July 01, 2018 Landslide

The IP Practitioner’s Guide to Working with Startups

By Natalie Alfaro Gonzales and Steve Maule

Jeff Bezos, founder of Amazon, has described his organization’s position on innovation as “stubborn on vision . . . flexible on details.”1 It seems intuitive that a successful strategy for startups includes flexible business solutions and innovation, but it is just as important for legal practitioners counseling startups to be “flexible on details.” In dealing with startups, the rapid pace of development and frequent changes in market conditions typically demand more flexibility than when dealing with a more mature company. Intellectual property (IP) practitioners counseling startups should be prepared to adapt to these frequent changes and deal with IP issues beyond prosecution of intellectual property and litigation. To best serve startups, IP practitioners should be stubborn in their pursuit of solutions for startups, yet flexible and holistic in assessing the specific legal strategies and solutions suitable for each company. That is, an IP practitioner should be prepared to leverage all IP types—patents, copyrights, trade and service marks, and trade secrets—when advising startups. Further, an IP practitioner should shift his or her focus to meet the demands of the startup’s market, product, financial position, and legal circumstances. The key to dealing with startups is recognizing there is never a one-size-fits-all solution.

Understand Your Client

A critical step in client service for any IP practitioner is understanding your client. While it is always important to understand a client’s business, market, product, technology, and goals, the growing nature of a startup comes with additional homework. Understanding the maturity of the organization and the startup personnel’s familiarity with IP issues not only is essential for tailoring the particular advice for that startup, but it will also dictate the vocabulary and depth of discourse between the practitioner and client.

Assess the Client’s Maturity

The most obvious factor that distinguishes startups from more traditional corporate clientele is the maturity of the organization. Whether the startup is a semi-amateur solo inventor with only the inkling of an invention, an experienced serial entrepreneur with connections throughout the venture capital world, or a robust organization ready to burst into the market, appropriate legal advice should be in context. IP practitioners should study the organization, including its ideas, goals, personnel, and financial situation, before wading into IP issues. This context-setting is particularly appropriate for early startups, including those participating in incubators or accelerators.2

A startup with ideas that are still taking shape may be best served by an incubator. Incubators typically provide office space, funding, and access to legal, accounting, and IT support staff. Incubators provide startup personnel an opportunity to address the idea of and goals for their innovative product or service—the problem it addresses, the solution it will offer, and how that solution fits within the larger market. At this stage, IP practitioners should be prepared to assist with multidisciplinary legal advice. If the IP practitioner counseling the startup is not with a full-service law firm able to address broad legal issues, it would be wise for the IP practitioner to have helpful referrals he or she can call on to ensure the client is receiving holistic legal advice. In addition to IP-specific legal advice, early-stage companies in incubators may need advice about which legal entity is best and how to create that entity. Once a legal entity exists, a startup might need assistance developing confidentiality and nondisclosure agreements (NDAs) and proprietary information and invention agreements (PIIAs) to protect the startup’s IP assets. Practitioners should encourage regular use of NDAs to minimize the risk of inadvertent disclosure of proprietary information, and PIIAs to discourage ownership arguments and trade secret misappropriation.3 Investors often inquire about the startup’s use of these agreements during the startup’s pitch for capital. The first steps toward basic IP asset protection will be ensuring that the startup is regularly using these agreements, and that the startup is a legal entity separate from the individual founders (more on this later).

Maturing startups may be more likely to participate in an accelerator. Accelerators are typically more structured than incubators. Accelerators often assist startups for a limited time, with a focus on rapid development toward creating or finishing the product, structuring the startup’s pitch, and raising capital. An accelerating startup is likely to have already addressed issues of business formation and IP assignment and protection. Practitioners should review and identify deficiencies in any existing startup organization, policies, and procedures to protect IP assets. With business organization questions resolved and good business practices in place, an accelerating startup can address targeted and IP-centric questions—e.g., which IP protection strategy is most appropriate, when and where the startup should apply for patent protection, and whether a trademark registration is a good idea.

It is important to keep in mind that the maturity level of the particular startup client will often determine the scope of the representation. For example, sophisticated serial entrepreneurs may already have established business procedures and IP protection strategies. This type of startup client may only need help with the occasional IP legal question. For example, the startup might seek advice regarding trademark registration before it engages in significant marketing, or need assistance filing a patent application to cover critical elements of the inventive product before visiting a trade show. Conversely, many early-stage startups will be inexperienced with IP matters and benefit from a more holistic legal approach. While corporate formation and business procedure may be less familiar to many IP practitioners, even a basic knowledge of these topics will permit an IP practitioner to be flexible in providing legal guidance to a client early in the startup lifecycle.

Assess the Startup’s IP IQ

Practitioners working with startups should not expect the founders, engineers, or other startup personnel to be legal experts or have any understanding of IP issues. Indeed, it is not unusual to find that startup personnel are misinformed when it comes to intellectual property. This differs from representation of large corporations, where IP practitioners typically deal with in-house counsel and the occasional inventor or technology subject matter expert, all of whom generally have some understanding of basic IP issues. Thus, an important step in working with many early-stage companies is teaching startup personnel the fundamentals of IP law with an eye on the audience’s level of expertise. By outlining IP basics, practitioners can engage everyone in the process of identifying valuable IP assets. For example, a serial inventor might have obtained multiple mechanical patents, but be less familiar with using copyright to protect the software developed for her new venture. Similarly, a music artist familiar with copyright might not understand how a trademark might protect his clothing label. IP practitioners should expect varying levels of expertise among early-stage organizations and prepare flexible education that addresses startup personnel on their level. Educating the client in this manner will empower the startup itself to identify opportunities for IP protection, which will lay a foundation for further discussion between practitioner and client.

IP Priorities and Business Considerations

Building on the foundation of IP education, a startup will often need to prioritize IP assets based on the startup’s business goals. Unlike established clients where the value of company IP assets may be generally understood, practitioners must understand how intellectual property is valued within the startup’s market to prioritize various IP strategies. For example, while a medical device startup may benefit from a broad patent portfolio, an app developer seeking to capture public attention may reap more immediate benefits from a federally registered trademark.4 In some markets, competitors might use patents defensively to guard against potential litigators or negotiate favorable licensing deals. Accordingly, IP practitioners may need to consider a variety of conditions when prioritizing IP protection.

IP priority may vary based on investor preference. Depending on the particular market, potential investors may have specific evaluation criteria when it comes to IP protection. Some investors might be generally dismissive of the value of patents,5 while other investors will want to review a startup’s patent portfolio before investing.6 If the startup plans to seek investment capital, investor preferences may shift a startup’s IP priorities.

In contrast to established markets where patents tend to maintain their value, practitioners counseling startups should expect the value of startup intellectual property to change with time. While the addition of a single patent to a large portfolio or a large company may be insignificant, a startup’s business model may rely on one single patent. If delays at the patent office or problems with a difficult patent examiner jeopardize the startup’s business, practitioners should offer appropriate guidance and explain the available alternatives. Similarly, a trademark deemed vital to a startup with a focus on building the company’s brand using trademarks could ultimately become valueless if the mark is not cleared. A flexible practitioner should anticipate these potential scenarios, consider the startup’s business objectives, and expect his or her focus to shift with the startup’s needs.

As noted above, most startups are unlikely to have a lawyer on staff. This often results in outside counsel providing virtual in-house counsel services to the startup client. In this role, startup counsel must strive to have a firm grasp of all aspects of the startup’s business and aim to provide lean and cost-efficient legal services while implementing a holistic IP strategy in line with the startup’s business goals.

IP Strategy

A holistic startup IP strategy should naturally extend from assessing a startup’s IP priorities and determining the intellectual property that provides the most value for the client. For most startups, where both time and money are finite resources, an IP strategy might even include forgoing certain IP protection, or disclosing some inventions to defensively block competitors from patenting important technology. A holistic IP strategy should also account for the startup’s planned exit strategy.7 Whether that exit strategy is acquisition or expansion, investors and acquirers expect a startup to have made progress toward its IP goals, while mitigating internal and external threats to the startup’s business.

IP Assessment

In customizing an IP strategy for a particular startup, an IP practitioner should always consider the value of all existing IP assets. This can include a review of all internal ideas, tools, and developments. Startups are often focused on their primary product or service, and may overlook other assets. Overlooked IP assets might include noncritical, but patentable, inventions or customer lists and research data protectable by trade secret. Indeed, in certain situations, a startup might even be better positioned to abandon the original invention and pivot to leverage overlooked IP assets.8 While capturing value in overlooked IP assets could create new opportunities for the startup, a startup (and its counsel) will need to avoid overextending the startup’s financial and other resources in pursuit of unnecessary IP assets.

A startup’s IP assessment should also include an identification of the ownership of all IP assets. As noted above, the startup company should hold all rights and title to any IP assets. Any assets overlooked prior to the IP assessment should now be properly assigned from the inventor or founder to the startup entity. An assessment might identify critical intellectual property owned by a third party, such as a university. In that case, a broad, exclusive, and perpetual license to the technology could remedy the issue of ownership.9 Further, this investigation of ownership issues could identify other risks associated with the startup’s IP assets. For example, it is not uncommon for employees to abscond with their former employer’s IP assets. While less than ideal, it is much better to address these IP risks head-on to avoid litigation down the road.10 Importantly, a startup should always be in a position to give a clear response to questions of IP ownership during acquisition discussions or investor meetings.11

Finally, a holistic assessment may identify gaps in IP coverage. Patents may cover critical products and processes, copyrights may be used to protect proprietary software, marks may be registered for public products and services, and trade secrets may be utilized for various reasons, including to fill in the gaps. Where appropriate, practitioners can help identify these gaps and advise the startup client on the best overall coverage to protect the startup’s intellectual property.

Risk Management

As noted above, the IP assessment may reveal some issues, including ownership conflicts or risks associated with third-party intellectual property. Holistic risk management should consider threats to the startup from all sources and offer solutions to mitigate risk. Creating a risk management strategy before any threats arise benefits both the startup and the practitioner.

Where applicable, practitioners should caution startups to avoid behavior that risks IP assets. For example, startup personnel may not know their own activities, such as offering the product for sale, can bar patent protection. Further, practitioners counseling startups should regularly update startup personnel regarding any changes in the law that could threaten IP assets. For example, recent cases have clarified the law regarding on-sale bars to patent protection12 and warn software-based startups that the use of open source software and fair use may be risky.13 Regular review of startup IP assets and the law affecting those assets may reduce the risk that the startup jeopardizes its own IP assets.

While the best efforts of practitioners can reduce threats from within the startup, even the most diligent activities cannot prevent frivolous litigation. While recent changes in patent venue law have resulted in fewer lawsuits filed in the Eastern District of Texas14—historically viewed as a hotbed for patent litigation matters brought by nonpracticing entities (NPEs)—NPEs are still filing patent infringement lawsuits in judicial districts all around the country. Startups also continue to face the threat of patent infringement lawsuits from competitors—both big and small—in the startup’s market. Thus, the threat of frivolous litigation still looms over startups that are often ill-equipped for prolonged legal disputes. For the risk-averse startup, patent infringement insurance may be a reasonable solution. Contingent on the quantity and quality of the intellectual property protected and the coverage amount, a startup can rest easier knowing that funds are available if the startup is sued for infringement.15 If IP insurance is appealing for a particular startup, practitioners may want to encourage similar insurance coverage from the startup’s suppliers and licensees, along with indemnification in the event of litigation.

Other defensive tools may also be available to startups. Programs like Google’s Patent Purchase Promotion,16 the Industry Patent Purchase Program,17 and PatentShield18 aim to curb frivolous litigation by reducing the number of patents in the marketplace available to NPEs or offering startups a wide range of patents with which to countersue competitors. Other organizations match startups with patents available for sale or license.19 These initiatives offer a number of flexible solutions to mitigate the litigation threats.

Conclusion

The wildly variant nature of the startup industry bars straightforward and run-of-the-mill IP guidance or a simple IP strategy. Practitioners counseling startups should expect to approach a startup’s legal issues with flexibility and offer holistic legal counseling, while understanding that most startups will be sensitive to costs and legal fees. Serving the startup community offers unique challenges and opportunities to practitioners willing to adapt to change and offer solutions that span the breadth of IP law.

Endnotes

1. See John Cook, Jeff Bezos on Innovation: Amazon “Willing to Be Misunderstood for Long Periods of Time, GeekWire (June 7, 2011), https://www.geekwire.com/2011/amazons-bezos-innovation; Jay Yarow, Jeff Bezos Thinks 100% Ad-Supported Businesses Are Bad for Users, Bus. Insider (Sept. 5, 2013), http://www.businessinsider.com/surprise-jeff-bezos-thinks-ad-supported-businesses-are-bad-for-users-2013-9.

2. Incubator and accelerator programs are not the only environments in which IP practitioners advise startups. However, these programs often provide unique opportunities for startups to meet and work with legal counsel to establish basic IP practices that lay a foundation for an ongoing IP strategy.

3. But see Brad Feld & Jason Mendelson, Venture Deals 179–81 (2d ed. 2013), where they assert “NDAs aren’t worth very much” and instead advocate for open discourse tempered by reasonable paranoia around unscrupulous characters. Practitioners would be well served to understand the needs of the particular startup, research the third party to whom the startup is seeking to reveal confidential and proprietary information, and consider alternative means of protecting proprietary information based on the startup’s business goals.

4. See Feld & Mendelson, supra note 3, at 152; and How You Can (but Shouldn’t) Patent an App Idea, Appster, https://www.appsterhq.com/blog/patent-app-idea (last visited June 14, 2018), which both argue execution is more important than patent protection. On the other hand, studies have shown patents “positively predict” longer startup lifetimes, and firms without patent protection are “much less likely to survive.” Jerry Cao et al., Patents, Innovation, and Performance of Venture Capital-Backed IPOs (Jan. 15, 2015) (unpublished manuscript), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2364668; Iain M. Cockburn & Stefan Wagner, Patents and the Survival of Internet-Related IPOs (Nat’l Bureau of Econ. Research, Working Paper No. 13146, June 2007), http://www.nber.org/papers/w13146.pdf. The Appster article also encourages the use of copyright, trademark, and trade secrets.

5. See, e.g., Gene Quinn, A Patent Conversation with Mark Cuban, IPWatchdog (Nov. 10, 2015), http://www.ipwatchdog.com/2015/11/10/a-patent-conversation-with-mark-cuban/id=63090. Despite his dismissive attitude toward patents and their value, Mr. Cuban admits he is willing to invest in patent-holding entities in certain circumstances.

6. Feld & Mendelson, supra note 3, at 152.

7. For startups hoping to exit by acquisition, a strong patent portfolio may be ideal. See Alistair Barr, The Other Reason Google Bought Nest: Patents, USA Today, Jan. 14, 2014, https://www.usatoday.com/story/tech/2014/01/14/google-nest-patents/4482201. On the other hand, Facebook successfully IPOed in May 2012 without an issued patent, but with at least one registered trademark. See, e.g., David Cohen, Facebook CEO Mark Zuckerberg’s First Patent Application Awarded after Six Years, Adweek (July 24, 2012), http://www.adweek.com/digital/zuckerberg-patent; FACEBOOK, Registration No. 3,716,926.

8. For example, the project management software Asana was originally created as a tool to support development of other Google products before the developer recognized that the tool itself was a valuable product. Stephen J. Dubner, Here’s Why All Your Projects Are Always Late—and What to Do about It, Freakonomics (Mar. 7, 2018), http://freakonomics.com/podcast/project-management.

9. Google traded 1.8 million shares to Stanford University for an exclusive license to U.S. Patent No. 6,285,999, its seminal page rank patent. Those shares later sold for $336 million. Sam Savage, Stanford Earns $336 Million off Google Stock, RedOrbit (Dec. 1, 2005), http://www.redorbit.com/news/education/318480/stanford_earns_336_million_off_google_stock.

10. Litigation contesting ownership rights of a company founder is not a new problem. See Pressed Steel Car Co. v. Hansen, 137 F. 403 (3d Cir. 1905) (involving a prior employer demanding assignment of patents based on an oral contract). For a more recent example of contested ownership rights, see Waymo LLC v. Uber Techs., Inc., No. C 17-00939 WHA, 2017 WL 2123560 (N.D. Cal. May 15, 2017) (involving Waymo, an Alphabet subsidiary, accusing a former employee of misappropriating trade secrets). In contrast, Justin Rosenstein has not faced any public problems with his prior employers after he abandoned internally developed IP assets at both Google and Facebook before leaving to start Asana. Dubner, supra note 8.

11. See Feld & Mendelson, supra note 3, at 86.

12. Helsinn Healthcare S.A. v. Teva Pharm. USA, Inc., 855 F.3d 1356, 1359, 1371 (Fed. Cir. 2017) (concluding that a public sale may bar a patent application, even if the details of the invention itself are private).

13. Oracle Am., Inc. v. Google LLC, 886 F.3d 1179, 1210–11 (Fed. Cir. 2018) (concluding that Google’s use of Oracle’s application programming interface was not fair use and therefore infringed Oracle’s copyright).

14. According to Lex Machina, the number of cases filed in the Eastern District of Texas fell to 121 in the fourth quarter of 2017, as compared with 467 cases in the same quarter of 2016. Brian Howard, Lex Machina Q4 2017 End of the Year Litigation Update, Lex Machina (Jan. 16, 2018), https://lexmachina.com/lex-machina-q4-litigation-update; see also Geneva Clark, TC Heartland, Legal Trends, One Year Later, Lex Machina (May 23, 2018), https://lexmachina.com/tc-heartland-legal-trends-one-year-later (indicating Delaware now leads the Eastern District of Texas as the “top place to file”).

15. Some might argue that the cost of IP insurance is prohibitive, but known and fixed costs may be easier to account for and project for the startup, investors, venture capitalists, and more.

16. Announcing the Patent Purchase Promotion, Google Pub. Pol’y Blog (Apr. 27, 2015), https://publicpolicy.googleblog.com/2015/04/announcing-patent-purchase-promotion.html.

17. About Us, Allied Security Tr., http://www.ast.com/about-us/asts-mission (last visited June 14, 2018).

18. PatentShield, Intertrust, https://www.intertrust.com/patentshield (last visited June 14, 2018).

19. See, e.g., Our Approach, Aqua Licensing, http://aqualicensing.com/our-approach (last visited June 14, 2018).

Natalie Alfaro

Natalie Alfaro Gonzales is a senior associate with Baker Botts L.L.P. in Houston, Texas, and an adjunct professor of law at the University of Houston Law Center. She advises startups in various stages of growth, and serves as a judge for business plan competitions involving startups.

Steve Maule

Steve Maule is an associate with Baker Botts L.L.P. in Houston, Texas, and has evaluated startups with the University of Houston Cougar Venture Fund.