Wednesday, October 06, 2004

The need to read: study your competitor's patents

Contrary to the idea that one shouldn't read competitor's patents, the wise businessman will gain an understanding of the IP terrain before investing money in any project. It is frequently the case that the company on the wrong end of an adverse patent decision didn't do its homework. The whole idea of the patent system is to advance technology by giving incentives for everybody to write down and publish their inventions so that everybody, including competitors, knows what's going on and can utilize the information, and, if appropriate, make a rational decision to license or design around. When someone ignores what's going on, that person can be hurt. Too bad, so sad, but quite avoidable.

The following is from an article by A. José Cortina:

The extent of due diligence is likely to be guided by the amount of investment and the stage of development/growth of the company seeking the investment. In the case of a very early-stage company, it may only be necessary to ensure that patent applications have been filed in an attempt to secure an exclusive position and create an asset with value. If software is involved, there may not yet have been any development conducted so that the only issue is whether appropriate agreements are in place with the developers. If no product or service is being provided, trademarks or service marks would not be an issue.

On the other hand, in the case of a larger investment or a more mature company, investors may wish to conduct comprehensive IP due diligence. On the patent front this may require a comprehensive infringement search, followed by culling of patents identified by counsel or company technical staff to preliminarily identify possible problem patents. Thereafter, a formal opinion of counsel may be required to allow the investor to properly assess the risk of infringement of a third-party patent. The issue of whether procurement of patents is important and still possible may need to be addressed. If software is involved, investors may need to pay more serious attention to the copyright issues discussed above, including ensuring that rights are owned by the company and that infringing work product is not built into the product. As in the case with patents, if trademarks or service marks are important to the success of the company, it may be necessary to know that they are protected and owned by the company, and that they do not infringe the marks of others.

The Balance

Ultimately, the investor needs to understand the impact of not sufficiently investing in IP due diligence as balanced against applying the funds involved towards productive growth of the company. The dilemma faced is that if IP issues are not addressed in a timely manner, the investment may be for naught as the company could find itself blocked from going forward, or in a competitive nightmare due to its lack of an exclusive position in the marketplace.

Ultimately, the investor should be knowledgeable about the potential pitfalls, and should go forward with a sufficient understanding of the risks involved depending on the amount of IP due diligence conducted prior to making the investment decision.


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