Preparing for investment - the role of patent law in funding
Trainee Patent Attorney Dr George Christian of Marks & Clerk Law LLP explores how patent law and process affect funding and financing options.
As assets, patents can make a business or organisation highly attractive to potential investors. They give the owner exclusive right to exploit a particular technology for a limited period or to generate income by granting others a licence to exploit it.
However, investors are increasingly well informed when it comes to assessing the value of a patent portfolio, so it is important to ensure that organisations know how to use the patent system to their advantage when seeking financial backing.
Will a patent add value?
When deciding whether to pursue patent protection, it is often beneficial to consult the research and development team, as they will usually understand the existing technological landscape. However, while a granted patent usually indicates that the invention is novel over known technology, following a rigorous application process, this does not guarantee that it will bring in revenue. A patented invention, no matter how ground-breaking, will only impress potential investors if the owner has a clear business plan in place identifying a route to commercialisation.
It is also worth considering whether alternative types of intellectual property (IP), such as trade secrets, may be suitable. The patent application process is expensive and time-consuming, and patent protection is time-limited. Once the patent (which will have been published) expires, the invention may be freely exploited by anyone.
Where the invention is a process that is undetectable in a final product – such as a recipe or manufacturing step – it may be impossible to establish whether a competitor has infringed a patent by using the same process, rendering the patent unenforceable in practice. Conversely, by ensuring that appropriate confidentiality agreements and secure systems are in place, a trade secret could be used to protect an undetectable process indefinitely. Investors will be unimpressed by wasting money on patents that offer no practical protection.
Who owns the invention?
When seeking investment, potential backers will want to be sure that an organisation actually owns the rights to its technology. Investing already carries a significant amount of financial risk, and investors will not want to take on any more due to uncertainty surrounding IP ownership. Where development has taken place as part of a collaboration, it is essential to establish ownership and exploitation rights at the beginning. If there is no formal agreement in place, these rights will be determined by local laws in each relevant jurisdiction. This could mean, for example, that all owners provide permission whenever one owner wishes to assign or license the patent to a third party. If one owner refuses to cooperate, it creates a difficult situation that any investor will wish to avoid.
Similarly, it must be clear that any IP is owned by the organisation seeking investment, and not the employees who originally generated it. Under the UK Patents Act, ownership of an invention automatically falls to the employer if it was invented by an employee in the course of their normal or specifically assigned duties. In contrast, consultants and contractors will own any IP that they generate unless otherwise specified in their contract. Investors will be wise to these pitfalls, and they will be put off supporting any venture if it appears that IP ownership might be brought into question.
Organisations should ensure they seek professional advice to avoid any disputes surrounding IP ownership, as these may otherwise prove costly, in terms of litigation and lost investment.
Do the research
Organisations should research what the ‘state-of-the-art’ is before seeking patent protection for their technology. If an invention is likely to be found to lack novelty or inventiveness, it may not be worth filing an application in the first place. Patent owners should also undertake periodic reviews of their portfolios, as changing technologies might render patents obsolete before they reach the end of their natural lives (a granted patent must be maintained by payment of renewal fees).
Even if a patent is granted, amendments during prosecution may mean that it no longer provides broad enough protection to prevent competitors from working around it. In these cases, it may be wise to drop these applications rather than invest any more time and money.
Investors will do their own research, and they may not want to finance a large but ultimately ineffective patent portfolio. On the other hand, ongoing patent applications can sometimes be useful to deter competitors, even if they do not result in granted patents. When used effectively, and with a strong commercial strategy in place from the outset, patents can be highly valuable assets. It is therefore essential to demonstrate clearly defined objectives if seeking investment.
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