Entrepreneurs - 2 Simple Questions Will Determine Whether IP Strategy is Critical to Your Business

Intellectual property ("IP") is often a subject that is "out of sight, out of mind" for entrepreneurs who are launching new business ventures. And, why shouldn't it be: business schools rarely teach much about law in general, let alone about the highly specialized world of IP law. Since non-business school trained entrepreneurs generally take their cues from the methods of their colleagues, it can be said that a significant majority of entrepreneurs do not consider IP to comprise a necessary step when they are formulating their business plans. My conversations with entrepreneurs over the years bears this out.

When IP does form a fundamental basis of an entrepreneur's new venture, it is likely because scientific or technical subject matter forms the basis of the business. In this context, it makes sense that the scientific or technical subject matter core of the business model must be protected by seeking patent protection. In my opinion, this is a far too narrow view of when a new entrepreneurial concept requires IP protection, however.

Put simply, an entrepreneur needs more than a yes or no decision centering on whether she should obtain one or more patents to protect her idea. Rather, prior to launching her new business venture, an entrepreneur must develop and execute on a business strategy focused on determining whether she needs to pursue IP protection in order to meet her goals.

While IP can seem somewhat arcane and impenetrable to people who have not been trained in this specialized legal area, fortunately, formulation of a strategy requires an entrepreneur to ask just two simple questions:

What aspects of my business model differentiate me from my competitors?
Would I find it difficult to meet my goal and obtain my desired payback if someone copied the differentiated aspects of my business model?

With regard to the first question, most entrepreneurs should find it easy to define the differentiated aspects of their strategy. Indeed, the large majority of business models will be based upon one or more perceived needs in a particular market that are not being met by competitors. These one or more differentiators serve as the competitive advantage provided by the entrepreneur's model and serve as the reason that she seeks to develop the business in the first place.

As for the second question, most entrepreneurs will agree that it would be difficult for them to succeed in their goals if a competitor were able to copy the differentiated aspects of their business models. In answering "yes" to each of these questions, the entrepreneur should understand that an executable IP strategy should form an essential aspect of their business plan preparation.

It is important to clarify here exactly what I mean by "IP strategy." Significantly, IP strategy does not necessarily mean that the entrepreneur's end goal is to obtain enforceable IP rights, whether a patent or otherwise. Rather, an IP strategy centers on understanding whether and how protection of the differentiated aspects of the business model will enhance the enterpreneur's ability to achieve her goals.

With regard to patents, the IP strategy may indicate that it may not be cost effective to obtain a patent, but that filing of an application may nonetheless provide significant competitive protection. For example, because it takes many years and significant expense to see a patent through to the end in most technologies, it would not make sense for an entrepreneur to seek rights when the business model is expected to significantly evolve over time. In this instance, by the time the patent issues, it likely will not actually cover the products, technology or services of the company. Even so, the IP strategy may indicate that it would nonetheless be valuable for the entrepreneur to provide her competitors with the perception that she is seeking to obtain a patent on some aspect of the business model.

To this end, the entrepreneur might wish to file an application with the full expectation that it may not issue as a patent. Such a filing will allow the entrepreneur to advertise that her business involves "patent pending" technology. I have found that in some industries the use of "patent pending" can assist in keeping competition at bay and can substantially assist in a company's marketing efforts. This "patent pending" IP strategy can be accomplished fairly cheaply if undertaken by a strategically focused IP attorney. The end goal with such an IP strategy is not to obtain an enforceable rights at the end but, rather, to leverage the "patent pending" to potentially reduce competition or give a product or service greater marketplace cache.

Moreover, by applying an under-utilized provision of US patent law, the entrepreneur can request that the application remain unpublished, a technique that will effectively keep her competitor in the dark about what she may be seeking protection on and whether she is likely to prevail. The uncertainty afforded by the unpublished application may be enough to keep potential competition away from the entrepreneur's growing business. Thus, the end goal of this IP strategy effectively serves as a shield against competition, rather than a sword.

Another way for an entrepreneur to use IP strategy to protect the differentiated aspects of her business model is to include brand equity development in the earliest stages of the launch of the venture. This brand equity must be associated with strategic trademark and service mark filings. As the business becomes more successful, consumers will increasingly associate the strong brand with the entrepreneur's product, technology or service. Successful strategic protection of a brand will hopefully result in the entrepreneur's solution being the go-to brand.

One example of an entrepreneur's establishing immeasurable value from developing brand equity is the LifeLocki dentity theft prevention product. This company was not the first to offer a product of this type; rather, it was the first to offer a $1MM guarantee that a purchaser would not experience identity theft as long as she paid $10 a month to LifeLock. Interestingly, LifeLock provides identity theft protection services in ways analogous to those of its competitors, both those coming before and after. This guarantee served as the basis of LifeLock's competitive differentiation.

Notably, the LifeLock guarantee could not be protected by a patent. Instead, LifeLock's owner (Todd Davis) decided to advertise the guarantee and build his company's brand equity around it. To this end, Mr. Davis flooded the airwaves with commercials in which he recited his social security number as proof that his company's product was foolproof--so foolproof, in fact, that he was willing to give the $1MM guarantee. Today, it is likely hard for many potential purchasers of identity theft protection products to think of going anywhere else than the company "where the owner tells us his social security number." The entrepreneurs responsible for the successful launch of LifeLock realized that the guarantee made them different from their competitors and made sure that the company's marketing strategy was focused toward ensuring that the public associated that guarantee only with LifeLock.

There are many other ways for an entrepreneur to protect the differentiated aspects of her business model from competition using IP strategy. Further illustrative examples include strategic agreements and first mover advantage. Indeed, there are likely as many ways to protect a business model from competition as there are business models. The key is for entrepreneurs to fully engage with the need to include IP strategy in their business plans and to ensure that they execute on that IP strategy. Put simply, IP strategy is not about getting IP as an ultimate end goal. Rather, IP strategy can ensure that the entrepreneur's business model not only provides a competitive advantage but that is also sustainable.

An Introduction to Patent Monetization Resources For Corporations and Entrepreneurs

For corporations and entrepreneurs seeking to monetize their un- or under-utilized IP rights for the first time, it can be difficult to know where to begin. The patent monetization market is not yet mature and, as with other emerging marketplaces, no established methodologies and few experts exist to guide owners through the process. Today, there are as many as 17 different business models used. More will likely spring up as the market continues to evolve, even while some of the current models will certainly fall away. With such a range of options, it is not surprising that those seeking to sell their patent rights may be confused about what path to take. This article is intended to provide an overview of ways that corporate and individual IP owners can most effectively monetize their rights in today's market. The models discussed in this article were chosen because they are currently the most common. Significantly, due to the great variability in patents and the individual needs of IP owners, the best model for a particular person or organization might actually one that is not discussed here.  Nonetheless, it is hoped that after reading this, a corporation or entrepreneur seeking to sell their rights for the first time will be better able to understand and execute on the opportunities and challenges present today in the patent monetization market.

Thinking of Selling a Patent Directly to a Corporation Without an Intermediary? Forget About It Most IP owners assume that it is possible to sell their rights directly to a company that might play or seek to play in the product or technology space covered by the patent. This is rarely the case, however. When I was employed as a senior attorney in a consumer products company, it was corporate policy to reject all unsolicited offers to purchase or license patents that came into the organization. Thus, an owner did not stand a chance to get their rights sold to my company. This absolute prohibition on unsolicited ideas is not the policy at all companies, but, in truth, few companies today actively seek to acquire products and technology from outside sources (although this is starting to change with the drive toward open innovation at many companies). Thus, even if a patent is a perfect fit for a company's offerings, most organizations will nonetheless prefer to pass on a purchase opportunity because external acquisition is not part of their technology development model. It is therefore doubtful that most patent owners can hope to successfully sell their rights directly to a corporation because the latter is not in the business of buying patents generally, and specifically not from individual owners.

  Aggregators: Buyers of Patents if a Patent Owner Can Get a Foot in Their Door In recent years, companies have emerged that hold business models centered on the buying of patents held by others. Well known aggregators today include Intellectual Ventures, RPX and Allied Security Trust. Each of these companies has a different reason that it seeks to acquire patents, but each can serve as a great resource for owners seeking to sell their IP rights in certain technology areas. Nonetheless, there are many more patent owners seeking to sell their rights than existing aggregator buying opportunities. As a result, if an owner obtains a "no" answer, how does he know it is because his patent is worth nothing to the aggregator or whether it's because he did not know the right person to get his rights in front of at the aggregator company? For most IP owners, especially those participating in the monetization market for the first time, patent aggregators will not serve as a likely direct purchaser of their rights.  

Brokers: Facilitors of Patent Sales, For a Price Brokers such as ThinkFire, IPotential and IP Transactions Group can assist IP owners in presenting their patent to a likely buyer, the most likely of which are patent aggregators, non-practicing entities ("NPE's") and, sometimes, corporations. By leveraging their relationships and reputations, brokers effectively serve as "filters" for potential patent acquirers to streamline and improve the quality of patent buying opportunities.  Put simply, patent buyers trust their patent brokers to "separate the wheat from the chaff" to make it easier for them to identify and act on good patent buying opportunities.  A broker who is trusted by a patent buyer can thus present the latter with a buying opportunity that the buyer would not have given a second glance to if the same patent had been offered to them outside of the broker-buyer relationship.   There is a substantial cost to hiring a broker, however--typically about 25 % of the total sale price. Patent brokers also require exclusivity. Thus, when a patent owner selects a particular broker to represent him in the sale, he must trust that the broker will find the best deal. I nonetheless believe that the knowledge and expertise available with a good broker can allow a patent owner to obtain a final purchase price for his rights that more than justifies the broker fee. In particular, the best brokers maintain a large network of potential purchasers of patents, including aggregators, NPE's and, in some cases, corporations that have expressed an interest in buying third party IP rights.  

I believe such broad networks serve a critical function in improving the efficiency of the monetization market by possibly raising the final purchase price.  When a patent is offered through a quality broker, he will ensure that each party participating in the process also knows who else is being offered the opportunity. Such transparency could also result in an increase in the final purchase price when one potential purchaser seeks to ensure that another potential purchaser not acquire that same right. For example, a corporation might increase its offer to prevent an NPE from obtaining that patent for the purpose of bringing suit against the corporation. This scenario means that those most interested in acquiring the patent will bring their best offer to the table, a fact which should improve the final price paid.   A further benefit of selling through a good broker is that they will typically conduct market analysis of the rights to set a rationally-based entry level price. Specifically, the broker will set the price based upon what comparable patents have been sold for in the past. These figures normally are not public, so a broker with several sales under his belt will likely set a more accurate initial sale price by virtue of the fact that he is privy to information that allows him to do so. Notably, even an experienced broker might incorrectly estimate the likely floor price, but when the patent is offered to many likely buyers, the market will typically act to reset the price to one more acceptable to potential buyers.    

Beware of Finders Who Say They are Brokers A significant problem with many people who hold themselves out as patent brokers is that some are not "brokers" at all. Rather, they are "finders" for aggregators or other buyers of patents such as NPE's (but likely not corporations). Like regular brokers, these finders maintain relationships with likely buyers. When accepting a patent for sale to a potential buyer, the finder likely already knows whether it will be purchased by its contact. In this scenario, the finder actually does little to earn his 25% fee other than maintain a relationship with the ultimate purchaser. Moreover, many of these brokers actually "double dip" because they obtain a fee from the purchaser for bringing the opportunity to them, as opposed to another potential buyer. The finder thus might hold divided loyalties: should they try to maximize the price obtained for his client's patent when they might never see an opportunity from that seller again, or should they keep the price reasonable so they don't ruin their relationship with their buyer to whom they might bring several buying opportunities to each year?   Clearly, this scenario is rife with questionable ethics, but the reality of the current monetization market is that no licensing is required for someone to call himself a "patent broker," and the rule is definitely "buyer beware." As things stand in today's unregulated broker market, the best way to find a quality patent broker is to seek referrals from someone who understands the market and/or who has successfully sold patents through a broker in the past.   

Patent Auctions: Selling in the Open to the Highest Bidder The final common vehicle for selling patent rights is the public auction setting. Today, the most prevalent auction is conducted by Ocean Tomo, which currently holds 2 auctions each year. Ocean Tomo is very selective about what patents it takes into each auction, a fact that limits the ability of many patent owners to participate in this model. Ocean Tomo obtains a fee from the seller and the buyer, and it is my understanding that the net fee amounts to approximately 25 % paid to the auction house. While I have not personally been involved in an auction, I have heard mixed things from people who have participated as both buyers and sellers in these auctions. My sense is that an auction allows one to sell his patent in a transparent setting where the price is set by competitive bidding. This can be good when a patent is desired by multiple parties who are influenceable by the "heat" of a public auction process to increase their bids to result in a higher price for the seller.   In my view, one downside of the open auction process is that all participants know the price being offered, a fact that can lead to a lower final sale price if a patent does not garner excitement from the participants. This view was borne out in the most recent (April 2009) Ocean Tomo auction which was almost universally considered a failure. Buyers were lacking and, as a result, not only did few patents sell, the tenor of the auction itself was said to be very quiet and unexcited. This lack of enthusiasm from the auction participants no doubt reduced the overall success of the auction itself.   In contrast, in a private auction--such as that effectively set up when a quality broker sells a patent into a large network of potential buyers--the lack of transparency can result in a higher final price because the participants know who has been provided the opportunity to purchase but not the amount they have offered (if at all). A further possible downside to a public auction is that one can only sell his patent to someone who shows up to participate in the auction. With a broker-conducted private auction, however, someone who may not actively be seeking to buy a patent at that time will be presented with the opportunity to buy. Thus, the number of potential buyers can be expanded with the use of a broker.  

It's as Clear as Mud Now, Right? As noted at the outset of this article, the IP monetization market is only just now emerging as a viable way to obtain value from un- or under-utilized assets. In view of this, most patent owners just starting into will be confused about how to proceed in a manner that maximizes the price obtained. If one owns patent rights and seeks to sell them today, it is my recommendation that he learn as much as possible about the process. And, as with many business situations, checking references and seeking recommendations from those with experience as patent sellers and counselors to IP owners will be critical to success in monetization.  Personally, I am looking forward to the day when more openness exists in the marketplace so that patent owners can better gauge the quality and qualifications of those participants in the process.