Patents and the Quid Pro Quo – How Bad Patents Can Harm A Company

The Quid Pro Quo – How Bad Patents Can Harm A Company

New inventors are often unaware of the quid pro quo that is fundamental to the patent system.

The inventors must show the world their innermost secrets of how to make or use their invention.  In exchange, the government grants a limited right in the form of a patent.

One of the options for the inventor is to not to file a patent, but simply to keep their invention secret.  The most common examples  are  the formula for Coca Cola or Colonel Sander’s secret herbs and spices.  Both of these examples could have been patented, but were not.  From a business standpoint, these were the right decisions.

There are many examples of patents that had virtually no value because the claims were undetectable, unenforceable, or ridiculously narrow.  In the process of getting a worthless patent, the company gave up their complete roadmap for how to manufacture and use their product.

These patents are not just a waste of money, but their competitive advantage is eviscerated by disclosing everything they know.  The bottom line:

Some patent applications can be very damaging to a startup company.

Part of the analysis prior to filing a patent is to first estimate how broad or narrow the patent might be, then evaluate whether the patent – at that breadth – would be worth pursuing.  This analysis starts with a patent search.

Many investors want to check the box of “is it patented?”.  However, most investors are not aware that the patent will post all the company secrets online for all competitors – with virtually no benefit to the company.  The decision to get a patent or not needs to be made carefully and thoughtfully, and many companies are better off with no patent protection.

How does this happen?

One very typical scenario is when a startup company thinks they need to get a patent and do so in a panic, often just before they do a presentation for the first time and publicaly disclose their invention to the world.

It is conventional – but a terrible practice – for patent attorneys to file provisional patent applications in this situation.[1]  The attorneys get called at the last minute and grab whatever information is available, slap a cover sheet on it, and file a provisional patent application.

Some companies put their pitch decks, pages of lab notebooks, internal decision making processes, internal financial projections, even source code for their software in the provisional patent application.  This is done with the mistaken belief that the provisional application will not be made public.[2]

This situation happens because the patent attorney figures they will sort it out later.  Maybe something in one of the documents will support some patent claims that we want to file a year from now.

From the patent attorney’s perspective, the larger pile of information, however disorganized, the more likely it will be that they can find something patentable.[3]

From the client’s perspective, they have given up their most valuable trade secrets, including all their internal documents, in exchange for their patent.[4]

As will be explained below in Chapter 3, the first patent that a company does is often the least valuable patent.  This makes sense because both the technology and business risks are the highest at this stage.  Why give up the most to get the least?

What to do if this happens?

How should an investor respond when a startup files these types of “kitchen sink” provisional patent applications?

One option to consider is to abandon the provisional patent application and start all over.

This appears to be a very drastic measure on the surface, but not as drastic as it sounds.  In many cases, these types of patent applications are very thin when it comes to describing the actual patent claims.

Consequently, this provisional application does not actually give the right of priority to the filing date, so the real right of priority would only start with the second, non-provisional application.

In this case, the company did not have decent protection to begin with, so abandoning the provisional application and writing a good non-provisional application has no downside.  In fact, there is a big upside because the company’s trade secrets are not published.

[1] The US allows for a “provisional” patent application, which serves as a placeholder for a “non-provisional” patent application, which must be filed within a year after the provisional patent application.  The non-provisional application is the only type of patent application that gets examined by the USPTO.

Provisional patent applications are often touted as the “poor man’s patent”.  As described later in the book, provisional patent applications are one of the big mistakes that startup companies make with their patents.

[2] When the subsequent non-provisional application is published, the provisional application then becomes part of the public record.  If there is no subsequent non-provisional application, the provisional application will remain secret forever.  But, if it was abandoned, it was a waste of time.

[3] This is just another example of how the attorney’s interest in getting patents can severely compromise the company’s interests.

[4] The company would have a very hard time enforcing any of their “trade secrets” when they publicaly disclose them in a patent application, because they would no longer be trade secrets.  For example, a disgruntled employee may join a competitor and bring all the trade secrets with them, and the company could not bring a claim against the employee to try to stop them from sharing the “trade secrets”.

This is an excerpt from “Investing in Patents” by Russ Krajec.

Investing In Patents is available at Amazon.com.

This is an excerpt from Investing In Patents, available on Amazon.

Investing In Patents by Russ Krajec

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