An IP protection strategy is often not the first or even the tenth thing startup founders think about.
This is particularly true for Canadian companies because Patent Assertion Entities, otherwise known as “patent trolls,” are not as pervasive a problem in Canada as they are in the U.S. However, the lack of a clear IP protection strategy can be a critical mistake for companies on both sides of the border.
This was a lesson I learned as I built my first company, a global payments provider called Hyperwallet Systems. One of the first steps we took was to file a patent, even though we were predominantly a software and services company rather than a creator of “breakthrough technologies.” We were underfunded and had a small team, so the patent process absorbed a sizeable chunk of our scarcest resource — cash. It also consumed considerable management and engineer time to file the patent, first in Canada and then in the US.
Why did we invest all this time and money?It was viewed as a necessary box to tick as we raised capital, but we were certainly skeptical about allocating precious resources to filing a patent as a defense mechanism. At one point, we were not even able to pay our two patent lawyers in Canada.
The patent was filed and went fallow. Seven years later, Hyperwallet was on better financial footing and able to invest the resources to actually get the patent issued. At one point, we considered selling the patent because we were not prosecuting it. We were clearly in business and succeeding but we had this asset that we were not leveraging.
As we looked into monetizing the patent, we considered whether we should sell it to a patent assertion entity (PAE). We interviewed a few, but quickly realized that the dollar value we would get from the sale of the patent versus the potential nuclear bomb it could represent for our reputation in the market was not even close to worth it. It was a no-brainer to keep our patent.
When I conceived my second startup, FI.SPAN—an API banking platform that connects financial institutions with independent FinTech service providers—in August 2016, I knew from the beginning that I wanted to invest in our IP strategy. I was in a much better position the second time around, much more confident in my ability to set the right course.
Fortunately, there are now a number of network-based organizations that are opening new opportunities for startups to protect their IP against aggressors. Joining one of these communities was an easy way to protect my business from IP risks without committing significant amounts of time and money.
Proactive, Rather Than Reactive
Patent trolls function by acquiring patents and using them to sue legitimate operating companies, hoping that the company will decide to settle rather than embark on a costly lawsuit. The patent assertion suits often have no basis, but even though fewer than 1% of all defendants in American PAE suits are found guilty, around 80 percent of defendants settle before trial to avoid the prohibitive costs. A trial can cost anywhere from $500,000 to $5 million — or more — which is crippling for most emerging businesses.
This is why FI.SPAN joined the LOT Network, a nonprofit organization that takes a community-based approach to fighting PAEs. More than 80% of patents litigated by PAEs are acquired from operating companies through bankruptcies, M&A activity, or (as we considered briefly at Hyperwallet) to leverage their patent portfolio for liquidity. Members of the LOT Network obtain licenses to other members’ patents that are effective if and only if a member’s patents somehow fall into the hands of a patent troll — thus rendering the members immune to troll suits involving those patents.
Joining a patent protection network reduces the business case for needing to have your own patent as a defensive strategy. Instead of spending time and resources to build a defensive patent portfolio, we can focus on the things that drive enterprise value, such as product development and customer acquisition. Just as importantly, joining one of these networks is a signal to the market that the business intends to succeed as an operating company and is committed to good corporate citizenship.
Given the size of the US market, Canadian startups usually have an eye towards American clients. This is why an IP protection strategy is essential for any Canadian company that plans to operate in the U.S. A sophisticated IP strategy shows investors that you are inoculating yourself at a low cost against the perceived litigious nature of the U.S. It demonstrates that you are thinking ahead and using your capital efficiently. Customers will also be concerned about how you as a vendor might drag them into aggressive IP litigation.
When it comes to your startup’s IP strategy, the choice does not have to be between spending considerable amounts of money or protecting your business. An IP protection strategy is something startups at all phases, and in all regions, should be thinking about.
It’s never too early to start.
Lisa Shields is the CEO of FI.SPAN.