Part 6: The Cavalry - Defending Your Castle from Attack
Russ Wilcox
Partner at Pillar VC
With well-written contracts in place acting like a gate to guard your interactions with the outside world, you can finally rest content. You have set up all the elements needed to create an IP fortress, and your walls are growing every day. There’s just one topic left to cover – what to do if your castle is attacked?
Let’s discuss how you might defend your castle in several crisis situations:
1.
IP Theft
2.
Receiving an Infringement Letter
3.
Competing with Copycats and Cousins
IP Theft
IP theft is unfortunately a real issue, and the more press attention your company receives, the more likely you are to be targeted.
Think it won’t happen? A few years after we started E Ink, a mainland Chinese employee was hired away to become faculty at a Chinese university. We discovered that they funded him to set up a research team to replicate E Ink’s work. We were very lucky that our material was low-quality while he was an employee and only improved later, after he left. Over the years we imagine he studied every word and diagram that was published in our patents, and he probably assumed he could copy whatever we did because he was based in China where patents are hard to enforce. But we had also kept some information as trade secrets, which he was not able to see. We were lucky he never caught up.
How about another example? At E Ink we conducted many press interviews. Once we were visited by a newspaper reporter doing a story on innovative companies. We took him on a tour of our facility, pointing out many recent demos, then returned to the conference room for an interview. After a few questions, the reporter excused himself to go to the bathroom and did not return for a long time. We found him in the hallway asking our scientists questions about which chemicals they used. We became suspicious and asked him to leave. It turned out that the newspaper he claimed to represent did not exist.
Bottom line, a certain degree of paranoia is appropriate if you are working on a valuable technology.
To better protect yourself, we recommend three practices:
1. Invest in cybersecurity and physical security. These are required precautions for any company developing cutting edge research.
2. Divide the IP so that no one employee or vendor knows or can download the crown jewels.
3. Maintain at least some of your technology as an unpublished trade secret.
How to Handle an
Infringement Letter
If you do infringe someone’s patent, they will typically send you a cease-and-desist letter asserting that they believe you infringe. They may be a direct competitor and demand that you stop making your product. Or, they may be open to license and demand that you contact them to negotiate paying a royalty (a “patent troll” is knocking on your door).
Once you have a read on the level of exposure and know your response plan, but in any case no more than a day or so later, you should also advise your Board of Directors.
Immediately share a copy of this letter with your IP counsel.
What is the right response?
If you ignore their letter, they may start sending letters to your customers instead, which is embarrassing and hurts your reputation. So it is usually best to respond somehow:
If you believe they are actually wrong, just tell them “go pound sand”. Your counsel can draft this letter for you. Lawyers are exceptional at snark.
If you believe you infringe the written claims but you think their patent would not hold up to scrutiny in court (perhaps you found some prior art to show it was not novel) then you can ask your lawyer to document this conclusion in an opinion letter and just keep operating. You are basically daring them to sue you. However if you lose the lawsuit, having the opinion letter in your files will show you did not knowingly violate a patent you thought was valid, and will help protect your from triple damages.
You can wait until they sue and then try to drag out the court case while you continue selling. However then the bills will really start to mount. The damages you are risking are related to how much profit you are taking away from them. In other words, the damages are somewhat related to your revenue. (For this reason, sometimes even if you infringe, a patent troll will wait until a start-up has launched a product before they sue. The most likely times for you to receive infringement letters are either a few months after product launch as they see you are practicing, or else right after a celebratory press release that exposes how much money you are making.)
Or, you can negotiate.
On the upside for a quick settlement, sometimes a patent troll will offer a low royalty to the first few small companies who agree to license, so that they can show momentum and convince bigger companies to pay.
In the end, paying a royalty is a lot better than going out of business and everyone knows that so the most natural result is a license deal. It just comes down to a game of chicken – who is more willing to suffer a tough, protracted negotiation in order to shift the royalty payment up or down by a fraction of a percent?
Competing with
Copycats and Cousins
From time to time, and especially if you are getting a lot of press attention, you may discover a new competitor has entered your field.
If the competitor is a copycat, and is operating in countries where you have issued patents, then you can consider to send them a cease-and-desist letter, also called “a nastygram.” They will probably respond as the inverse of what we described above. Nevertheless, this is a useful step if the company is a start-up because as explained, it will complicate their ability to raise money.
Perhaps though the competitor has a fresh take on your field, and they are pursuing a novel approach that is different enough to bypass a lot of your patents, but still similar enough that they will go head-to-head with your products over time. Call this an alternate branch of the technology tree, or a close cousin.
This time, focus on building walls inside their territory.
This is when you should return to the concept of an IP Sprint. Assemble all your best brains again, only this time, focus on building walls inside their territory. If you are a few years ahead, or smarter, your team may be able to read their patents and anticipate the problems they are likely to encounter soon, and also anticipate the ways they might solve those problems. You can then file your own patent in the competitor’s field, covering a long list of improvements on the competitor’s technology.
If you are a few years ahead, or smarter, your team may be able to read their patents and anticipate the problems they are likely to encounter soon, and also anticipate the ways they might solve those problems. You can then file your own patent in the competitor’s field, covering a long list of improvements on the competitor’s technology.
This type of aggressive patent is known as a picket patent, because it lies just outside their Keep, and it can make a competitor’s life miserable when they try to industrialize their product. You have built a “picket fence” that will limit their commercial opportunity.
Conclusion
Congratulations on reaching the end of our guide! You just covered IP from A to Z*, from what to do before incorporation, to the crucial first patent sprint, how to set up a continuously running comprehensive program, where to take care on external relationships, and advice on responding to treachery and assault.
We hope your IP fortress will become a major edifice and a valuable asset for your company!
If this guide is helpful for you, please contribute to the hard tech community and share the additional tips and tools that you learn, so this document continues to improve. Email us at russ@pillar.vc – thanks!
*Admittedly we did not discuss copyright or trademarks, which are also forms of intellectual property. So right now the “A to Z” excludes C, M, R, and T. If you’d like us to add those, please let us know.
