Why Startup Patents Are Doomed From The Start
Patents for small companies are fundamentally different from patents for large companies. The decisions made – and skills needed – to develop the two are very different.
There are several problems facing a startup company when getting patents. The biggest problem: the skillset needed for a startup’s patents is not practiced in the conventional law firm. Couple that with the inherent economic forces of a law firm, and we have the recipe for very bad patents being written for startup companies. This is one of the reasons why the patent system is broken, but not the way you think it is.
How to solve this problem? Insert the needed expertise into the process.
What Startups Need is Much Different From What Big Companies Need
Every patent matters to a startup company. This is not the case for big portfolios. For larger portfolios, the size of the portfolio compensates for any weaknesses.
Startups are making big investments in a specific market, and they are relying on their patents to protect that investment. They need each and every patent to have value.
The startup’s patent has to rise or fall based on its inherent strengths. One badly worded argument with an examiner, an extra word in the claim, a seemingly small admission in the specification: any of these can kill the entire patent. Worse yet, the whole business proposition of a startup are undermined with patent claims that focus on an invention that is undetectable or unenforceable.
For startups companies at infancy, their one patent needs to be absolutely bulletproof.
It is a different story with large portfolios.
I had a client who said: “Patents are like hyenas. One hyena is easy to scare away, but a whole pack is vicious.”
I was the Chief Patent Counsel and COO of a startup company several years ago. We began discussions with Intellectual Ventures to do some kind of financing deal. At the time, IV had an enormous portfolio of 30,000+ patents which they were actively licensing. As part of the deal that we were discussing, IV wanted us to buy a license to their gigantic portfolio.
I asked them if they knew of a single patent in their portfolio that we might have infringed. They responded: “if I have to dig through 30,000 assets to find the infringement, the license would cost double.” Neither of us wanted to sift through 30,000 patents. But the threat was very clear: they were sure that they could find something that could put us out of business.
For giant portfolios, there is no way that anybody – even the biggest corporations with billions in the bank – are willing to shoot down every single one of the patents in such a large portfolio. These portfolio’s pure strength lies in volume, not quality.
Prior to the startup company I referenced earlier, I also wrote hundreds of patents for a Fortune 10 company. That portfolio had many tens of thousands of assets, and none of the patents needed to rise or fall individually. They were licensed as big packages of IP assets.
The best practices established by my Fortune 10 client met minimum standards that avoided known problems. But doing such high-volume work has an implicit understanding that the client was paying for high volume, not high quality. Reasonable quality patents would suffice.
For large portfolios, none of the individual patents are bet-the-company critical. Quality controls and best practices used to manage the patent process reflect that, as you would expect. My Fortune 10 client would from time to time get a bet-the-company critical patent. That patent would go to specially vetted patent attorneys, and that patent would undergo much different quality control procedures.
Processes and procedures for high volume, medium quality patents are different from what startup companies need.
Simply put: startup companies need every single patent to be enforceable, but virtually nobody else does.
A single patent lawsuit (or a successful licensing deal) can fast-track a startup to bankruptcy or propel it to greatness. These patents are bet-the-company-level assets. A single problem in the startup’s patent can kill everything.
The skillset for building bet-the-company-level patent assets is not taught to patent attorneys.
Differences in Skillsets for Big Portfolios vs Small Portfolios
Bet-the-company-critical patents take a different skillset than writing run-of-the-mill patents.
Important patents take two specific skillsets that are not taught in law firms: properly curating the invention and ultra-high-quality prosecution.
A patent attorney’s job is to get a patent. They do not care what it is, just that they get paid for it. The old joke: “How does a patent attorney tell the difference between a good invention and a bad invention: it is whether the check clears.”
A startup typically wants patents fast and cheap. Using the old saying that you can only get two of good, fast, and cheap, their patents will necessarily be weak on “good.” Their patent attorney’s bias is inventions that are easiest to get through the patent office. This is expected, and the attorney is (or at least appears to be) serving the client well by doing so.
Here are some easy patents to get, but are utterly worthless for a startup:
- software algorithm patents
- server-focused software patents
- method of use patents
- method of manufacture patents
- manufacturing equipment patents (unless the company’s business is selling the equipment)
- multi-actor patents
Another wrinkle to the problem: the attorney has zero motivation to challenge the client, especially at the beginning phase of an engagement. The attorney needs the client to be happy, so the attorney will not rock the boat. In fact, attorneys are trained to do everything possible to convince the client that the invention is brilliant, no matter how awful it really is.
The focus on “low cost” forces the attorney to get the easiest patent possible, which is often a worthless patent.
The next problem is that the skillset of ultra-high-quality prosecution is hard to find.[1]
Patent attorneys typically have zero feedback about the quality of their work product. This is an inherent weakness of the whole patent system. The attorneys do not have to live with their mistakes, because patent litigation and patent transactions happen long after their work product has ended.
A patent attorney will work on a patent, but the patent might not be litigated, licensed, or sold for 5, 10, or even 15 years. It is only then will someone critically evaluate the patent attorney’s every word. Only then will we know if that patent attorney did a good job.
All patent attorneys are required to take Continuing Legal Education courses. Ideally, these courses will review the relevant changes to patent law and go over best practices. However, a patent attorney might fulfil their course requirements by taking courses in real estate, insurance, or something completely unrelated.
As a patent practitioner who reviews countless patents, I can read a patent specification and tell when they started practicing and how they were trained. The style of writing, the techniques for explaining things, the way a patent is crafted all reflect what was in vogue when the practitioner began their career. One trained, that attorney will do things the same way their entire career.
One of my little games is to try to guess the patent attorney’s registration number purely from reading their work product. (The registration number correlates to when they passed the patent bar exam.)
Good patent prosecution techniques come from learning from your own mistakes, but also from learning from other people’s mistakes.
Someone who has no law firm training is stuck with making their own mistakes, but the feedback loop might take 5 years. It can take that long before they get into examination and finally realize the problem. Now they have 5 years’ worth of patents in the pipeline with the same mistake. This is not an efficient feedback loop, and that attorney slogs out their career with poor workmanship.
One of my friends took a brilliant approach to this. He was pretty green when he hired on as inhouse patent counsel. As part of his hiring package, he negotiated for a budget to hire patent litigators to review his patent applications. He wanted immediate feedback from people who would later have to enforce/defend the patents.
By getting feedback from experts on the “other side” of the patent equation, my friend quickly became a dominant leader in the best way to do patent prosecution.
The sad part is that very few practitioners develop this type of skillset. There are a few, but they are hard to find (and never advertise).
The law firm model also hurts the startups because their work is done by the junior varsity team.
Law Firms Favor Big Clients Because They Have To
Almost all law firms have bigger clients who get all the love and attention. Typically, any law firm will have one or two “whales” that account for most of their revenue. These corporate clients send lots of work at dependable intervals. They get the best service, of course, and any leftover time is filled by smaller clients. The Big Clients are the lifeblood of the law firm, and justifiably get the best that the law firm has to offer.
The Big Clients also get the best talent of the law firm. Often, Big Clients will qualify or vet specific attorneys at a law firm who can touch their work. These Big Clients will prohibit any other attorney from working on their matters.
However, the firm needs to groom lower-level associates. The conventional law firm model is a glorified pyramid structure, where the partners make money on the associate’s billing. The partners need to bring the associates up to speed as fast as possible so that they can justify higher billing rates – and to get them working for Big Clients.
So, who actually works on Small Client’s patents? In a law firm model, that work flows downhill to the low-level and inexperienced associates. The partner will take all the meetings with the client so the partner gets “credit” for the client’s billings. However, the work will be done by the first-year associate in the window-less back room. Most Small Clients have no idea that this is going on, but they are terrified to inquire because the hourly meter is always running.
As an aside, many smaller firms or solo attorneys can provide much better work product than bigger, more conventional law firms. However, this can be hit or miss. Some small firm or solo attorneys spent time in larger firms where they were well-trained and exposed to lots of different legal situations. Others were not. Some small firm or solo attorney were, to be frank, not good enough to make it into a law firm, were never properly trained, and are making it up as they go. These attorneys are flat-out dangerous when handling your patents.
The point is that Small Client will always get the junior varsity team working on their matters. This is just a fact of life for law firms and nothing will change it.
Putting It All Together: The Startup Is Doomed
These factors all point to the economic and practical headwinds that doom a startup company who is trying to get their first set of patents. Using the conventional systems, there are just too many factors pushing in the wrong direction.
The conundrum of the startup company: They need patents that are bet-the-company-strong. But they are stuck in a system where patent attorneys are not trained to build these types of assets – and in a law firm model where they are second-class citizens. Couple that with the startup’s desire to keep costs low and there is no wonder 95% of all patents are worthless: the system is rigged against them.
How to Solve This Problem?
The way to solve this problem is to decouple the forces in play and insert the needed skillset.
Big Client knows how to handle very high value patents: they put the patents through a different process and are willing to pay high fees to do so. They have internal patent attorneys who are the experts in creating valuable patents, and they work with highly skilled (and expensive) outside counsel. In this engagement, the inhouse patent counsel is calling the shots, directing every move, because they are ultimately responsible for whether the asset is good or bad.
Big Clients have expert, inhouse patent attorneys who have “skin in the game.”
Startup companies need that same level of expertise but with someone who also has “skin in the game.” The person managing the patent process must have some accountability after the patent is issued. Sadly, the startup company rarely has that level of expertise and “outsources” it to their outside counsel who has zero skin in the game. Most startup CEOs do not realize that they are letting the wolf guard the henhouse.
For Big Client, the accountable person is inhouse patent counsel. For Small Client, it could be an IP strategist who is responsible to the Board for the quality of the patent assets.
In the BlueIron financing model, BlueIron is responsible for
the quality of the asset because BlueIron is treating the patent as collateral.
A startup never has to worry about having less-than-stellar patent assets
because someone has skin in the game.
[1] A reminder: patent “prosecution” refers to the back-and-forth with the patent examiner. This is different from “litigation,” which is when the patent is enforced in court.