WHY TECH STARTUPS NEED TO PLAY OFFENSE WITH PATENTS (AND WHY BIG TECH COMPANIES DON’T)

Patents are valuable business assets, and a smart patent portfolio can give your tech company a competitive advantage and add value to your business.

Every tech company should think about what type of patent strategy makes the most sense for them, considering their unique business goals and core strengths. 

In developing a portfolio, people often talk about taking an “offensive” or “defensive” approach. Fundamentally, these two approaches differ in the business goals that they are meant to support:

• An offensive strategy aims to produce sales or licensing revenue by controlling access to valuable technology. As such, “offensive” patent owners are often prepared to actively assert their patents against any and all infringers.
• A defensive strategy aims to protect profit margins and market share by minimizing the risk of being sued by competitors. To that end, “defensive” patent owners are not necessarily looking to actively enforce the rights associated with their patents.

Many large tech companies take a more defensive approach to the patent process  — but as I’ll explain in more detail below, that‘s usually not the right approach for tech startups.

In particular, tech startups looking to gain market share in emerging fields of technology will need to take a more offensive approach in order to be effective.

WHY LARGE TECH COMPANIES USE A HIGH-VOLUME DEFENSIVE PATENT STRATEGY

Large tech companies flush with cash will often try to file as many patent applications as possible to create a constellation of patent rights. Here’s how it works. 

For one, big tech companies build arsenals of patents to deter competitors from suing them. If a competitor ever does sue, the company will then have a large pile of patents to use for cross-licensing with the competitor. Indeed, it’s not uncommon to see the two or three biggest players in an industry agree to a “ceasefire” on patent suits. By owning lots of patents, each company maintains its leverage for keeping the peace — reducing its exposure to patent infringement suits. 

For another, because the company owns so many patents, it’s practically impossible for competitors to avoid infringement. But new players in the field won’t be part of any negotiated “ceasefires” on patent suits. So the company protects its market share by creating an IP minefield to deter newcomers.

VOLUME V. QUALITY: WHAT’S THE DIFFERENCE?

High-volume should not be confused with high-quality. In fact, companies using the typical high-volume, defensive approach often end up making a conscious tradeoff between cost and quality.

On one hand, they enjoy reduced costs during the patent process. Big tech companies can guarantee a huge volume of work for their patent counsel, which means they often enjoy discounts from big law firms. They also commoditize patent applications; each is filed at a fixed cost, and contains only a limited number of claims.

On the other hand, they have to settle for a lower degree of protection from an individual patent, because the claims are often narrower and the inventions are not as well described in the patent. This is because, in a sense, the patent applications are often prepared by the lowest bidding law firm.

That said, large companies are willing to make this tradeoff because  they derive value primarily from the “constellation” of patent rights. As a result, no individual patent is particularly important. There’s no reason for them to spend significant resources on any individual patent, because the value lies in the sheer volume of patents they’re getting.

OTHER DEFENSIVE PATENT PLAYS

In addition to high-volume filings, large companies also use the following tools in their defensive strategy:

• Insurance: If someone accuses the company of patent infringement, patent insurance will cover the associated legal costs.
• Network cross-licenses: This refers to a contract between two or more parties that grants mutual rights to each party’s IP. Cross-licensing can help businesses avoid litigation and reduce risk, which saves time and money.
• Patent pools: Defined by World Intellectual Property Organization as “an agreement between two or more patent owners to license one or more of their patents to one another or to third parties,” patent pools are a subset of cross-licensing — but describe only public agreements between a large group of patent holders.
• Pledges: A patent owner agrees not to sue another party that is using technology covered by the patent — even though a license hasn’t been granted — provided the other party follows certain terms and conditions.

These strategies are far more valuable for big tech companies than for startups, mainly because big companies have more resources and therefore more leverage in negotiating these types of agreements.

Also, these strategies are primarily aimed at reducing risk and protecting market share (which big companies are keen to do), rather than growing revenue through innovative technologies (which startups must do).

WHAT APPROACH SHOULD TECH STARTUPS TAKE?

Instead of trying to emulate the high-volume, defensive approach used by large companies, tech startups should take an offensive approach to patent strategy. Here’s why.

STARTUPS CAN’T COMPETE WITH LARGE COMPANIES ON FILING VOLUME

The typical large tech company will file between 500 and 1,000 patent applications per year. It costs about $10 million per year (or more) to maintain this pace over time. 

(In fact, according to this report from the Intellectual Property Owners Association, the top tech companies will obtain thousands of patents per year. The top patent owner of 2017, IBM, had 8,996 patents granted!)

By contrast, a well-funded tech startup will typically file 10 to 30 patent applications per year. That’s because, on top of their limited funding, most startups also have limited infrastructure and focus: They don’t have an in-house legal department, and besides, their innovators need to prioritize product development, not writing IP.

In other words, a tech startup will never create the type of patent volumes that big tech companies generate. It’s an orders of magnitude difference. Practically speaking, tech startups can’t achieve the number of patents that would encourage cross-licensing based on sheer volume. Instead, they need quality. 

STARTUP BUSINESS GOALS AREN’T ALIGNED WITH A HIGH-VOLUME FILING STRATEGY

By definition, startups don’t have any existing market share to “protect” or “defend” — which is why a primarily defensive posture doesn’t make sense. In other words, startups typically don’t really have anything to “defend” in the first place.

Instead, tech startups have to claim new ground and aggressively grow their market share. In a sense, a startup’s existence is basically a bet on their ability to monetize some future market. To succeed in that market, the startup must do two things:

1. Own a future market share: Startups need to prevent others from blocking the startup’s entry into the market. They can often do this through defensive publications, or by buying or licensing existing patents.
2. Prevent others from owning that future market: Startups also need to create their own exclusive domain. They can often do this by procuring patents that create a barrier to entry for other companies.

STARTUPS NEED TO FOCUS ON QUALITY AND “OFFENSIVE” VALUE

Because of their unique position in an untested market, startups stand to benefit the most from an offensive approach. This means creating patents that have meaningful scope, and have been thoroughly vetted for validity and enforceability. An individual, poorly-executed patent can often be dismissed — but your competitors have no choice but to respect a strong, high-quality patent. 

Therefore, the smartest tech startups invest in obtaining broad patent protections for their most important technologies. And they take a thoughtful approach to crafting patent claims that cover their products and box in their competitors. This means that each patent application is treated as a unique business asset, rather than a commoditized patent widget.

Tech startups would also be wise to recognize that having a smaller patent portfolio can actually work to their advantage, in terms of the quality and scope of patent rights they’re getting. If you’re filing only 10 or 20 patent applications per year, your company’s top strategists can put real thought and effort into each patent application, and calibrate their investment to have the highest impact. By contrast, it’s impossible to do that when you’re filing hundreds of new applications per year.

Finally, to develop a patent portfolio that serves their business objectives, tech startups should go through the necessary diligence at each significant milestone in each patent application to ensure that their rights will be enforceable in court. This is because a patent that’s not enforceable in court has no offensive value. So tech startups should make sure their patent counsel is taking all reasonable and necessary steps to reduce exposure to validity and enforceability challenges down the line. 

In summary, tech startups should seek to obtain:

• Patents that will be respected by competitors or potential acquirers
• Patents that actually cover the company’s products (and/or a competitor’s product) with meaningful breadth
• Disclosures that prevent others from patenting
• Patents that can be enforced in court

PREPARING FOR THE COST OF THE PATENT PROCESS

The patent process is both lengthy and costly, which is why startups need to plan ahead in order to budget well and meet deadlines. That’s why we’ve put together a FREE infographic containing cost estimates for each stage of the patent process. Download it now!