To file, or not to file? In the world of intellectual property rights and protection, filing patents is not a question; it’s an imperative. That’s the view of experts who note that decisions, including when and where to file, can materially impact a technology company’s future.
Despite a proven capacity to generate world-class IP across sectors ranging from aerospace to biotechnology, when it comes to filing patents, young Canadian tech firms need to up their game.
Ottawa-based IP lawyer Neil Milton says while Canadians file about 10,000 patents annually, “that’s just one-half as many per capita as Americans, and one sixth per capita compared to Swedes.”
While the cost and other factors associated with filing and defending patents warrant serious consideration, not filing patents brings risks beyond an idea’s infringement.
EDC information and communications technology sector advisor Rob Caouette, says, “When you’re working on software and you don’t have physical assets, it can be difficult to secure corporate financing. In the ICT sector, IP is often a company’s biggest asset.”
Paul Lee, president of VanEdge Capital – a $137-million technology-focused venture capital fund– says a lack of patents might not completely undermine a tech company’s ability to raise money, but it adds complication and cost.
“If the company doesn’t have patents filed, it’s one of the things most VC firms will do as part of their due diligence. But this will add to the fees the company pays on closing. It will also add to the complexity of the financing process, so ultimately it can also delay a deal’s completion,” he says.
Mr. Lee, who, prior to starting VanEdge helped build Electronic Arts into one of the world’s pre-eminent interactive gaming companies, advises tech companies also take early measures to address inadvertent patent breaches. “If you are in breach, it’s always easier to negotiate with the patent-holder up front, before you fully develop a product.”
For these and other reasons, Mr. Milton advises companies to “file first and then figure out how to monetize the IP – how to raise the money to keep your rights alive and make a return.”
He is quick to caution, however, that determining whether filing – and potentially defending – a patent in multiple jurisdictions is worth the cost is a measure of the IP’s potential market value in a given region.
“Ask yourself, ‘What will the big guys with the brand and distribution power to use my IP to make significant market gains pay for my technology? Where do they manufacture and sell?’ Apply only in those countries that matter most.”
Regardless, he says filing in the U.S. is typically a must. “There really is only one primary market: the U.S. All others are secondary. But those markets add up. You have to figure out what works for your product and your market. With patents, think 20 years out.”
The good news, says Mr. Milton, is a U.S. provisional patent application costs a fraction of a full-blown patent and affords the holder a 12-month window to “aggressively and wisely determine whether it can afford to monetize the patent. File first; then spend 12 months determining whether to proceed with a full-blown patent.”
That analysis is critical. Filing a patent application costs from $10,000 to $50,000. The next step, known as “prosecuting” the patent in the home market (and any other market you want to file), adds another $10,000 to $50,000, depending on the IP’s complexity and distinctiveness. Canada now has bilateral agreements with countries worldwide, including Denmark, the UK, and the U.S., that help make prosecution in those countries faster and less expensive. “Localizing” the patent adds an additional (minimum) $5,000 per country, not including translation fees and government fees. Then there is asserting the patent. “IP is most valuable when it makes someone else’s life painful. Ultimately, you (or your investors, partners or acquirer) have to have the pockets to make a credible threat to litigate. You have to figure out a way that bigger companies will honour your rights,” says Mr. Milton noting that litigation can cost hundreds of thousands of dollars. Factor that into an IP’s value equation and he says, “If your angel investors are seeking a seven-times return on their investment, a rough rule is that you need to show them an ability to sell your IP for several million dollars.”
Is protecting IP worth the price? To the right buyer and investor, it certainly can be.
Consider VanEdge Capital’s recent investment in a small company called Signalset. Its Canadian engineers and management developed a ‘carrier-switching’ technology now proving to be a game changer for PACCAR, a global provider of telematics systems used by large fleet operators.
Signalset’s TruckerLink application helped PACCAR’s Connected Truck program earn PACCAR the number-one rank in Information-Week magazine’s 2011 Top 500 company list.
“It’s really important that the truck is in constant communication. PACCAR’s system automates the driver’s log functions and offers navigation. The Signalset technology ensures the system is always in touch. But it’s not just a technology play, it’s a distribution play,” says Mr. Lee. “We believe that over time there will also be opportunities to monetize screens in trucks, because they will also provide entertainment and gaming functions for drivers when they are on breaks.”
“You have to have a big dream and spend as prudently as possible to protect IP. Kill patents that aren’t working and keep the ones that a large buyer will value. This is a difficult game, but the payoffs can be huge.” says Neil Milton, Ottawa-based IP lawyer.
For more information, visit edc.ca.