Lessons learned from a Start-up
As someone working in patent dispute resolution, one of the most disheartening parts of my day is watching the same simple, but costly, mistakes being made by clients with a great new idea, but no idea whether another business has already protected it and, if not, how they can protect it. I’ve watched too many clients launch a new product, only to receive a cease-and-desist letter from an irate patentee or see the competition steal the idea. The result? A new product shelved, and countless hours and dollars spent on research and development, manufacturing, marketing and setting up distribution networks poured down the drain. The biggest frustration is knowing that all of that could have been saved by taking simple steps from the outset.
Peter has been a physiotherapist for ten years and has seen his fair share of patients with back pain. As part of their treatment, Peter recommends several exercises to strengthen the muscles around the back. But he’s received feedback from some patients that these exercises are difficult to do alone at home. Peter decides to create a device that will help patients maintain correct form, give them a stable platform, and really target the problematic muscle groups.
After a few weekends spent in the garage, Peter has a dozen splinters and, more importantly, a basic prototype that he’s happy with. He’s figured out, broadly, how the design will work and the important physical features it requires. He calls it the BackProX.
What is a Freedom to Operate Search?
Peter is familiar with a lot of commercially-available physiotherapy equipment, and isn’t aware of anything like the BackProX, so he feels like he has a winner. But, as a precaution, he asks Lisa, a patent attorney, to conduct a freedom to operate search, to check whether any other companies have patent or design rights that might cover the BackProX and stop Peter selling it.
Lisa undertakes the freedom to operate search by searching the registers of the Australian Patent Office and Australian Design Office for any relevant patents or registered designs. As patents and registered designs are limited by territory, checking the Australian registers will only identify rights that exist in Australia. Peter definitely wants to sell in Australia, but isn’t sure of whether he might expand his business to other markets in the figure, so Lisa also checks the US and European registers, since these are generally the largest markets and most companies will file patent and design applications there. She also checks in China because there’s a strong likelihood that the BackProX will be manufactured there.
As Peter has a reasonable idea of how the BackProX will work and its physical features, Lisa is able to create a list of keywords to search the registers. Being a physiotherapist, Peter is also aware of the main suppliers of physiotherapy equipment and gives Lisa a list of a dozen companies. Lisa also searches the registers using those names to see whether they have any rights.
It was too early to do a search before the prototype had been developed, because Lisa wouldn’t have known what keywords to search. That said, it’s a good thing Peter didn’t wait any longer because Lisa’s search identifies a patent granted in the US, Europe and Australia held by a big supplier, PhysioPlus, that would cover the BackProX. A quick internet search shows that PhysioPlus isn’t supplying any products that are covered by its patent, which is why Peter wasn’t already aware of it. Nonetheless, any time and money spent further developing the BackProX as Peter initially envisaged it would have been wasted if PhysioPlus decided to enforce those rights against Peter.
Peter and Lisa sit down to consider their options. As PhysioPlus doesn’t seem to be making any money out of the patent, it might be prepared to sell the patent to Peter. Peter isn’t a fan of this option, because buying the patent could mean a big outlay of cash, and at this point Peter isn’t sure whether there is a viable market for the BackProX.
Peter could ask PhysioPlus for a licence to its patents. The advantage of a licence is that Peter could negotiate paying royalties on a per-sale basis, rather than a lump sum upfront. The size of the payment will therefore reflect Peter’s commercial success. However, there are downsides, including that Peter will need to share his future profits with PhysioPlus. Further, unless he’s prepared to pay more for an exclusive licence, if the BackProX is a success, PhysioPlus might license the patent to another entity or launch its own version, meaning unwelcome competition for Peter.
Peter decides on a third option. He and Lisa take a closer look at the patent and realise that, with a small modification – replacing two components joined by a hinge with a single, flexible component that will achieve the same outcome – the design of the BackProX can be taken outside the reach of the patent altogether. While he’s back in the garage making the modification, Peter realises that adding a couple other features will allow the BackProX to also be used for strengthening shoulder and core muscles.
Peter’s Own Patent Rights
He runs the re-designed BackProX past Lisa, who confirms that it won’t infringe any existing patent or design rights. Even better, Lisa is confident that the new design is itself patentable. Lisa drafts a provisional patent application for Peter and files it in Australia. A provisional application is like a placeholder. It won’t give Peter any patent rights on its own, as a complete application is required to achieve patent rights. However, a provisional application is a relatively small outlay that gives Peter the option of filing a complete application (which would be based on the provisional application) later down the track. It also allows Peter to delay the decision on which countries he’d like to pursue patent rights, and incurring that expense (which could be in the $10,000s), until he has a better idea about whether the BackProX will be commercially viable, has better developed his business strategy and, hopefully, has more capital.
Having ensured that he’s able sell the BackProX and secured his own patent position, Peter refines his design and begins testing it with clients. The feedback is positive, so Peter finalises his design and looks for a manufacturer in China. Although he has a contract with the manufacturer giving him exclusivity, he ensures that his patent rights will extend to China to give him additional protection.
Peter’s also looking to start marketing the BackProX, but first asks Lisa to conduct a trade mark search in Australia, the US and Europe to make sure he is free to use “BackProX” as a brand. The search is clear, so he files his own application to register BackProX as a trade mark.
Peter realises he needs more money to start manufacturing and marketing the BackProX. As he has a patent position, Peter can promise investors an exclusive market, which makes it a far more attractive investment for them. Peter creates a corporation, transfers his patent and trade mark rights to the company, and sells a proportion of the shells to his new investors, whilst keeping a majority of the shares for himself.
With a fresh injection of capital, Peter launches BackProX in Australia and enjoys significant success. Had Peter not undertaken a freedom to operate search and designed around PhysioPlus’ patent rights, it’s at this point that he would have received a letter from PhysioPlus demanding that he stop selling the BackProX and/or pay PhysioPlus a significant sum of money as damages, or else face a very expensive lawsuit.
Although Peter may have been able to negotiate a licence with PhysioPlus at that point, chances are he’d be paying a lot more than if he’d approached PhysioPlus for a licence from the outset. As Peter would have infringed its patent rights, PhysioPlus would be negotiating from a position of strength. Peter would need to a licence to avoid litigation, and does not have the option of walking away.
Had Peter not secured his patent rights, there’s a strong possibility that a larger supplier would have seen his commercial success and launched its own product. Given their size and established relationships and distribution networks, Peter would have struggled to compete. In either case, the time and money that Peter (and others) invested in his business could well have been for nothing.
Given his success in Australia, Peter looks to expand his business by selling the BackProX in the US and Europe. Rather than undertaking the work himself, he negotiates a deal with Millennium, a large international supplier of physiotherapy equipment. Millennium has noticed Peter’s success, but hasn’t been able to launch its own version internationally because Peter applied for patent rights in those jurisdictions. As part of the deal, Peter licenses his patent and trade mark rights in the US and Europe to Millennium in exchange for Millennium paying him a 20% royalty on all sales.
Towards the end of his first year selling the BackProX, Peter notices a couple of negative reviews left on his website by customers. The reviews complain that the BackProX doesn’t fit properly or offer anywhere near enough support. Peter is surprised by the negative feedback, and quickly finds the culprit: a competitor selling a cheap knock-off called the “BackBroZ”. It’s only a matter of time before those negative reviews translates to lower sales.
The BackBroZ doesn’t have the same functionality as the BackProX so it doesn’t infringe Peter’s patent, but that’s not stopping customers becoming confused and harming Peter’s business. Peter instead draws his registered trade mark to the competitor’s attention, and they agree to rebrand to avoid a trade mark infringement litigation.
Fast forward a few years and Peter is finding that he’s spending too much of his time focusing on the BackProX business. Peter’s first love is physiotherapy, not the boardroom, and he’d love to return to private practice full time. His investors, having made a significant return, are also happy to cash out.
With his intellectual property rights, Peter has a few options. While he could license his Australian patent and trade mark rights to another company, he’d prefer to sell up and make a clean break. Instead, he sells all of his patents and trade marks to Millennium for a substantial fee, allowing Millennium to begin selling the BackProX in Australia, and carry on selling it internationally without paying Peter any more royalties. Peter can then return to private practice, albeit in a pretty ritzy room.
This is, of course, a simplified start up story, and every business will face its own challenges. However, too many businesses forget to take simple steps to protect themselves against intellectual property risks, and take advantage of the intellectual property that they have developed, before investing their time and money into a new venture.
It is critical to ensure that there is freedom to supply a new device, or steps are taken to clear the way (whether by designing around existing rights, licensing or purchasing those rights, or challenge those rights if necessary), before launching a new product. Where a business does not undertake a freedom to operate search, it is taking a serious and unquantified risk of a legal challenge forcing them out of the market. The unfortunate reality is that, unless a business has the money and courage to fight legal proceedings (a process that can take years and cost millions), it might well be forced by a rights holder to abandon a new product even if there is a strong argument that those rights are not valid or infringed.
Securing intellectual property rights (patents, registered designs and trade marks) also minimises the risk of competition, and provides flexibility in terms of how the business can be run.
Although it may not always be obvious from the outset, there are myriad ways that taking a proactive approach to managing intellectual property rights and risks will protect and enhance your business in the future.