Intellectual Property: Protecting a Patent

Usually, once someone has obtained a patent or two, the first thing they want to do is either sell that patent or start up their own company to exploit the patent (that is, make lots of money manufacturing and selling their invention). If you're planning on selling your patent, good luck to you! It's probably the best way of getting quick cash for something you've invented. But don't be surprised if it's not a whole lot of cash. If you're planning on starting a company and doing it all yourself, again, good luck! Starting a company is a tough process. Here are two little tips on protecting your patent that might help you out.

Protecting a Patent in the Courtroom

The first thing you've got to know is that, if you're just a small company, protecting a patent can be very, very difficult. If a larger, but kind of unethical company wants to infringe on your patent, they will. And often, in a small company, the "monopoly right" that the patent offers you is just about the only thing keeping you in business.

Well, the problem is that if your patent is worth a lot (that is, if the company infringing on your patent thinks they can make millions of dollars off your idea), chances are, there's not a whole lot you can do. There are two basic strategies: Suing for breach of patent, or negotiating a licensing fee with the company infringing on your patent.

Suing for breach of patent is what's done most often. However if the patent is worth a lot of money, and you're a small company, this can be very difficult to do. A larger, patent-infringing company who's making a lot of money off your patent can usually drag courtroom proceedings out for a long time -- often for years. This causes two problems: First, while the proceedings are taking place, they often continue infringing on the patent (putting a significant dent in your company's revenues and profits). Second, because your company needs lawyers to represent it, deliberately dragging out courtroom proceedings in this way can cost you a lot of money. Your company could easily go bankrupt because of the cost of the proceedings (this often happens with small companies).

Unfortunately, there are few things you can do about this problem. The first is that, if your patent is really worth that much, you can sometimes find financing for your courtroom proceedings in the form of an equity investor. That is, someone who sees that your patent is being infringed (and a company is making tons of money doing it) may want to take the "bet" that you could make just as much if the patent wasn't infringed upon. This person may finance your courtroom costs for a percentage of your company. The second, more frequent way is by having a "big-shot" as part owner of the patent. They may want to enforce their patent rights on principle alone. An example is a large, research-based university. An institution of this nature may realize that, if they get a reputation for enforcing any and all of their patents, no one will mess with any of their patents. This reasoning is why Stanford and Harvard are often seen in court, defending their patent's rights.

The other strategy I mentioned was negotiating a licensing fee. You may ask: Why would any company, knowing the problems you're going to have defending your patent rights in a courtroom, ever pay you licensing fees? Well, remember that the courtroom battle will often cost the offending company millions of dollars as well: It may be less expensive for them to just pay you a small license fee, rather than pay a lot of money trying to make you go bankrupt.

Protecting Your Patent From Creditors

The second group of people you need to protect your patent from are creditors: that is, people that lend your company money. The issue here is that they may ask you for your patent rights as collateral. Also, if the company should fail, all of its assets go into receivership, and this might include your patent. Because your patent may be the most valuable part of your business, you don't want this to happen.

In order to protect yourself (to a certain degree) from having this happen, you can do what a lot of technology-based companies do: Set up two companies. Company A can own the patent and license it to company B. Because the only asset for company A is the patent, and the only purpose for company A is to earn money licensing the patent, chances are it's not going to go bankrupt: It has no costs, and no creditors. If company B goes bankrupt, well, at least you've still got your patent.

Because this is a very common practice, many creditors ask company A to co-sign loans to company B before they give them any money; however, the two-company approach gives you some protection and gives you a little more control if things turn sour.

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