Patent Protection

August 26, 2002

by Wendy Hall, Larta Staff Writer

With the potential of creating much-needed revenue streams and erecting barriers to entry, intellectual property (IP) is no longer just another asset in the tumultuous tech economy, but constitutes a vital business strategy.

For entrepreneurs and tech startups trying to either attract capital or gain market share, patented assets have become one way for new businesses with little track record to gauge both value and viability in its chosen marketplace. Thus, the management of IP has become a considerable priority for emerging companies as well as established corporations trying to locate untapped revenue sources. This priority shift is reflected in the rate of patent applications that have been filed since the beginning stages of the current economic downturn. According to Forbes magazine, the annual growth rate of the number of IP applications rose from an average of 8% (during the 90s) to 12% in 2000 and 2001, while biotech applications alone saw a 24% increase during that time frame.

"I would assume that the main reason for the increase in filing is because companies are coming to see patents as a more valuable asset," says Michael Kreiger, a patent attorney and speaker at the upcoming Larta University workshop on intellectual property.

The bulk of the market capitalization in many companies is now a series of intangible assets, says Kreiger. Because these assets aren't reflected in accounting reports (a current concern of the SEC in light of recent corporate scandals), IP has become one of the few assets that is tangible, and thus plays a major role in determining a company's stock. For most entrepreneurs seeking capital to grow a tech business, patented assets are also crucial in the initial marketing stages because it can convey to a potential investor that, "you at least know enough to think about patents. A decent potential patent is very important to providing a competitive advantage or barrier to entry against potential competitors."

Despite the importance of IP for a startup tech company, many entrepreneurs mistake a successful patent application as providing an umbrella of protection against not only a venture capital drought, but unforeseen circumstances such as market development cycles, shrinking lead times, changing legal interpretations, and-- one of the most common conflicts for tech companies--conflicting patents. Because of the vastness of the number of tech and science patent applications, a patent approved does not insure that there are no other already-licensed innovations that don't conflict with it. The patent search, which the US Patent and Trademark Office conducts during the application process, attempts to remedy the problem of rivaling properties, but because of the vastness of the number of applications and the rapid change taking place inside these fields, it is inherently flawed. Thus a company does not relinquish its responsibility of understanding market competition by being afforded patent protection.

"Presumably the entrepreneur understands the market they're in and understands whether they're treading on toes," Kreiger says. "One of the things about technological innovation is having something that's a new idea or a new discovery or application of a discovery, and really knowing about your field is what's going to tell you that you're the first."