The Patent Mirage: The New Challenge for Today’s IP Strategy

By K. Lance Anderson
November 28, 2017


• Categories: 04-Product Design & Development, 05-Quality/Regulatory, Business Analysis

Anyone dealing with “intellectual property” (IP) and its role in capturing innovation understands the critical role patents play in value creation. Patents are constitutionally-driven, time-limited rights to exclude others from practicing your invention, usually in exchange for your ‘enabling’ one of equal skill to carry out the invention, thus (in the words of our founding fathers) advancing the useful arts.

Over the years, businesses that participate in research and development or improvements to goods and services have implemented best practices when it comes to protecting their intellectual property assets. Effective due diligence, valuations, and negotiated representations and warranties around patents have become routine parts of many corporate transactions. Patent assets, material contracts, licenses, data, and software are often scheduled in mergers, acquisitions, asset purchases, and debt facilities. Security interests may be recorded based on ownership transfers and collateralization.

Patents have long served as the primary asset within IP portfolios. Patents are then typically bolstered by copyright, trade secrets, data, and by the careful management of trademarks and branding to maintain relevance as markets mature. After all, a majority of the allocated value of today’s businesses are comprised of intangible assets, including branding and goodwill, culture, and human capital. IP rights are clear contributors to overall market capitalization, and patents play a central role in the leveraging of innovation captured by a business.

It is therefore concerning to see that many existing patents, particularly those on the front edge of meaningful discovery and innovation, are under increasing threat.

Patents have come under increasing scrutiny over the past 5 years, ranging from court precedence on patentable subject matter to damages calculations. The mere ability to enforce your patent now requires significant risk and time (not to mention expense), with less guarantee of success. Patent litigation has fallen as a result, as companies and inventors realize their patents may not be as bulletproof as previously thought. Non-practicing entities (sometimes referred to as “trolls”) are changing their business models – some even shifting toward more collaborative opportunities.

The resulting patent climate is two-fold: (1) patents are hard to get (especially if a computer is involved); and (2) patents are easy to invalidate (especially if a computer is involved). Oh, and these cases apply retro-actively, so it won’t help to rely on your pre-dated patent portfolio.

The Patent Mirage

Because of these moving targets, patents may no longer represent the cornerstone of any nutritious IP portfolio. The patenting process is difficult enough, but when courts move the ball on patentability standards, the results are potentially disastrous for an innovation-driven company. Whether there are emboldened infringers in effect ‘daring’ you to assert your patents at the risk of invalidation; or if your investors are counting on your ability to effectively patent your innovation (probably because you told them you could), these objectives are no longer certainties. And if your innovations involve anything that could be deemed ‘abstract’, including portions that involve computer processing, even long-issued patents are subject to being thrown out.

The size of one’s patent portfolio is often thrown around like 40-yard dash times for athletes. A typical investor, analyst, or even acquirer, assumes that – well – patents are patents. However, there is a qualitative aspect to patent portfolios, and with the current climate, there should be skepticism with any patent portfolio. The patent mirage lies before you.

The Modern IP Strategy

While patents should maintain a role in a cohesive IP strategy, you should explore other ways to protect your assets. Today’s innovations, regardless of the nature of your business, often utilize data or executable applications that are cloud- or web-based, and may never require disclosure or transfer of source materials. It may therefore be worth focusing on careful management of information and exchange rather than subjecting that innovation to the disclosure requirements for purposes of trying to get a patent (which you may not get). One area to exploit further is the universe of trade secrets.

Trade Secrets – Thinking Inside the Black Box

Trade secrets are defined to be inclusive – the list of qualifying information is quite broad – provided that: (1) it is truly a secret; (2) it represents something of value; and (3) reasonable steps are taken to keep it a secret. As opposed to patents, trade secrets have unlimited shelf life (so long as they cannot be reverse engineered) and they can significantly increase a business’s value in multiple ways. While independent discovery by others is always a risk, building a portfolio of trade secrets is possible, even for the most basic of businesses. When considering that even “customer lists” are considered trade secrets by both state and federal trade secrets laws, things can get interesting.

As businesses are formed and grow, trade secrets emerge. It is inherent in any business, and it is a greater opportunity than many companies realize. The introduction of data aggregation and analytics – ranging from applications in healthcare to marketing and advertising – hits at the heart of trade secret law. Properly protect it and you’re valuable. Mismanage it and you’re toast. None of the data is patentable, that’s for sure.

Creating a culture within of harvesting expertise and know-how, inventorying it, and protecting it against disclosure or misappropriation should become a core function of management. This involves starting with the correct policies, employee documentation, security parameters (both electronic and physical), thought with regard to bring-your-own-tech (BYOT) policies and/or memory storage and access, disclosure standards with customers and third parties, and ensuring consistent compliance throughout an employee’s arrival and departure. Should a successful trade secret program be initiated, robust amounts of information are now identified and accounted for, and these can become core assets in the eyes of the business.

This pendulum further swings when factoring in the robust amount of law in your stable. Trade secrets may be protected via contract, and the penalties are often severe. Statutes such as the new(ish) federal Defend our Trade Secrets Act (DTSA), which went into effect in 2015, created a federal cause of action for trade secret misappropriation. State common law may be utilized, with (almost) every state having its own trade secret laws modeled after the Uniform Trade Secrets Act (UTSA). These rights and associated remedies have further increased the potential of trade secrets to be protectable and enforceable (and perhaps more predictable than patents). In addition, there are several peripheral bodies of law which may be triggered: The Computer Fraud and Abuse Act (CFAA), Copyright Act, and the Economic Espionage Act of 1996 (EEA) allow for certain statutory, civil, and even criminal remedies for misappropriation of your trade secrets.

Effectively leveraging the intellectual assets of your business requires a holistic approach to IP protection. Today’s legal climate means that your patents may not be able to fulfill your needs, nor may they be as strong as you expect. One option is to enhance your position by focusing on what you can control – identifying, protecting, and exploiting your information in a vigilant manner, consistent with the expectations likely placed upon you by your stakeholders.

Utilizing all forms of IP, particularly the expansive trade secret classification, will help ensure that your IP strategy takes advantages of all the tools for maximize value.