At some point in the career of any scientist, developer, or inventor, the question of whether or not to patent their discovery comes into play. It is often a difficult decision to make, one that necessitates serious conversation regarding the advantages and disadvantages of patents. This back and forth is even more evident in startup companies, where the technology is fresh and the stakes are high. Due to this, new companies often face a sort of “patent dilemma.”
Naturally, inventors have an interest in protecting their intellectual property. Understandably so, as developing a novel software, machine, or product takes a significant amount of time and resources. As inventors foray into the legal world of patents and trade secrets, there is often a need to balance the interests of several different parties and ensure that their IP is handled properly. For instance, the presence of capital investors may influence the decision to move forward with a patent.
The Types Of Intellectual Property
In essence, intellectual property (IP) refers to any and all creations of the mind. This definition is intentionally broad, leaving room for various different industries and creative pursuits within. It covers everything from works of art to inventions to computer software, from spurring new jobs and industries to generally enhancing quality of life.
The progress of society hinges upon the capacity to generate new ideas, technologies, and creations. Intellectual property law recognizes this through the creation of different IP rights and protections. The World Intellectual Property Organization recognizes several different types of IP, which fall into two general categories:
Artistic or literary creations
For our purposes, we will be considering patents and trade secrets – two forms of IP typically most relevant to startups and investors.
What Is a Patent?
The United States Patent and Trademark Office (USPTO) uses federal law to outline what a patent is and what types of discoveries can be patented. Under the United States Constitution, a patent is used to protect the invention or discovery of any new and useful process, machine, manufacture, or composition of matter. To this point, there are three types of patents that an inventor may pursue:
Utility patent: the most traditional form of patent, this type covers any process, machine, manufacture, or composition of matter (or any useful improvement thereof),
Design patent: granted for the creation of a new, original, ornamental design for an article of manufacture, and;
Plant patent: granted to the invention, discovery, or asexual reproduction of a new plant variety.
Regardless of the type of patent, the invention or discovery must have novelty and utility. This means that the invention or discovery must be both useful to society as well as entirely new, and never before discussed within any published content or patent.
In 2020, the USPTO received nearly 650,000 patent applications and granted slightly more than half of them. The software/internet industry encompasses the majority of this metric, holding 73% of patents. Meanwhile, biotechnology/agriculture, IT/hardware, and the medical industry share the bottom three-quarters, far behind the front-runner.
What are the Advantages And Disadvantages Of Patents?
There is a great deal of discourse surrounding the use of patents. One side of the conversation argues that a patent can generate greater success for an inventor or inventing company while the other claims that patents are entirely unnecessary and/or detrimental. Opinions aside, obtaining a patent is a difficult and arduous process, and must be carefully considered before taking action.
Much like researchers and inventors, we value evidence and objectivity. With that being said, let us explore the advantages and disadvantages of patents, especially for startup companies.
Advantages Of Obtaining A Patent
The most common arguments for obtaining a patent are financial in nature, as there is significant evidence suggesting that the existence of a patent could greatly benefit startup companies fiscally. Here is what we know:
Patents help secure venture capital: Venture capital-backed companies tend to patent more than non-venture capital-backed companies. They also have a higher number of applications. An empirical analysis of patent strategies of technology startups reports that companies that patented their technology early on were associated with higher total funding and therefore were more successful. This suggests that patents could serve as evidence of innovative activity, thus encouraging funders to invest in the company. (Read more in Rueter's article here)
More patents, more money: On average, tech startups have two patents per company. Moreover, some major Silicon Valley investors like Khosla Ventures, DAG Ventures, and Menlo Ventures have patent application rates that are substantially higher than average. The aforementioned study indicates that companies receive $530,000 more in funding per additional patent that they have, indicating a strong correlation between the amount of patents and amount of funding received. There is also a connection between the financial impact of patents for different funding rounds, with the greatest impact happening in rounds 1, 2, and 3.
Increased employment and sales growth: Due to the positive connection between patents and investment decisions, companies that patent their technology tend to find greater success and longevity. With this comes better employment and sales growth than companies without patents.
With this information in mind, it is clear to see why the patent dilemma often boils down to finances and investment-potential. Many investors value patents as they make investment decisions. According to the 2008 Berkeley Patent Survey, 67% of investors state that patents were an important factor when funding startup companies. This figure is significant and should be taken into account when evaluating the advantages and disadvantages of patents.
Disadvantages of Obtaining a Patent
While the advantages of obtaining a patent are clear and supported by evidence, there are certainly factors to consider that may deter a company from applying for a patent. Some of the most important considerations include:
Patents are quite expensive: Startups often lack the financial resources to pursue a patent. Between filing fees, issue fees, and patent prosecution, the costs associated with obtaining a patent can be steep. These costs increase greatly if the application includes foreign jurisdictions. There are also maintenance fees that must be paid at regular intervals following patent approval, which sustain legal protection of the patent.
Relatively short economic lifespan: Another common factor that deters startups from obtaining a patent is the short economic life in comparison to other forms of IP protection. At most, patents last for twenty years, starting from the date the applicant files the application. The USPTO reports that a patent application is pending for an average of 22 months before a decision is made. In some situations, the pending period stands to severely reduce the lifespan of the granted patent.
Limited jurisdictional protection: While a patent grants exclusive rights to an invention, these rights only apply to certain jurisdictions. Moreover, when an invention is patented, the inventor must disclose the exact nature of the invention including how it works on a technical level and the problems that it addresses. This disclosure carries risk, as patents only protect intellectual property within the confines of their jurisdiction. If an inventor patents their technology in the United States, the same technology is not patented in another country. Therefore, to fully protect their innovations, inventors may file applications in foreign jurisdictions.
What Is a Trade Secret?
Different from patents, trade secrets include confidential information that has commercial value derived from its secrecy. They can include a practice or approach that a company uses which is relatively unknown outside of the company. Often, trade secrets provide a company with a marked advantage over their competitors.
For a trade secret to exist, all three of the following elements must be present:
Contains publicly undisclosed information that has actual or potential economic value,
Has value to others who are not privy to the information, and;
The owner of the trade secret must take reasonable precautions to protect the information
Note that all three prongs must be met in order for a valid trade secret to exist. If any element ceases to exist, so does the trade secret. This means that there is no specific lifespan for the trade secret; it can be protected indefinitely, assuming all three elements persist.
Diverse areas of information can be protected by trade secrets, including both technical and commercial information. To this point, trade secrets can protect:
Research and development data
Supplier or client lists
Trade secret law has been put in place to ensure that the market continues to function fairly by promoting innovation and reducing unfair competition, or anti-competitive business practices. Many types of companies value the IP protection offered by trade secrets, but it is necessary to consider the advantages and disadvantages of patents vs trade secrets before committing to a strategy.
Patents vs. Trade Secrets
Trade secrets either meet or do not meet the patentability criteria, meaning some trade secrets could be further protected through a patent. As such, trade secrets are oftentimes used to complement patents and offer more comprehensive protection for intellectual property.
Some advantages of trade secrets compared to patents include:
Time limits: There are no time limits on trade secret protections. Whereas a patent is generally valid for twenty years, trade secret protections do not expire as long as the three elements are met.
Cost considerations: There are no registration costs associated with trade secrets nor are there disclosure requirements. The lack of formalities in this regard make it much faster and less expensive to obtain a trade secret.
Immediate effect: Trade secrets are effective immediately and there is no application involved. Companies will oftentime protect their trade secrets through non-disclosure agreements. Therefore, once the secret is established, and the company goes through reasonable effort to protect it, it is in effect.
There are also disadvantages associated with keeping information a trade secret, especially if it is patentable. These can include:
Reverse engineering: If the trade secret is embedded in an innovation, it is possible for other individuals to discover the secret and reverse engineer it into a product. A trade secret does not prevent a third party from commercially using the information; only patents can protect IP in this regard.
Enforcement: A trade secret is much more difficult to enforce than a patent. A patent carries with it certain legal protections that can have serious legal consequences if violated. Given the lower amount of protection and nature of the enforcement, is difficult to prove that a trade secret has been violated.
Ability to sell or license: Due to the secret nature of the information, trade secrets are more difficult to sell or license than patents. Patents protect novel developments or inventions that are typically implemented within their respective industry.
How Can A Patent Law Attorney Help?
Navigating the waters of IP law can be highly stressful to individual inventors and startup companies. Weighing the advantages and disadvantages of patents is not only incredibly important to protecting intellectual property, but it carries significant financial consequences as well. The patent dilemma is a common occurrence for a reason, and it is natural to have concerns regarding the best way to protect your intellectual property.
It can be difficult differentiating between what is relevant to your specific innovation, and it is for this reason that seeking legal assistance can be of great benefit. Consulting an experienced patent law attorney can help with understanding the advantages and disadvantages of patents vs. trade secrets for your startup or company's IP decisions.