Patent Value and What It Can Mean For Your Startup

It’s big news:  Google is paying $12.5 billion to take over Motorola Mobility, the maker of mobile handsets.

And Google really wanted the company for its patents.

It’s trying to beef up it’s paltry portfolio. Google also recently bought 1,000 patents from IBM.

In July a group of companies including Apple and Microsoft spent $4.5 billion for the patents of bankrupt telecom company Nortel.

Companies are trying to beef up their defensive and offensive positions in an all out patent litigation and licensing duke-out over mobile phone applications. There are billions at stake and patents are providing the leverage.

You may be thinking, sure that’s great for the big boys who can afford patents but:

What’s the value of a good patent to a little startup?

1.  Patents can help you stop competitors from making, using, or selling an infringing device or service covered by the patent claims.

Even for a tiny startup, a good patent on your core technology, service or distribution method can give you an amazing competitive advantage. The mere fact that you have a patent can make potential competitors think twice before competing with you.  The threat of patent litigation is very serious and expensive. Potential investors of an infringing company would likely run for the hills. The patent isn’t making you any money per se but is providing a key barrier to competitors. A patent gives you a limited, legal monopoly.

A patent is like a big sign that says, “Keep Out of My Territory.”

For example, eLance, who provides a service for hiring workers on-line has a patent on its method of hooking up workers with companies.

See U.S. Patent No. 7,069,242, Method and apparatus for an electronic marketplace for services having a collaborative workspace.

The claims of the patent set out the boundaries of what is covered. Each claim has a slightly different scope. If a company does the method covered by the claim, it is guilty of patent infringement. Here is one claim of the eLance patent.

1. A computer implemented method, comprising:

accepting a posting on a website of a project that a buyer wants completed;

providing a database containing all registered sellers;

receiving a bid on the project from any seller, where all registered sellers are qualified to bid on postings in all categories;

allowing the buyer to accept the received bid from the seller; and

allowing the buyer and the seller to work on the project in a collaborative workspace accessible by only the buyer and the seller, where the seller develops and delivers the project in the collaborative workspace and the buyer can track the project in the collaborative workspace before it is complete.

This claim is pretty broad and a real coup for eLance. It will help them stay ahead of the website job placement pack.

2.  Patents can make your startup more attractive to investors.

Startup company valuations are often based primarily on the value of the intellectual property that protects the key technology or business method. A granted patent increases that value.

Before they invest in your company, Angels and VCs want to know how you are going to have an advantage in the marketplace.  A patent or even a patent application shows investors that you take intellectual property protection seriously and that you are trying to get a strong competitive advantage by using the law.

3.  Patents can give your startup leverage in negotiation with a big company.

I’ve represented little software companies in negotiation with big companies.  Startups with key patents had far more bargaining strength and were able to enter into cross-licensing deals on much better terms.

4.  Patents can also generate licensing revenue.

In some circumstances, a patent can also generate money for your company through licensing deals with others. It’s called patent monitization and even small companies with important patents can play the game.

(Although patents can also generate revenue though settlements and damages awards through litigation, patent litigation isn’t really practical for a startup unless you can find a litigator who will take your case on contingency for a chunk of the final recovery.)

A patent can do wonders for your startup and it’s worth serious consideration when you are developing your IP strategy.

But make sure you don’t inadvertently blow possible patent protection. See the related post.

Jill Hubbard Bowman is an intellectual property attorney who helps startups and emerging companies gain a competitive advantage.