Protection of technology is a hot-button issue in the age of an ultra-competitive business environment fueled by the instant access to information and a worldwide market made possible by the internet. Despite their sophistication in their respective fields of technology, many tech executives in Silicon Valley have proved less than savvy when it comes to developing an effective and coherent strategy for protection of their technologies. Consequences range from reduced competitiveness—and the resulting financial loss—to failure of a startup business.
A pivotal and highly consequential threshold decision a Silicon Valley startup company needs to make is to choose between patent protection and trade secret protection for valuable information that is central to the startup’s growth and development. Each offers certain advantages and disadvantages for tech startups.
Patents and trade secrets are both capable of protecting valuable information. Patentprotection is in the form of a limited-term, legal monopoly awarded by the government to the patent owner in exchange for the inventor making the invention available to the public. The protection period afforded by a patent is 20 years from the first filing date for a utility patent and 15 years from the issue date for a design patent. In order to qualify for patent protection, the invention must be new, useful and nonobvious.
Trade secret law, on the other hand, protects information by keeping it from the public. Broadly speaking, a trade secret refers to confidential business information that provides a business with a competitive edge, including industrial know-how, customer lists, business methods, and the like. There is no legally set protection period for a trade secret; a trade secret is subject to legal protection for as long as it is kept a secret. A famous example is the Coca-Cola formula, which has been successfully protected as a trade secret for over a century.
The key decision for a tech startup on which option to choose turns on whether the information is patentable and the ease with which it can be reverse engineered. Generally speaking, patent protection is more valuable to tech companies because it allows the patent owner to monopolize the market for the invention, even against those who may independently arrive at the patented invention. Additionally, a patent acts as an effective notice to the world that the patent owner owns the potential market for the invention, and, as such, it adds significant value and credibility to the upstart business and makes it easier to attract investment and business partners. Moreover, the fact that patent laws are well developed and consistent around the world provides the patent owner an advantage in enforcing its patent rights against infringers. And, despite the limited monopoly term, the protection period provided by patents is generally more than enough for adequateprotection given the fast pace of technology evolution.
Trade secret protection offers its own advantages over patent protection, in addition to its potentially unlimited term. Pieces of information that are difficult to patent and to reverse engineer may be particularly suitable candidates for trade secret protection. Trade secret protection also enjoys an advantage over patent protection in the area of licensing in that, whereas a patent license expires after the expiration of the patent, trade secret licenses can continue even if the secret becomes public. Finally, as trade secret laws become more developed and easier to enforce, the gap in legal protection has been narrowing as well.
Startups opting for patent protection over the trade secret approach must file their patent application before public disclosure of the invention to avoid the risk of losing their patent rights. The key question, which trips up many a tech startup, is what actions count as a “public disclosure” of the invention.
The law is clear in that any non-confidential disclosure, including disclosures made to friends and family, constitutes a “public disclosure” of the invention. Despite that requirement, many tech startup owners opt for protection only after public disclosure of their invention and after detecting interest from the market, without realizing the detrimental effects of such premature disclosure.
Foreign jurisdictions overwhelmingly require absolute novelty of the invention. The U.S. does provide a one-year grace period for filing a patent application following public disclosure. However, if someone else independently arrives at the same invention and is the first to file a patent application during the grace period, the second inventor gets priority over the earlier inventor and the earlier inventor is shut out.
The three categories of patents for protection of tech startups are utility patents, software/business method patents (a subcategory of utility patents), and design patents. The value of patents to high-tech companies has been brought into renewed focus with high-profile tech deals during this decade. For example, back in 2011, Google’s $12.5 billion deal for Motorola Mobility was mostly centered not on the company’s products or management, but on the company’s approximately 17,000 issued patents and additional7,500 pending patents, which were valued at about $400K each. The main reason for the high value of patents to a business’s bottom line is that high-tech wars are increasingly fought in court.
The number of patent litigation actions has skyrocketed from roughly 800 in 1980 to more than 5,000 per year today. Along with a rise in patent values, more and more companies have been willing to step up and take a stand in defending their patents, leading to what has been aptly described as a “patent arms race.”
In today’s international market, protecting inventions in the U.S. is no longer enough.Silicon Valley tech startups often neglect international patent protection at their peril. Further, obtaining patent protection abroad is not as costly as many startup owners may think.
First, a U.S. filing provides for a year of potential international protection for the asking, which provides tech startups a year to “test” market for their inventions, while keeping their international options open. At the end of the year, startups who have identified their potential international markets can directly file for protection of their invention in the foreign jurisdictions. Startups who have not identified their foreign markets but don’t want to lose potential international protection can “buy” an additional 18 months of available international protection under the Patent Cooperation Treaty (PCT).
Following a period of uncertainty as to their patent eligibility, it is now clear that software and business method inventions are indeed protectable under U.S. patent law. For example, recently, the U.S. Court of Appeals for the Federal Circuit found that a business method patent with claims directed to “a method and system for the electronic trading of stocks, bonds, futures, options and similar products” is eligible for patent protection. A year ago, the same court of appeals had affirmed patent eligibility for a software patent with claims directed to “automatically … producing accurate and realistic lip synchronization and facial expressions in animated characters.”
As a result of these and other decisions, clarifying the criteria for patent eligibility of software and business method inventions, businesses now are able to seek patentprotection for such inventions. Despite recent progress, software and business method patents are still subject to heightened scrutiny by the courts and the U.S. Patent and Trademark Office. As such, tech startups can maximize their chances of having their patents pass muster by drafting patent applications that provide sufficient detail, contain clear and focused claims, and are distinguished from the prior art.
5. Utilize Design Patents for Their Purpose
Design patents protect aesthetic but non-functional aspects of inventions, and in the high-tech world, many aspects of products and even software are protectable by design patents. For example, the design of graphical user interfaces (GUIs) can be design patentprotected. GUIs are an important aspect of the highly competitive consumer electronics market for making products more intuitive, attractive, enjoyable, and user-friendly. Examples of GUI design patents include Apple’s iPhone icons (D604305) and slide-to-unlock feature (D675,639). Design patents can also cover non-static GUIs, i.e., images that change their appearance during viewing.
Design patents enjoy certain advantages over other intellectual property rights. Unlike trademarks, which require a mark to act as a source identifier, design patents do not include such a requirement. Moreover, while copyright protection requires certain creativity, design patent rules only require that the design be sufficiently different from the prior art.
Compared to their utility brethren, design patents are much less expensive and much faster to obtain and generally easier to enforce. On the other hand, design patents have a much narrower scope of protection than utility patents, and a shorter life.
6. Consider Copyrighting the Technology
Although not a substitute for patent protection, copyright protection affords an additional layer of protection to startup tech companies. Copyright generally protectsoriginal works of authorship that are recorded in a retrievable format. An advantage of copyright is that it does not require registration but is automatically vested in the work.
However, registration of the software is required for bringing an infringement lawsuit in court and also provides additional benefits, including the ability to request statutory damages of up to $150K, plus attorneys’ fees for the prevailing party. If the copyright application is filed within three months of publication of the work, the copyright holder is eligible for statutory damages and attorneys’ fees request even if the infringement had occurred before the registration. If the software is not timely registered, the copyright owner can only recover actual damages measured by lost profits or profits made by the infringer. Tech startups would be well advised to file the application within three months of publication of their copyrightable work.
Copyright protection of software became significantly stronger in 2014, with the Federal Circuit’s decision that confirmed that copyright protection is not merely limited to literal copying of source code, but includes copying of the structure, sequence, and organization of computer software as well. Before that decision, many copiers avoided liability by rewriting the code but keeping the same structure, sequence, and organization.
A key advantage of copyright protection is the very long protection period (up to 120 years or more) that it affords its owner. Also, as a member of the Berne Convention forprotection of copyrights, a U.S. copyright holder is automatically protected against copyright infringement in other convention member states. Tech startups thus do not have to register their copyrightable work in the foreign jurisdiction or comply with any other formalities in the foreign jurisdiction in order to bring suit for copyright infringement in the Berne member states.
A key aspect of any business is its relationship with its employees. Tech startups are particularly vulnerable to “technology theft” resulting from hiring competitors’ employees or their key employees being poached by a competitor. As such, well-drafted employment agreements that include provisions that address trade secret protection and enforceable non-compete agreements are key to their success.
Tech startups can significantly improve their initial success chances, longevity, and prosperity with early and consistent focus and attention on obtaining and maximizingprotection of their most valuable assets—their intellectual properties.
Dr. Dariush Adli, Ph.D., Esq. is the founder and president of ADLI Law Group. His practice is primarily focused on business and intellectual property litigation, media and entertainment law, real estate, products liability, family law, labor and employment, and transportation law. He can be reached at firstname.lastname@example.org.