Last Friday, the Caltech Entrepreneurship Club hosted the second in a series of talks on Startup Law. The speaker was Vincent Sanchez of DLA Piper and the focus of the talk was on the key aspects of intellectual property law or IP. IP law is particularly pertinent to Caltech, as the startups emerging from the school tend to skew towards offerings that are built upon original inventions.
IP is defined as the “creations of the mind: inventions, literary and artistic works, names, images and designs used in commerce.” IP is generally broken down into two categories: industrial property and copyright. Industrial property deals with inventions, trademarks and industrial designs while copyright generally protects the incarnation of an idea. Vincent outlined the difference between the two by saying that, “copyright protects the embodiment of an idea, and basically how the creator displayed or authored it whereas patents cover an idea itself.” Essentially, copyright protects the form of an expression rather than the subject matter of an expression which would fall under IP.
The use of IP is governed in the Unites States by intellectual property laws, or as they are more commonly known, patent laws. These laws grant the inventor or owner of the intellectual property exclusive rights to technology of their own creation in exchange for the public disclosure of their invention. These rights of exclusivity, called patents, may be financially exploited by the inventors via licensing its use to others based on the terms specified by the inventor.
Vincent began the talk by explaining the challenge IP holders face in how to best exploit their intellectual property. “Today’s greatest asset is intellectual capital,” said Vincent, “but it is also a multi-dimensional game. Finding how exactly to exploit an intellectual property is difficult in today’s high-tech economy." In addition to exploiting intellectual property via licensing, inventors can choose to directly apply the technology within a commercial property that they own.
However, rapid advances in technology mean multiple persons can be close to a discovery or can be leveraging technology that is protected via patent law simultaneously. Because of this IP, owners need to learn how to defend their intellectual property from unlicensed use, as well as ensure it is used or traded according to their best interests. According to Vincent, “companies often neglect the value of their intellectual property because it is not something typically in their line management experience.”
This often happens to companies that produce products directly or have established meta-brands. These companies tend to underestimate their worth because they have failed to correctly valuate their IP portfolio or in the case of acquisitions, have accidentally omitted key pieces of IP from the deal.
Vincent next offered the audience a few examples to illustrate the value of intellectual property. For example, the Dr. Seuss estate is worth an estimated $1 billion while IBM’s take from patents and licensing is $1.5 billion a year and the Sabre reservations system (A widely used travel reservation program once owned by American Airlines’ parent company AMR) earned the company between 38 and 45 percent of its profits in the past. Most of these items are behind the scenes and not necessarily associated with holding high value themselves.
Vincent pointed to a growing trend of companies wanting to cash in on the value of their IP. “Savvy Fortune 1000 companies are trying to find ways to monetize their IP portfolios. Lots of private equity and venture capital firms are looking at companies with heavy IP portfolios to spin out.”
For these reasons, it is imperative that startups determine the value of their IP portfolio apart from their product line. In order to avoid any potential lawsuits, startups should be sure to research whether the technology used in their products infringes on any patents. Even if any infringements are discovered, properly licensing the technology from the patent holder can help prevent any issues moving forward. Some startups even find themselves in the enviable position of receiving direct investment from the patent holding corporation looking to support a new way to exploit their IP portfolio.
Look out for part II of this article on Monday, where we discuss what investors look for when evaluating the IP of startups for potential backing.