an entrepreneur?

From KickStarter and Shark Tank to Tesla and Facebook, people are excited about innovation. Sure, Elon Musk and Mark Zuckerberg achieved incredible success, but their stories are one in a million. The truth is almost all startups fail. This article presents intellectual property licensing as an alternative to the startup route.

If you enjoy discovering customers, creating markets, and developing teams, then you may be an entrepreneur. A successful path may be to create a company and work on an exit strategy. On the other hand, if you enjoy discovering problems, creating inventions, and developing products then you may be an inventor. A successful path may be to create an intellectual property portfolio and work on a licensing strategy.


What can you do with intellectual property?

Intellectual property (IP) generally refers to creations of human intellect and creativity that governments reward by granting property-like rights to their creators. The basic types of IP are patents, copyrights, trademarks, and trade secrets. Patents protect new and useful inventions; copyrights protect original works of authorship; trademarks protect the goodwill of a business or brand; and trade secrets protect confidential valuable business information. For simplicity, this article focuses on licensing of product patents.

Assign a patent

An assignment is the transfer of IP rights from one owner to another, for example from an inventor to a company. This must be done in writing, and is often accomplished by language like “For good and valuable consideration I hereby assign all right, title, and interest in my Invention X to Company Y.” Assignments commonly occur when the assignor (e.g., inventor) prefers an immediate payment over a potentially larger but less certain payment in the future. Assignments are also common when the assignee (e.g., company) prefers to have control or ownership of the IP for strategic, accounting, finance, or tax purposes.

License a patent

Instead of “outright selling” IP rights as an assignment, an inventor may “lease” them as a license. IP Licenses are usually in writing due to their complexity, but they can be oral. The prototypical license establishes a running royalty to be paid by the licensor (e.g., company) to the licensee (e.g., inventor). Both parties may benefit from a license: the licensor can expect robust royalties if the invention achieves market success, and the licensee can expect not to pay royalties if the invention fails in the market.

Dedicate a patent to the public

An inventor can simply give away his IP or abandon it altogether. This is not generally a viable monetization strategy, but it may be a way to earn credibility as a prolific inventor or to absorb goodwill of a company who will put an invention on store shelves.


How are the relevant industries and markets configured?

Some inventions have a very specific market and an obvious distribution channel, for a non-stick frying pan. But some inventions span multiple markets, for example a low-friction coating. Understanding the markets are how they are configured can be a good starting point for licensing.

Non-exclusive license

A non-exclusive license gives a licensee the right to exploit the IP, but the licensor may grant additional licenses to others concurrently. This can be advantageous for a licensor when his IP improves a product made by several companies having roughly equal market share, for example computers or shoes. Several lower royalty-rate licenses to several companies can earn substantially more total royalty revenue than a single higher royalty-rate license to just one company.

Exclusive license

An exclusive license gives the licensee the right to exploit the IP, and the licensor may not grant additional licenses to any other party, nor may the licensor exploit the IP himself. Consequently, the royalty rate is usually higher than for a non-exclusive license. The scope of exclusivity can be based many parameters, such as field of use, geographic territory, or market channel. Exclusive licenses can be advantageous for both parties when the licensee is a large company with national or international channels to market. But they can be disastrous for a licensor when the licensee has insufficient market power to create or satisfy market demand.

Sole license

A sole license gives the licensee the right to exploit the IP while permitting only the licensor to continue to exploit the IP. This is an uncommon arrangement that sometimes arises in cross-licensing agreements (where two parties each have intellectual property that the other wants to exploit).


Hedge your bets against an uncertain future.

An inventor may believe in the long-term market potential for his invention, but he may be uncomfortable relying solely on speculative future earnings from IP licensing. In this case the inventor may wish to trade-off some running royalties (future) for an up-front payment (present). 

Up-front payment (lump-sum royalty)

An up-front payment, also called a lump-sum royalty, is a dollar amount the licensee pays to the licensor usually at or near the start of the license term. If the licensor suspects the IP is so weak that it may be easily designed around or that the technology is changing so rapidly that what is valuable today may be obsolete tomorrow, he may wish to trade-off running royalties for an up-front payment. On the other hand, if the licensee believes the market is unstable or consolidating or that the market is so competitive that a design-around is inevitable, it may wish to omit an up-front payment altogether. However, maximizing an up-front payment can be detrimental to both parties. It can limit how much cash the licensee has available to commercialize the invention, resulting in either poor execution and a product failure or slow time-to-market and a missed market window.

Running royalties

Running royalties are amounts paid to the licensor over time based on the revenue earned by the licensee from sales of products that embody the licensed IP. A licensor may wish to forego an up-front payment for higher running royalties if he believes the IP is so strong that it may never be designed around or that the technology is either unchanging or so fundamental that its value will endure. Similarly, a licensee may wish to offer an up-front payment if it believes the market is stable or growing or that it has so much market power that design-arounds are not a concern. However, maximizing the running royalty can be problematic for both parties. If the licensee erroneously assumes a rapidly growing market and continued market power, it may fail to achieve the economies of scale necessary to support the high running royalty.

Combination of up-front payment and running royalties

Up-front payments and running royalties are not mutually exclusive. It can be beneficial for both parties to balance these appropriately.


Part II: How to optimize an IP license?

What types of products will embody your IP?

Running royalties, commonly just “royalties,” are generally proportional to how well the licensee exploits the IP. The two most common methods to compute royalties are based on sales revenues (dollars) and based on units sold.

Royalties as a percent of sales

Royalties as a percent of sales—typically net sales and rarely gross sales—can be beneficial for licensors whose IP is embodied by expensive and low-volume products, or for products whose price is expected to increase over time. The percentage is normally fixed but can vary proportionally with sales volume.

Royalties per unit sold

Royalties based on the number of units sold can be beneficial for licensors whose IP is embodied by inexpensive and high-volume products, or for products whose price is expected to decrease over time. Like percent-of-sales, the per-unit rate is normally fixed but can proportionally with sales volumes.

Royalties per use

Technology that tracks user’s usage has given rise to royalty rates based on the number of times a product is used. Example uses may be when a user opens a smartphone app or when he queries a cloud-based server. The former is similar to royalties per unit whereas the latter is similar to royalties as a percentage of revenue.

Royalties per unit time (lump sum)

Sometimes it can be easier to compute royalties based on time, for example how long a computer program is active. Time-based royalties can use computed per month, minute, or any duration make sense.


What should you base running royalties on?

Licensors often focus on the royalty rate—believing higher is always better. But this is only half the story:

Licensor: “I’m so happy. I negotiated a 10% royalty rate!”

Friend: “Great! But 10% of what? Gross sales? Net Sales? Profits?”

Royalties based on gross sales

In most cases gross sales is simply the total of all invoiced amounts, in other words what the licensee charged its customers. It is rare to base royalties on gross sales, especially in industries like retail where it is customary for vendors (licensees) to pay for shipping, markdowns, and volume discounts.

Royalties based on net sales

Net sales is gross sales minus expenses related to the sale of products, for example shipping, returns, and trade allowances. This is the most common basis for royalty rates; however, it can be easily overlooked or misunderstood. A seemingly high royalty rate can be eviscerated by excessive deductions.

In many industries it is common to deduct the following expenses:

  • Volume discounts. These usually increase total sales and therefore both parties benefit.
  • Product returns. It can be unfair to pay a royalty on such an unprofitable transaction.
  • Product freight and insurance. Customary.
  • Local taxes. Customary.

A licensor should generally resist permitting the licensee to deduct of the following expenses:

  • Sales commissions. This can encourage a licensee to pay excessive commissions.
  • Marketing and/or advertising. These are normally the licensee’s costs of doing business.
  • Unpaid debts. The licensor should not be accountable for the licensee’s customer management.
  • Vaguely specified fees. Such catch-all categories can become sources of contention.

It is beneficial for a licensor to cap the total amount of deductions to some percentage of gross sales.

Royalties based on profits

Because there is so much variability in companies’ financial management and accounting, it is best to simply avoid using profits as the basis for royalties.


When should running royalties accrue?

A licensee almost always computes royalties when it ships goods, invoices for those goods, or receives payment from its customers. 

Accrue royalties on shipment

Computing royalties when products ship can be an attractive option for licensors who rely on royalty payments for cash flow. However, if net revenue is the basis for royalties and there are extensive or delayed deductions, then accrual on shipment can complicate bookkeeping. For example, if the licensee pays the licensor quarterly royalties but it credits buyers for volume discounts annually, then the licensor may need to pay back the licensee for royalties paid in excess.

Accrue royalties on invoice

Computing royalties when products are invoiced is very common because it provides a clear basis for computation—the invoice quantity or amount. In practice, sellers often invoice buyers shortly after they ship products, so there may not be much practical difference in timing between accrual on shipment and accrual on invoice.

Accrue royalties on payment

Computing royalties on payment uncovers a subtle issue—not only does accrual determine when the royalty payments become payable, but it determines what the royalty payments are based on. Royalties that accrue on payment are based on products the licensee sold and received payment for. In other words, if the licensee never receives payment from a customer, then the licensee will pay no royalties on those products. A good way for licensors to negotiate against accrual on payment is to remind the licensee it is the licensee’s responsibility to choose its customer wisely.


How to ensure your IP is adequately commercialized?

An IP license can be worthless if the IP is never commercialized. Licensees sometimes exclusively license IP to prevent that IP from being commercialized (called shelving), usually if the licensee wants to protect its own competing product. A licensor should negotiate for some sort of assurance that the licensee will work diligently to adequately commercialize the IP.

Milestone payments

If the license agreement is for an invention that requires significant time to commercialize, then it is customary for the parties to determine a schedule of milestones for the licensee to achieve. The licensee almost always pays the licensor a lump-sum amount for each milestone it achieves. The license agreement should clearly express what happens when the schedule slips for various reasons. Example milestones are “building a functional prototype” or “starting clinical trials.”

Minimum royalties

A minimum royalty is a quarterly or annual amount that the licensee must pay the licensor whether or not the licensee sells enough products to generate adequate royalties. This may be the most important provision of an IP license because it provides the licensor with some certainty for future income.

Minimum royalties align the parties’ expectations of the commercial value of the licensed IP. For example, assume the parties want an exclusive license for a simple invention having a market size around $10 million and agree to a 5% royalty on gross revenue. This should generate expected annual royalties of roughly $500,000. So if the licensee refuses to agree to a minimum annual royalties above $100,000, then it means the licensee may expect to capture just 20% ($2 million) of this market ($2 million * 5% = $100,000). In this case the licensor may want to propose a non-exclusive license with this licensee or to explore exclusive licenses with other companies who are more confident that they will fully serve this market.

Importantly, minimum royalties provide a straightforward way for to modify or terminate an agreement with an underperforming licensee. For example, if the licensee falls short of one minimum royalty payment then the license could convert from exclusive to non-exclusive; if the licensee misses two payment then the license could terminate. Minimum royalties are no guarantee of commercialization, though, because the licensee can usually just pay these minimums out of pocket—as long as it can afford to do so.


Who should get rights to improvements to the IP?

It is important to consider whether the IP may be further developed and by whom. Which party will own and/or have rights to such improved IP depends on many factors, including: (1) the size, sophistication, and business models of the parties; (2) the strength and maturity of the IP; and (3) the amount of research and development required to commercialize the IP. A reasonable rule of thumb is that the party who creates some improved IP owns that improved IP.

Retain ownership to improvements

A licensor whose business is creating and licensing IP may want to negotiate to retain rights to all improved IP created by either party. This prevents the licensee from inventing around the licensed IP and thereby undercutting the licensor’s business. A licensor may retain ownership of improved IP but agree to license it to the licensee at some fair market value.

Grant ownership to improvements

Most licensees want to own improved IP that its employees create or which it paid to have created. This is a reasonable expectation, especially when the licensee is in a better position than the licensor to file, prosecute, and maintain the improved IP. Further, a licensee may ask for an automatic license to all improved IP created by the licensor. While seemingly unfair, the licensee is simply protecting its investment in the licensed IP. This prevents the licensor from creating improved IP and then demanding additional royalties and/or up-front payments while threatening to take the improved IP to a competitor.

Agree that each party owns improvements it develops

Licensors and licensees generally operate at arm’s length and may therefore further develop the IP without regard for the other party. In this common situation each party pays to develop and protect the improved IP it creates, and consequently owns such improved IP. Whether the other party gets rights to the IP up for negotiation.


Employer-Employee Relationship Matters in Patent Ownership

When an employee creates an invention and later is issued a patent on that invention, does the employer get any rights to the patent? This might be a strange question to ask for some people, especially to those without expertise on patent law. They might take it for granted that an inventor owns all patent rights to his or her invention. However, this is not always the case.


Patent Law: Ownership is Different From Inventorship

A person must show that he or she contributed to the claims of a patentable invention in order to qualify as an inventor of the patent. By default, the inventor becomes the owner of the patent, but this ownership can be assigned away through a written document, or in some instances through an implied-in-fact understanding (discussed below).

It is the owner, not the inventor, who enjoys all property rights to the patent. With these property rights, the owner of a patent can license the patent to third-parties; sell the patent ownership; sue a potential infringer; and manufacture, offer to sell, sell, or use a product covered by the patent. If the inventor assigns his ownership to someone else, then he or she will not have any of these rights.


Ownership and Inventorship in Employer-Employee Relationship

The general rule is that the employee who creates an invention owns the patent rights to the invention. There are two exceptions to this general rule: (1) intellectual property (IP) was explicitly assigned to the employer or (2) the employee was specifically hired to create the invention at issue.

Explicit assignment of IP usually occurs in the form of signing an IP Assignment Agreement. The agreement would provide that all IP that the employee has created or may create in connection with the services provided to the company and/or derived from the company’s proprietary information shall be the property of the company. Different states have different laws regarding the scope of work that this assignment can cover. For example, California’s labor law stipulates that an employee owns the patent rights to his or her invention if the invention is made entirely on the employee’s own time, without using any of the company’s equipment or technology, as long as the invention (a) does not related to the company’s business, and (b) did not result from work performed by the employee “as an employee” of the company.

Even if an agreement was not signed between the employee and the employer, the employer might still have been assigned the patent rights if the employer explicitly hired an employee to invent the product that was patented. This arises from the implied-in-fact understanding that the employee was specifically hired and paid to create the invention and therefore, any fruition of patenting the invention should be the employer’s.


Where Assignment Has Not Been Made, Employer Might Still Have “Shop Right”

So is the employer completely without any remedy if the assignment scenarios above do not apply? Not if the employee used the employer’s resources, such as its computers or laboratories, to create the invention. A judge-made doctrine called a “shop right” allows employers to practice inventions created by employees that the employer helped to subsidize.

However, a shop right does not involve transfer of ownership. A shop right is basically a non-exclusive and royalty free license given to the employer. The employee still holds the ownership of the patent and is free to go to third parties and negotiate non-exclusive licenses. Also, the employer cannot sell or transfer this shop right to a third-party.

One important note: the shop right doctrine is not a substitute for an assignment. The doctrine is only a defense to patent infringement in court. In other words, it only arises in situations where the employer is sued by the employee for infringing the patent that the employee was issued by practicing the invention.


Implications for University Students and Faculty

Many startups are formed by the students and faculty of universities. Graduate students and faculty typically sign an IP assignment agreement with the university, which means that the employer-employee relationship discussed above is established. A good example of this relationship is Larry Page, one of the co-founders of Google, and Stanford University. As you can see from the excerpt of patent number US 6,285,999 below, the inventor of this patent that served as the foundation of Google was Larry Page. However, he was not the owner of the patent because he was a Ph. D. student at Stanford. As a result, the assignee of ownership was Stanford University, and the university received 1.8 million shares of Google stock in exchange for long-term license of this patent, which translated to $ 337 million.

Meanwhile, each university has its own policy regarding IP assignment of undergraduate students and other students who are not employees, but typically, universities do not seek to claim rights to patents issued as results of class participation. For example, the University of Michigan policy states that:

“The University will not generally claim ownership of Intellectual Property created by students. (A “student” is a person enrolled in University courses for credit except when that person is an Employee.) However, the University does claim ownership of Intellectual Property created by students in their capacity as Employees. Such students shall be considered to be Employees for the purposes of this Policy. Students and others may, if agreeable to the student and Tech Transfer, assign their Intellectual Property rights to the University in consideration for being treated as an Employee Inventor under this Policy.”


Advice for Startups

If you’re a startup, there are many other issues regarding IP that should concern you. Regarding the employee IP assignment issue, make sure that all employees sign IP assignment agreements. Litigation is expensive. You don’t want to go to a court to argue that you had an implied-in-fact assignment or that you have a shop right defense to infringement. IP assignment agreements are a lot easier.

Also, find out whether you are working with university faculty or grad students already in an employment relationship with a university. This pertains to your employees as well as independent contractors who will participate in creating inventions for the company. Your employee or independent contractor signing multiple IP assignment agreements could cause ownership problems further down the line.


The On-Sale Bar to Patentability: A Pitfall for the Startup

onsaleSales are generally a good thing. A startup company’s first sales of a new technology, “must-have” product, or innovative service are proof that the company has arrived. They can initiate a steady source of income and signal legitimacy to creditors, including friends and family who have kept the venture afloat through its early days. Most importantly, sales validate founders’ excitement for sharing their passion with the world.

But sales can also spell disaster. Due to a pitfall built into United States patent law, first sales of a product or service can prevent a startup from pursuing patent protection on its key technologies. Startup founders should be aware of the “on-sale bar” to patentability, which can kill an early-stage venture’s ability to attract investors and ground the company just as it about to take flight.


Getting to Know the On-Sale Bar

Patent protection is not usually the first thing on busy entrepreneurs’ minds. That is, until they begin seeking funds from investors. Venture capital firms, especially those investing in tech startups, often insist on robust patent protection before bankrolling a small company’s growth. This makes sense when one considers what a patent is: the right to exclude others from practicing the subject technology. Investing in startups is risky and expensive. Exclusivity reassures investors that they have a chance of recuperating their investments if the company ever gets up and running full tilt. That is why, for many, lack of patent protection is a deal killer.

As it turns out, those celebrated initial sales can doom the startup. Under American patent law, certain acts by an inventor can prevent him or her from ever patenting his or her invention. The Patent Act reads, in relevant part:

A person shall be entitled to a patent unless . . . the claimed invention was patented, described in a printed publication, or in public use, on sale, or otherwise available to the public before the effective filing date of the claimed invention.

35 U.S.C. § 102(a)(1) (2012). There is a one-year grace period built into this law. The upshot is that an inventor who places his invention “on sale” anywhere in the world one year or less before filing a patent application cannot obtain a patent on that invention. This means losing the exclusivity some investors demand.

Furthermore, the Supreme Court and the Federal Circuit have interpreted the law to mean that the on-sale bar applies where the claimed invention (1) is the subject of a commercial offer for sale and (2) is ready for patenting. With respect to the second prong, we can assume for our purposes that if a startup is selling its product or service, the technology at issue is mature and “ready for patenting.” But what about the first prong? When is a product or service “on sale” under the law? Startups should familiarize themselves with what constitutes an “offer for sale” and why our laws discourage patenting an invention that has been on sale for too long.


How Can Sales Be a Bad Thing?

Patent law reflects a quid pro quo between the inventor the public. In exchange for full public disclosure of new technology, the inventor gets a temporary exclusive right. The idea is that we can incentivize rapid technological innovation by granting a temporary “monopoly,” while the public receives technological knowledge and the certainty that comes with legal notice as to what it can and cannot do. The public also gets freedom to practice the technology after the patent term expires, when the invention becomes part of the public domain.

Once something is in the public domain, it is unfair to remove it. Imagine the uncertainty that would surround any new technology if it could be given to the public, then taken back. Anybody building upon known technologies to create the next big thing would be on shaky ground if an inventor could remove that technology from the public domain at any time, then threaten an infringement action. Such a policy would discourage the technological progress that the patent system was designed to promote.

Although we like the idea of incentivizing innovation, we are also fond of concepts like certainty and notice. This is where the on-sale bar comes in. Selling a patented widget to the public is, in effect, putting it out there for the public to see. And the business community wants to know what it can do with the widget. Can innovators invest huge sums of money around using the widget to make the next next big thing, or are their resources better spent on alternative approaches? The longer the widget is on sale, the more patenting it feels like taking it out of the public domain. Therefore, United States patent law does not allow inventors to commercially exploit their inventions for long before public policy demands they patent it or dedicate it to the public.


What the Startup Should Know

With the above discussed public policy in mind, below are some helpful guidelines entrepreneurs should remember to avoid falling prey to the on-sale bar:

  • Courts have signaled that they will look to the Uniform Commercial Code (UCC) when determining whether a communication rises to the level of a commercial offer for sale. A key feature of such an offer is that acceptance by the other party would create a contract transferring title of the goods. If the seller retains title to the goods themselves, a transaction might not constitute an offer for sale.
  • The invention itself must be the subject of the offer for sale. Offering to sell rights to the invention or promotional items related to the technology at issue won’t trigger the on-sale bar.
  • A finalized sale is not required. A mere offer for sale is enough to spell trouble. In fact, even a rejected offer has been held sufficient to bar a patent. Similarly, delivery is not required. For example, courts have held that a signed purchase agreement is enough to bar a patent, even when the subject goods or services are never delivered.
  • Conditional sales count too. The fact that a sale is conditioned upon the buyer’s satisfaction, for example, does not get around the on-sale bar.
  • The on-sale bar applies anywhere in the world. Under the old U.S. patent laws, which applied to patent applications filed before March 16, 2013, only offers to sell within the United States would trigger the on-sale bar. Today’s startups must proceed more cautiously. Under the America Invents Act (AIA), passed in 2011, the on-sale bar now has no geographic limitation. Offering to sell your widget in Nepal or on the internet can trip you up as easily as selling it from a booth down the street.
  • Secret sales may trigger the on-sale bar. Under the old patent laws, the “on sale” provision was interpreted as including secret or private commercial activity. It remains unclear whether the courts will interpret the “on-sale” provision in the same way following enactment of the AIA.
  • Even unauthorized third party sales may trigger the on-sale bar. This is important for a startup to keep in mind when entering into a manufacturing or distribution agreement.

Although these guidelines do not outline all the contours of the “on sale” provision, the take home point is clear. Startups with patentable technologies should not offer goods or services for sale to anyone, anywhere, before filing for patent protection. 


Startup companies considering patenting their products or processes should be cautious about offering to sell their products or services, in public or in secret. More precisely, if a startup’s founders envision fundraising through investors, they should make sure a patent application is on file before putting their company’s goods or services on the market, whether that be through a brick-and-mortar operation or, more likely, the internet. Taking precautions to secure patent protection now can help the tech startup avoid pitfalls, like the on-sale bar, that could keep it from realizing its long-term fundraising and development goals.


Hiring New Employees: Beware the Risks of Assignor Estoppel


A drawing included for the patent for a slinky (Patent #: US 2415012 A), issued in 1947.

Startup companies frequently hire new employees from established technology companies — or even competing startups. New employees often provide creative energy and technical expertise critical to the growth of a startup. However, new employees may also bring unforeseen liabilities as a consequence of their past employment. One such liability in the domain of patent law, called assignor estoppel, could prove hugely detrimental to a startup in potential patent disputes down the line.


Patent Basics

Patents provide their owners exclusive rights to exclude others from practicing the invention detailed in the patent. Patents can cover a huge swath of technology areas ranging from pharmaceuticals to software. The Patent Office has even issued a patent on a method of swinging a swing.

All patented inventions must have an inventor or a set of inventors, but the inventor can assign, or transfer, her rights to the patent to another person or entity. Most commonly, this occurs when an employee at a company invents something during the course of her employment. Many employers require employees to assign all of their intellectual property rights if the intellectual property connects to the employee’s work at the company. As patent applications have flourished in recent years, particularly in the field of software, many technology employees have pending or issued patents that are assigned to previous employers.

Once a patent has issued, patent owners can sue others who infringe the patented invention; these cases generally arise in federal district courts. Defendants battling against patent owners in these cases typically have two primary lines of defense: non-infringement and invalidity. Non-infringement means that the defendant did not actually practice the invention and thus did not violate any of the patent owner’s rights. Invalidity, on the other hand, means that the Patent Office should have never issued the allegedly infringed patent in the first place, because the patent did not satisfy the criteria necessary for a valid patent. Increasingly, district courts have been invalidating patents, particularly software patents deemed to cover un-patentable abstract ideas.


Assignor Estoppel

The rise of patent invalidations has rendered invalidity defenses invaluable weapons in defendant companies’ arsenals. But the doctrine of assignor estoppel can eliminate a company’s invalidity defense, potentially subjecting a company to millions of dollars in patent damages.

Assignor estoppel poses the following proposition: If an inventor files an application for a patent and assigns his patent rights to someone else, he cannot later claim that his assigned patent is invalid during a district court battle. Essentially, the doctrine prevents inventors from patenting an invention and later claiming that the patent is worthless.

For example, an inventor may create a new software application and then assign his patent rights to a large company in exchange for money. Later, the inventor may want to sell the software application to others, even though he assigned away his patent rights already. If he sells the application anyway and thus infringes the company’s patent, assignor estoppel will prevent him from trying to invalidate the patent if the company sues him.

This doctrine can also apply to the new employers of inventors as well. For instance, if the inventor in the previous example joined a new company (Company B) and helped that company develop a competing application, the original company with the patent rights (Company A) might sue Company B. During the ensuing district court battle, Company B may be prohibited from raising an invalidity defense because its new employee has infected his new employer with assignor estoppel.

Assignor estoppel will transfer from a new employee to his new company if a number of factors are met. Some of these factors include the employee’s leadership role at the new company, the employee’s role in allegedly infringing activities, and the employee’s ownership stake in the new company <>. Roughly, employees with larger influences at their new company pose a higher risk of infecting their new employer with assignor estoppel. At small startup companies, this risk can be significant and pervasive.


Nipping Assignor Estoppel in the Bud

So how can startups hedge their risk against a potentially “infectious” employee and secure the availability of legal defenses in patent suits should the need arise? Here are a few tips that entrepreneurs and startups should consider when hiring new employees or taking on additional founders:

  1. Have new founders and employees sign a form that assigns to the company all of the employee’s intellectual property rights that relate to the company’s business.
  2. Ask new founders or employees if they have any issued patents from when they worked at previous employers. Most companies require employees to assign their IP rights, but some employees may not remember that they assigned their patent rights to a previous employer. Consequently, you should search for any issued patents or published pending patent applications with the prospective employee’s name on them.
    1. If a prospective employee has issued patents or pending applications assigned to a competing company, ensure that your new products will not infringe or potentially infringe these patents. It may be prudent to enlist the services of a patent attorney to counsel the company on potential litigation risk relating to these patents.
    2. If the prospective employee will have a leadership role or ownership stake in the startup, the risks of assignor estoppel will be higher. If, however, the employee won’t be working on product development and receives no equity, the risks of assignor estoppel, while still potentially present, will be lower.

Hiring great employees involves a number of important considerations completely divorced from legal risks down the line. However, an employee’s prior patent assignments can create huge legal risks for burgeoning startups. Consequently, startups should be mindful of these risks when making hiring decisions.


Keeping Public Disclosure Risks in Perspective

Publicly disclosing a patentable invention prior to filing your patent application has its risks, but startups need to keep these risks in perspective.

Publicly disclosing a patentable invention prior to filing your patent application has its risks, but startups need to keep these risks in perspective.

Start-ups must at once protect their valuable intellectual property and promote their product to customers and investors. These two functions—protection and promotion—are often in conflict, especially for a start-up in its early stages. At large, publically traded corporations, intellectual property protection is usually automatic. While large corporations generally have several bureaucratic levels of decision-making related to patent protection, they also have the resources to promptly file patent applications when necessary. Many start-ups have neither the institutional knowledge nor the capital to file a patent so quickly.

But more often than not, start-ups also do not have the luxury of suspending business activities until they have enough capital to seek intellectual property protection on their products. In today’s booming tech economy, delaying critical business even a few weeks might position a start-up perilously behind its competitors. So start-ups are forced to disclose their products and technology to potential customers and investors without the critical safety net of a filed patent application. A start-up may have to disclose certain aspects of its technology at pitch competitions or to venture capitalists, and it certainly must test iterations of its product with small groups of consumers prior to a larger product launch. Each of these activities may constitute a “public disclosure” under 35 U.S.C. § 102 and affect the future patent rights of both the start-up and other parties. And even apart from the legal consequences, start-ups may have an incentive to keep their secret to success hidden from the prying eyes of potential competitors.

What is a public disclosure?

A public disclosure is any (1) non-confidential communication, (2) which an inventor makes to one or more members of the public revealing the existence of his invention, and (3) enabling a person having ordinary skill in the art to reproduce the invention.

(1) Non-confidential: generally, a communication is non-confidential if it does not require secrecy by the person receiving the communication. If the person receiving the communication has, for example, signed a non-disclosure agreement (NDA) covering the subject matter of the invention, then that communication is likely confidential and would not be considered a public disclosure.

(2) To the public: a communication need not be made to a large group of people to be “public.” A communication about your invention to a single person, without the expectation of secrecy, could be considered public.

(3) Enabling: a communication regarding one’s invention is “enabling” if it is detailed enough to allow someone with expertise in the subject matter to create the invention. For example, a communication listing the components in an invention and describing how those components are put together would likely be enabling. In contrast, simply naming one’s invention would likely not constitute enablement.

Examples of public disclosures include articles in scientific journals about the invention; abstracts, posters, and presentations; and even the public use or sale of the invention.

What are the consequences of a public disclosure?

Publically disclosing an invention has a number of business and legal consequences. First, after making a public disclosure, an inventor has a one year “grace period” during which to file a U.S. patent application. After that grace period has expired, the inventor can no longer obtain a patent on the disclosed invention. Fortunately, third-parties do not have this same grace period. Once an inventor publically discloses his invention, that disclosure serves as prior art against all other parties seeking to patent the same invention.

What, then, is the risk of publically disclosing an invention? On its face, a public disclosure seems like a win-win scenario—the inventor is allowed a grace period to file a patent on his invention, and all other parties are hypothetically barred from obtaining one. That thinking isn’t totally incorrect. Publically disclosing an invention does provide an inventor some protection. But consider these scenarios:

(1) A third-party uses an inventors’ disclosure to create a similar but not identical invention that does not infringe but performs substantially the same function.

(2) The inventors’ disclosure is not specific enough to meet the enablement requirement but nonetheless incites a third-party to innovate in the same area and enter the market.

In both of these circumstances, the inventor has given potentially valuable information to a competitor who could beat the inventor to market. But in the context of an early stage start-up, sometimes it is necessary to take this risk. For example, when a venture capital (VC) firm is vetting a start-up in preparation for a potential round of financing, it will certainly want to learn as much as possible about the technology or product that forms the foundation of the start-ups’ business. This may require a non-confidential disclosure to the VC firm, especially since VC firms tend to be averse to signing NDAs. If the start-up wants to secure financing, this disclosure is necessary and usually an acceptable business risk. Similarly, most start-ups will at some point in time need to test their product with a group of consumers before taking the product to market. This testing likely constitutes a public disclosure, and it may be cumbersome to have each and every consumer who tests the product sign an NDA. Again, this may be a tolerable business risk for a start-up.

How can a start-up mitigate the risks of a public disclosure?

There are several steps that a start-up can take to mitigate the risks of a public disclosure:

  • File a provisional patent application prior to the disclosure. Provisional patent applications are substantially cheaper than standard utility patent applications and can be prepared by the inventor or an attorney. A non-provisional application must be filed within 12 months of the provisional application, or the provisional application is abandoned.
  • If practical, ask the receiving party to agree to an NDA.
  • If a public disclosure is a necessary business risk and a patent application has not yet been filed, make sure the disclosure is as broad and non-specific as possible. A broad disclosure will likely not enable another party to copy your invention. In many cases, the specifics of the technology do not need to be disclosed. One can rather talk about the problem, the market opportunity, and other aspects of the business.

Generally, taking these steps will be sufficient to protect a start-ups’ patent rights in the U.S. While filing a patent application offers the best protection, disclosures without one are sometimes a necessary business risk. But the content of a disclosure can be limited in a way that does not affect the patent rights of the start-up and will not allow potential competitors to benefit from it. Even in cases where a competitor is able to glean some useful information from a disclosure, the start-up likely has a major head start in getting to market with a viable product.

Moreover, even if a startup loses foreign rights in a patent, a U.S. patent is often a good starting point, allowing the start-up to later pursue international patent protection on new creations and improvements.


Why Should You Consider Filing A Provisional Patent Application


Provisional patent applications can help entrepreneurs beat the clock by establishing important filing dates

Provisional patent applications can help entrepreneurs beat the clock by establishing important filing dates.                                             Image by opensourceway.

Since March 16, 2013, the United States switched from a first-to-inventor to a first-to-file patent system, which means the first inventor to file an application (but not necessarily the first to invent), gets the patent. As a result, it is important to file a patent application to claim priority over the invention soon after the invention is conceived (i.e. once the inventor has created a definite and permanent idea of the complete and operable invention) and capable of being described. Moreover, having an invention that is patent-pending adds value and credibility to a business, which helps the business seek additional financing.

However, filing a regular patent application (i.e. non-provisional) can be very expensive, ranging from several thousand dollars to over twenty thousand dollars, which is often outside a business’ budget, especially in its early stages. Additionally, a non-provisional patent application is examined by the Patent & Trademark Office and an applicant’s responses to the examiner’s rejections also incur significant legal fees. This is where a provisional patent application can come in handy. A provisional patent application allows you (the inventor) to claim priority to the invention (and claim that you have a “patent pending”) and push off some of the costs associated with a non-provisional application.

What is a provisional patent application?

A provisional patent application is a temporary patent application that includes the specification of the invention, including sufficiently detailed description and drawings to allow another to make and use the invention. The drawings can be hand-drawn or computer-created (though the latter may be better for business reasons). Moreover, the applicant does not need to draft any patent claims. Because there is no examination of the patentability of the provisional application at the USPTO, the filing fee is relatively low – $65 for micro entities, $130 for small businesses, and $260 for all others. Although ultimately you will need to file a non-provisional patent application in order to obtain a patent in the United States, the provisional application allows you to (1) have an effective filing date that a later non-provisional patent application, filed within 12 months, can claim priority to and (2) say that you have a “patent pending”, which can add more value to your business.

What are the benefits of applying for a provisional patent?

One of the key benefits of a provisional application is that it has few formal requirements, which can translate to a lower cost of obtaining early protection for your invention. As mentioned above, a provisional patent application does not require disclosing any patent claims. Because there is no examination process, an applicant will not have to incur legal fees in responding to “office actions” until after a non-provisional application is filed.

A related benefit of the provisional application is that it allows you to delay filing a non-provisional application for 12-months. A successful and valuable invention is often a work-in-progress, and this grace period can be very valuable for evaluating the merits of the invention and making improvements. While aspects of your invention may be sufficiently concrete and detailed for you to seek protection for, there are still parts that you may want to research and develop. One flexibility to a provisional application is that when you file a non-provisional application, you can claim the priority to multiple provisional applications so long as they are within the 12 months prior to your filing date. In other words, you can combine multiple iterations of your invention into a single document, which is beneficial if you’re still in the processing of developing and perfecting your invention.

In addition, this 12-month grace period can be especially helpful for small entrepreneurs or businesses that do not have the funds upfront to afford filing a non-provisional application. As mentioned earlier, the cost of filing a provisional application is relatively low, especially if you qualify as a micro-entity. Provisional applications allow you to immediately establish a filing date for your invention and to begin promoting and seeking additional funding for your invention without the worry that by disclosing your invention to others, you may lose your claim to your invention. Because the “novelty” of your invention is generally judged as of your filing date, this early filing date can have enormous benefits. By filing a provisional application (and within 12-months, the non-provisional application), if a patent is issued, you can claim priority to the date you filed the provisional application and exclude others from making, using or selling products that embody your invention.

What are the risks of filing a provisional patent application?

While a provisional patent application does not require many of the formalities (such as patent claims or formal drawings) of a non-provisional application, it still must be drafted with care. The provisional application must sufficiently enable and describe the invention that you will later claim in your non-provisional application. If the provisional application does not provide adequate description to enable the claims in non-provisional application, the claim will not be able to benefit from the provisional filing date. As a result, a public disclosure after the filing of the provisional application but before the filing of the non-provisional application could invalidate the claims. For more information about the risks of filing a provisional patent application, see our prior post on the risks of filing a “cover sheet provisional” application.

What are the next steps after filing a provisional patent application?

One important point to keep in mind is that filing a provisional patent application is just the first step towards obtaining protection for your invention. Ultimately, you still need to file a non-provisional patent application to obtain a patent, and to take advantage of the earlier filing date of the provisional application, you must file a non-provisional application within 12-months. Thus, if you’re planning on referencing multiple provisional applications, the critical date you want to file your non-provisional application by is 12-months from the filing date of the earliest provisional application to which you want to reference.

Lastly, so long as you do not run afoul of any of the statutory bars (e.g. offering to sell the invention or publicly disclosing the invention), even if you cannot file a non-provisional application within 12-months and claim priority to it, it will not cause you to lose what you have disclosed in your application because the provisional application is not published.


Avoiding Inequitable Conduct and Meeting the Duty of Candor and Good Faith

If entrepreneurs are not careful in their communications with the Patent Office, their valuable patents may later be found to be worthless.

If entrepreneurs are not careful in their communications with the Patent Office, their valuable patents may later be found to be worthless.

What is Inequitable Conduct?

As a fledgling startup, maximizing the value of the company is important when attempting to obtain early funding. For many startups the lion’s share of their value comes from their intellectual property. Obtaining and keeping that IP is critical. With that in mind it becomes crucial for entrepreneurs to consider issues of inequitable conduct and duties of disclosure when applying for patent protection for their intellectual property.

Inequitable conduct is a judge-made doctrine that allows the court to render a patent unenforceable if the patentee engaged in certain prohibited conduct during the application and prosecution of a patent. Inequitable conduct requires the patentee to intentionally misrepresent or omit material information from the patent office, as discussed here. This includes:

  • Failure to submit documents, including material prior art known by the applicant or explain/translate foreign language references
  • Misstating facts or affidavits of patentability
  • Incorrectly or incompletely identifying inventors

Further, the USPTO has enacted Rule 56, which holds that “each individual person “associated with the filing and prosecution of a patent application has a duty of candor and good faith in dealing with the Office, which includes a duty to disclose to the Office all information known to that individual to be material to patentability.”

In the case of withheld prior art, under the Therasense standard, a defendant would need to show that a plaintiff patentee or their counsel:

  • Intentionally withheld or misrepresented information; and
  • The information was material.

To be material the defendant must show that the patent would not have been granted “but-for” the omitted prior art.

The penalty for inequitable conduct is invalidation of the entire patent. In addition, the lawsuit often becomes “exceptional” which can force the losing party to pay the other side’s attorney’s fees.

Defending against a charge of inequitable conduct can significantly increase the costs of litigation and patent ownership, even if one defeats the charges.

How Do I Avoid it?

First and most importantly, it is imperative that a startup ensure correct inventorship on any patent application. USPTO rules require all inventors to be listed on the patent application. An inventor is any person that participated in conception of the invention. That is, anyone who helped come up with the idea and form of the invention. Persons who simply helped build the prototype or who contributed ideas and knowledge that was not used in the version that is being patented need not be included.

Startups often have numerous founders or others who are involved in the conception of an invention. Be sure to keep track of these people and name them on the patent application. Further, do not intentionally omit a person who should be listed as an inventor in an attempt to avoid ownership issues (for example if a professor assisted in creating an invention and the startup is concerned about the University claiming title). While it may be the easier solution now, it risks the entire patent being unenforceable later.

Second, entrepreneurs must be diligent in preparing their application or in working with their counsel to prepare an application to ensure all prior art known is considered and disclosed if relevant. The USPTO does not require applicants to perform prior art searches, so applicants and their attorneys are only responsible for disclosure of prior art that is known to them. However, it is the responsibility of the applicants to ensure that no relevant information is being withheld.

If in doubt about the materiality of a reference, it is always better to err on the side of disclosure. Further, the duty of disclosure extends through grant of a patent, and if any prior art becomes known to an applicant it should be disclosed to the USPTO. Keep in mind that the duty of disclosure extends to the inventors, their counsel, and anyone involved in preparation of the application or anyone to whom there is an obligation to assign the patent. Entrepreneurs should be sure to check with every person meeting those criteria to ensure no prior art is being withheld. Keeping records of any prior art searches and of personnel having knowledge of an invention is extremely helpful when it comes time to apply for a patent.

Finally, the new patent reform act created a new administrative procedure called supplemental examination. This procedure can be used to cure inequitable conduct for a patent that has issued. A patentee may present new information to the USPTO and the examiner will consider whether the patent should have been issued in light of the information. If the patent is allowed in light of the new information, it cannot be later held to be unenforceable due to failure to disclose that information in the original application (but could still be held unenforceable for failing to disclose other information that was not included in the supplemental examination). Essentially it is a patent amnesty program. Entrepreneurs who have already obtained patents and are concerned about inequitable conduct should speak with counsel regarding supplemental examination.

By keeping records of the persons involved in conception of a new technology and their roles, as well as keeping track of what references were consulted or searched, it can save time and headaches when it comes time to apply for a patent and can make all the difference if the patent one days ends up disputed in court. For those entrepreneurs who already have a patent and are concerned about false or omitted disclosures, supplemental examination can be extremely useful.


Trade Secret vs. Patent Protection for Software Startups

In light of recent changes in the law concerning software patents, software startups should more heavily consider trade secret protection to protect their technological and operational advantages.

In light of recent changes in the law concerning software patents, software startups should more heavily consider trade secret protection to protect their technological and operational advantages.

So you’ve launched a software startup. You know that if you are to have any hope of becoming the next Google, Facebook, or Twitter success story, you need to take steps to protect your technology and your brand. Making the choice to invest some resources into obtaining intellectual property protection can be a great decision, but the specifics of how to carry out such a plan might be a little elusive. The question is what kind of protection do you actually need, and how do you go about getting it.

Two types of IP protection that most startups will want to consider are patents and trade secrets. What works best will vary from startup to startup depending on each ones own unique circumstances. However, there are several factors that all startups will want to consider when implanting an intellectual property protection strategy. First, let’s consider the basic types of IP protection that the patents and trade secrets provide, and then we can better understand factors that might encourage you to choose one or the other.


One type of IP protection that most people have heard of but few people fully understand is patent protection. There are several categories of patents, including utility patents, design patents, and plant patents. Plant patents and design patents give inventors rights in specific areas as defined by statute. However, the most common type of patent is the utility patent.

Utility patents grant the holder an exclusive monopoly on inventions of “new and useful process, machine, manufacture, or composition of matter, or a new and useful improvement thereof.” For example, someone could obtain a patent on a new and improved hair trimmer as long as it was different than and not obvious in light of previous hair trimmers. Last year, over 500,000 utility patent applications were filed at the U.S. Patent & Trademark Office.

Patents, utility patents in particular, enjoy popularity for several reasons. First, they grant the rights holders a very strong form of protection. This protection – the right to prevent others from making, using, selling, offering for sale, or importing the patent holder’s invention – is given in exchange for a publication that explains how to make and use the invention. After twenty years anyone is allowed to make and use the invention. When considering whether or not to apply for a patent, a software startup should evaluate whether or not the exclusive protection is worth having in exchange for giving up their invention after twenty years. In many instances, this will be a good tradeoff to make given the rapidly evolving world of software and technology.

Another benefit of utility patents is that the patent holders will not lose their rights due to the actions of third parties, assuming that they justly received the patent in the first place. This may not necessarily be true with trade secret protection. For example, a person who has trade secret protection in a manufacturing process can not prevent a third party from independently discovering and using such a manufacturing process. But if the original inventor of that manufacturing process acquired a patent, the third party could not use the process even if they independently discovered it (assuming that the patent holder had a valid patent that was not acquired through fraud).

While there are some significant upsides to obtaining a patent, there are costs as well. One downside that was already mentioned is the limited duration of patents. Another potential downside is the cost and difficulty of obtaining a patent. As discussed in our recent post, in recent years, it has become more and more difficult for inventors to obtain patents on software, and the scope of granted software patents may be more limited. Getting a patent can also be quite expensive. Depending on how many jurisdictions (i.e., countries) your startup is applying for patents in, the price tag can reach into the hundreds of thousands of dollars. See our prior post outlining the costs of obtaining patent protection.

Trade Secrets

Unlike patents, trade secrets are creatures of state law rather than federal law. This means that specific trade secret regimes will vary some from state to state; however, there are generally accepted principles regarding how trade secret law should work. One attempt to compile some of these generally accepted principles is the Uniform Trade Secrets Act. This document defines trade secrets as follows: “’Trade secret’ means information, including a formula, pattern, compilation, program, device, method, technique, or process, that: (i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.” In short, a trade secret is information that is valuable because it is kept secret. State laws prevent the “misappropriation” of trade secrets. This basically means that people aren’t allowed to steal your secret sauce. They can, however, independently create or reverse engineer it. This is one of the main disadvantages to trade secrets.

There are several benefits to weigh this disadvantage against when considering whether or not to rely upon trade secrets as your chosen form of IP protection. One benefit is that trade secrets can be relatively cheap compared to patents. There are no government filing fees for trade secrets, and the main costs result from taking measures to make sure your secret information remains secret. Trade secrets also can last forever assuming the information remains secret. This can be advantageous if you believe your invention will have commercial value for a long time to come.

Choosing Trade Secrets or Patents

One form of protection or the other will not be right for every startup. The following are some factors to consider when choosing between the two: (1) Will the invention be useful beyond 20 years? (2) Is it possible for companies to reverse engineer the invention? (3) Is the invention likely to be discovered independently in the near future? (4) Can you afford more expensive patent protection given your goals? (5) What is the risk that competitors design around a patent? (6) Are you interested in licensing/cross-licensing with competitors? (7) Would you be able to detect if someone was infringing your patent?

Let’s look at a couple of examples in order to understand how these factors can play out.

Example 1:

A software startup has developed a technology that has never been seen before, but as soon as you sell it, everyone will understand how to make it. They believe that this technology will be relevant for 5-10 years, but are not sure beyond that. Finally, the startup thinks there a lot of potential competitors who will likely be interested using this technology.

In this example, the startup would likely want to obtain a patent because all the factors lean in that direction. It will be easy for other competitors to develop similar products once they see the startup’s new technology; this will greatly reduce if not eliminate the value of any trade secret protection. The indefinite duration of trade secrets wouldn’t really be that valuable even if competitors couldn’t reverse engineer the product. The technology will only be relevant for 5-10 years, well less than the time frame protected by patents. Finally, because there are a lot of potential competitors that might be interested in using the technology, the startup could potentially operate on licensing business model to obtain revenue or cross-licenses.

Example 2:

A software startup has made a discovery that they believe is so foundational in nature that they believe it will revolutionize the industry for many years to come. They’re a little low on cash right now, but they expect that to turn around in the next year or two. Finally, the discovery should improve the ease with which current products are made, but the final products themselves won’t necessarily be changed.

In this example, the startup will likely choose to rely on trade secret protection. Given the foundational nature of the discovery (think F=MA2 rather than a bulldozer applying the principal of F=MA2), it is not even clear that the discovery would be patentable.  Further, the startup does not have a lot of money to try and convince the USPTO that the discovery is in fact patentable. Finally, it looks like the manufacturing processes for widgets will change, but this will not be detectable in the final widgets themselves. Thus, it might be very difficult to tell if a competitor was infringing a patent. Relying on trade secret protection will mitigate these concerns and allow the startup to profit for the discovery for many years to come.

It is important to note however, that deciding between a patent and trade secret does not necessarily have to be an either or proposition. It might be possible to go the trade secret route at first, and then obtain a patent further down the road. However, this is a one way street. Once you obtain a patent, you can never go back and rely on trade secret protection. Also, you can split up various aspects of your business. Certain aspects of the business might be appropriately covered by patents while other aspects would be great candidates for trade secret protection.


Startups creating an IP protection strategy should make decisions in light of their business model and technology. If it is not a clear decision to go one way or the other, the startup will need to make a calculated decision as to what factors are more important to them. Finally, when appropriate, startups should consider using patents and trade secrets in a hybrid form of protection.


Biotech Ventures Beware! The Industry May Need a Different Kind of Cure.

Last year's Supreme Court decision in Myriad and the USPTO's subsequent change to its examination guidelines make it more difficult to protect certain biotech innovations

Last year’s Supreme Court decision in Myriad and the USPTO’s subsequent change to its examination guidelines make it more difficult to protect certain biotech innovations


On June 13, 2013 the Supreme Court handed down its decision in Association for Molecular Pathology v. Myriad Genetics, Inc.. In this landmark decision for life science patents, the court held that a “naturally occurring DNA segment is a product of nature and not patent eligible merely because it has been isolated.” In so holding, the court weaved a fine line between unpatentable subject matter – the long-standing rule that “laws of nature, natural phenomenon, and abstract ideas are not patentable,” as they are not any single inventor’s creation, but rather are the “tools of scientific and technological work,” – and patentable subject matter. The court indicated that “the rule against patents on naturally occurring things is not without limits, for all inventions at some level embody, use, reflect, rest upon, or apply laws of nature, natural phenomenon, or abstract ideas, and too broad an interpretation of this exclusionary principle could eviscerate patent law.”  After Myriad, practitioners were uncertain as to whether Myriad specifically made genomic DNA unpatentable or whether other “naturally occurring” entities were also unpatentable.

On March 4, 2014 the United States Patent and Trademark Office (U.S.P.T.O), the regulator of U.S. patent grants, issued guidelines determined to shed clarity on this Myriad ambiguity. In these guidelines, the Deputy Commissioner for Patent Examination Policy identifies 12 factors that must be considered by a patent examiner in determining whether the invention is “naturally occurring.” Some of the factors that weigh in favor of eligibility are:

a)  Claim is a product claim reciting something that initially appears to be a natural product, but after analysis is determined to be non-naturally occurring and markedly different in structure from naturally occurring products.

b)  Claim recites elements/steps in addition to the judicial exception(s) that impose meaningful limits on claim scope, i.e., the elements/steps narrow the scope of the claim so that others are not substantially foreclosed from using the judicial exception(s).

c)  Claim recites elements/steps in addition to the judicial exception(s) that relate to the judicial exception in a significant way, i.e., the elements/steps are more than nominally, insignificantly, or tangentially related to the judicial exception(s).[7]

Some of the factors weighing against patentability are:

g)  Claim is a product claim reciting something that appears to be a natural product that is not markedly different in structure from naturally occurring products.

h)  Claim recites elements/steps in addition to the judicial exception(s) at a high level of generality such that substantially all practical applications of the judicial exception(s) are covered.

i)  Claim recites elements/steps in addition to the judicial exception(s) that must be used/taken by others to apply the judicial exception(s).[8]

The large number of factors and their inherent ambiguity have resulted in unpredictable examinations. Practitioners have been surprised to receive 35 U.S.C. § 101 rejections, when they were expecting patent issuance notices for molecular biology and non-molecular biology based inventions alike. Patent examiners have thus been effectively reading Myriad’s prohibition on “naturally occurring” as not limited solely to DNA-based inventions. As pointed out in a recent article, what’s more is that products that are derived from a naturally occurring product might be considered to be naturally occurring as well, further stifling patent protection for life science inventions.

The result has been a siege of the biotech and pharmaceutical industries. For an industry so reliant on patent protection, that is fixed with high upfront research and development costs, patent ineligibility is a real scare. If these guidelines stand, the industry can no longer be assured that their R&D expenses will pay off down the road.

However, the Myriad-Mayo Guidelines have themselves also been under threat from those companies and practitioners most affected by them. July of this year marked the end of the public commenting period, in which biotech and pharmaceutical companies as well as universities voiced their consternations with the Myriad-Mayo Guidelines. The vast majority of the comments were extremely critical of the guidelines, incentivizing the USPTO to revise the Myriad-Mayo Guidelines. The revision is currently underway and it will be important for life science based startup companies to watch for what occurs at the USPTO in the immediate future. Will the USPTO cure the patent illness it began? Patent protection for your start-up may be at stake