Patents – What Start-ups Need to Know

Patents – What Start-ups Need to Know

We ask patent attorneys Manuel Söldenwagner (MS) and Fabian Fegers (FF) frequently asked questions start-ups have regarding patents. They explore how useful patent protection is and the best way to approach protection for the betterment of their business.

  1. How useful is patent protection for start-ups?

MS: It allows protecting the technology behind the business model, in particular against big industry and competitors with the capacity to catch up quickly and outpace the start-up in an early stage.

FF: Patents also play an important role when investors are involved. The IP situation has a strong impact on a company’s value, and a proper IP strategy and patent protection are often crucial in investment rounds and even more during exit. Some VCs see patents as some kind of insurance for their investment and as a fit-to-practice proxy.

MS: Patents, other than pure know-how, are independent of single individuals and can easily be transferred or otherwise monetised.

  1. In which industries is patent protection particularly important already in the start-up phase and why?

FF: E-commerce is a good example where patent protection may not be too important, of course depending on the business model. In contrast, when a start-up is built on a technology platform, as it is often the case in technology-driven start-ups, patent protection should definitely be part of the corporate strategy – not only when the start-up sells a physical product, but also when the business plan involves, for example, licence based SaaS or other services.

MS: For life sciences and pharma, patent protection is absolutely essential. Market entry is only possible after having accomplished several years of trials and approval procedures. Therefore, it is particularly important to maintain a monopoly position as long as possible.

  1. What is patentable, what is not?

FF: A broad range of innovations, from food products and electronic devices to manufacturing processes and even plants – at least to a certain extent – and software can be patented if they meet the respective criteria.

MS: It does not have to be rocket science. But it has to be “technology” – and technology has to be understood broadly. In some jurisdictions even specific medical and other uses of known substances are patentable. The possibilities of patenting inventions of different kinds vary in part from jurisdiction to jurisdiction – and are strongly influenced by the respective jurisdiction.

FF: A predominant aspect of an invention is the technical character. In many cases, this aspect can be clearly assessed; for example, it is not possible to patent a business method in Germany. In IT, however, this is often controversial. Also, software can be patented when it has a technical character, for example, video coding or predictive maintenance software. Most start-ups underestimate their chances to obtain patent protection.

MS: The typically greatest hurdles for an invention are novelty and inventive step. They usually constitute the essential aspects of a patent examination procedure.

  1. What competitive advantages can start-ups expect from a successful patent application? Which not?

FF: As mentioned, it allows protecting the technology against big industry and competitors. Furthermore, patents allow minimising the disruption of Freedom-to-Operate by developing an IP portfolio that may be used as leverage in negotiations.

MS: You should try to not only cover your own technology, but your IP portfolio patents too, covering certain aspects of the competitors’ technology, to reduce the risk of patent infringement allegations being asserted against the company and to improve the company’s ability to assert a patent infringement counterclaim, thereby reaching a cross licence situation.

FF: Strong patents also result in increased attractiveness for investors and IP also can be monetised if necessary.

Usually, the budget should not only cover patents but also other IP issues as well as a portion for general IP counselling.

  1. What risks arise from third-party intellectual property rights?

MS: Of course, the major risk is that such rights are a “show-stopper” for the start-up in an early stage. A single patent with no option to obtain a licence could end the whole business plan. This does not necessarily involve patent litigation, which would be a threat, too. Therefore, a thorough freedom-to-operate analysis is needed.

FF: Talking about later stages, the obligation to pay royalties may put pressure on the product’s margin and in the worst case could make the whole business model inefficient.

  1. In what way does patent protection for start-ups differ from the protection for globally active corporations?

MS: Typically, start-ups do not have a large portfolio and budget is tight, so they need to focus their efforts and usually cannot apply a cross-license strategy. They rather acquire solid protection for their core market.

FF: A further aspect is a high degree of flexibility, both in countries and claim-scope. We often see that the product, the market and the business model of start-ups change in the first years after seed-investment – a challenge for the IP strategy. Therefore, the patent drafting approach, as well as the filing strategy, should be chosen carefully. The IP strategy should also aim at shifting costs to the future when investment rounds typically have larger tickets.

MS: Keeping administrative effort, such as inventor compensation, low is important for founders, as they have many other tasks to solve – and for start-ups, time is even shorter than money.

  1. Which budget should be allocated to patent protection?

FF: The most important point here is to have a budget! We see many start-ups which do not assign an IP budget, putting them in trouble once they decide to file patents or when an investor requires them to so do. A rule of thumb says you should assign 10-15% of your R&D budget to an IP budget. Of course, this is highly dependent on industry, product and business model.

MS: Usually, the budget should not only cover patents but also other IP issues as well as a portion for general IP counselling.

Manuel Söldenwagner is a patent attorney and partner at German IP law firm Eisenführ Speiser. As a leading patent attorney in the field of Life Sciences, with a special focus on “hidden champions” as well as venture capital funds and start-ups, he supports clients not only in managing IP portfolios, or in complex FTO analyses, but also advises and represents them in licensing negotiations, in opposition and in nullity and infringement proceedings.

Fabian Fegers is a patent attorney and partner at German IP law firm Eisenführ Speiser. Besides patent prosecution, IP portfolio development, oppositions before the GPTO and EPO as well as patent litigation and licensing, counselling start-ups and Venture Capitalists is a particular focus of Fabian. He supports them in IP Due Diligences and in building and managing a strong and valuable IP portfolio.

Eisenführ Speiser is one of Germany’s leading IP law firms with a particular emphasis on mid-cap companies with a strong IP focus. Since its foundation in 1966 Eisenführ Speiser has been advising clients in all matters related to intellectual property rights. With offices in Bremen, Munich, Berlin and Hamburg, a staff numbering over 280, including more than 50 patent attorneys and attorneys-at-law, assists clients in filing applications for patents, utility models, trademarks and registered designs and defending and enforcing those rights as well as in any other intellectual property-related matters such as portfolio and freedom-to-operate analyses, licensing and IP due diligence.

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