Like tangible, real or personal property, the law recognises a person’s exclusive right to own and control their creativity and innovation in the same way that they can own physical property. Linda Roberts explores the implications of Intellectual Property (IP) for angel investors.
Intellectual property (IP) is not just a fanciful term; it is often the key asset of a technologydriven organisation. It is intangible property – that is property created intellectually by the mind and includes inventions, scientific discoveries, designs, literary and artistic works, symbols, names, images, and performances. IP protection therefore provides the potential commercial benefits of ownership and allows the owner to manage how their IP is used and who uses it.
If a product is a commercial success, other businesses will be keen to tap into that success by bringing competitive products to market. As an Angel Investor, when you invest in a start-up company you need to be sure that the technology and ideas that contribute to its potential success are protected and cannot be copied or reproduced by competitors. It is not easy to quantify the impact of legally protected product exclusivity on the financial success of a product. It is however easier to appreciate the risk of not protecting an invention.
It is equally important that the products of the potential investee company do not infringe another company’s protected IP, as this could result in legal action to stop the investee company making, using or selling its products and hence the loss of your investment. A patent attorney will be able to handle both the patent application and a search of existing patents on your behalf. Alternatively you can pay for a patent search at the British Library or through the UK Intellectual Property Office (IPO). The type of IP protection you will need depends on what is being protected and how it will be used. Intellectual property can be protected in various ways: by a patent, a registered design, copyright, design right or a trade mark.
Patents protect the technical and functional aspects of products and processes for example how a product works, what it does, how it does it, what it is made of and how it is made. They are concerned with inventions -new and improved products and processes that are capable of industrial application; Designs relate to the visual appearance of products for example the shape or pattern. They are concerned with brand identity - of goods and services;
Trade marks protect signs that can distinguish the goods and services of one trader from those of another, for example a logo or name;
Copyright is an automatic protection that arises from the creation of certain categories of original work - literary and artistic material, music, films, sound recordings and broadcasts, including software and multimedia.
A patent gives an inventor the right for up to 20 years to prevent others from making, using, importing or selling an invention without the permission of the inventor. Patents are generally concerned with new inventions and must fulfil specific conditions to be granted. Most patents are for incremental improvements in existing technology - evolution rather than revolution.
To be considered patentable by the Intellectual Property Office, an invention must be:
- Functional or technical The invention must relate to how something works, what it does, what it is made of, or how it is made.
- New The invention must not have been made public in any way anywhere in the world. No part of the invention must already be protected by a patent. It is therefore crucial to perform a thorough patent search before making your own application. A patent attorney or the IPO can provide this service for you. It is important to recognise that if you are granted a patent, you can stop others from making the invention, however whether you can make your invention depends on other parties’ patents.
- An inventive step The invention must not be obvious to someone with a good knowledge of the subject.
- Capable of an industrial use The invention must work in a way which meets established physical laws and therefore be capable of being made or used in an industry.
- Clearly owned It must be clear who is the owner of an invention and therefore the eligible applicant. The creator of an invention is usually regarded as the owner for patent protection. However, if the invention was created by an employee, in the course of their normal duties, the invention belongs to the employer.
Scientific theories and mathematical methods can not be patented: the patentability of computer software is a grey area. In November 2006, the IPO issued guidance stating that ‘it will not normally grant a patent holder the exclusive rights to distribute or sell software that forms part of a patent description’. This is in conflict with European patents and a legal challenge has been mounted by a group of small British businesses.
The patent application should be made through the IPO and include a full description of the invention (including any drawings), a set of claims defining the invention, a short abstract summarising the technical features of the invention and a filled in form 1/77.
It is currently free to apply for grant of a patent in the UK although there are costs associated with the processing of the application. The standard fees to process a UK patent application amount to £200 comprising: a £30 application fee for a preliminary examination, a further £100 for a search and £70 for a substantive examination.
A patent attorney’s fees are in addition to the Government levied fees listed above. A typical patent application takes 2 to 3 years to grant; there is a maximum time limit of 4½ years from the application’s earliest date. Patent rights last for up to 20 years in the UK and must be renewed every year after the 5th year to remain in force. So how can you protect the IP before being granted a patent? Firstly, don’t put it into ‘the public domain; by discussing it openly as this could invalidate your application. Ensure that anyone who has access to the IP, for example a potential manufacturer, financial backer or other partner, signs a non-disclosure or confidentiality agreement that legally records the terms under which you provide confidential information. Display the terms ‘patent pending’ or ‘patent applied for’ on all appropriate collateral to warn competitors that a patent may protect the product in future.
When the patent is granted display the patent number and country of the application or patent on the product. Once the patent has been granted you may choose to benefit from the protection rights it bestows and the commercial benefits that accrue from limited competition (and therefore higher prices).
A patent may also provide other commercial benefits by providing leverage in cross-licensing arrangements, attracting additional investors and acting as security for a loan. If you do not want to use the IP yourself, you can sell (‘assign’) it to another party. Once you have sold the IP you cannot use it unless you are granted a licence by the new owner.
If you want to let other parties use the IP, but you want to keep control of it, you can licence it to the said parties for a fi nancial consideration. All licensing arrangements and assignments should be registered with the IPO.
Bear in mind that patent rights are territorial; a UK patent does not give rights outside of the UK. You will need to apply separately for parent protection outside the UK. If your application contains information about military technology, or could harm national security or public safety, you must request permission to apply for a patent abroad from the Intellectual Property Offi ce (IPO) at http://www. ipo.gov.uk.
If you just want protection in a few countries, the simplest option is to apply for patent rights in the individual countries through the national patent offi ce of each country. For protection across many countries, there are two collective options. If you want protection across more than 30 countries in Europe, you can apply for European patent rights (by means of the European Patent Convention) through the IPO or through the European Patent Offi ce (EPO) at www.epo.org. This is processed as a single application, but once granted it becomes separate patents in the designated countries.
If you want the protection to include non-European countries you can apply for protection using the Patent Co-operation Treaty (PCT) through the IPO, the EPO or the World Intellectual Property Organisation at: www.wipo.org.
Again you make a single application through one patent offi ce that becomes a collection of national applications in designated countries accompanied by a single international search report. The resultant applications must then be processed separately in each country or can be used to secure a European patent. Patent applications outside the UK will soon eat into the company budget and both professional and market advice should be sought before initiating multi-country applications.
As a rough guide, the EPO states that it costs around EUR 4,600 to take a patent with seven or more designated states to the grant stage (2006). Renewal fees will then need to be paid in each of the designated countries to maintain the patent.
Once you have IP protection in place, remember that you are responsible for enforcing it. If someone uses your IP without permission, that is they infringe your IP rights, you can take legal action to stop them.
This may include seeking an injunction, claiming damages, negotiating a solution or taking other appropriate action. In all cases you should consult your legal adviser before taking action.
Patent attorneys can offer advice and information and deal with all IP matters on your behalf. You can find a locally registered attorney through the Chartered Institute of Patent Attorneys at www.cipa.org.uk. It is also worth considering intellectual property insurance in case of such an infringement to help cover your legal costs should you need to take enforcement action. Remember that your insurer should also sign a non-disclosure or confidentiality agreement.
Intellectual Property Office (IPO)
World Intellectual Property Organization
Chartered Institute of Patent Attorneys
European Patent Office (EPO)
So will a patent make you money? The answer is of course no. The Institute of Patentees and Inventors claims that each year approximately 20,000 patents are applied for by UK residents. However, the success rate of getting patented ideas to the market is currently only 2%. Quality commercial products, astute management, potential high growth, and predictable market potential are what make an investor money. But not having a patent could lose you money by allowing your investment returns to be diminished by bigger and more market-ready competitors who steal a march by copying an unprotected marketable invention.
Designs and trade marks will be covered in future issues of ‘The Angel Investor'.