A problematic question faced by early stage startups is when to invest in intellectual property (IP). Trademarks and patents are granted on a “first-to-file” basis. Therefore, the sooner you file, the better your chance is in defending your IP claim. However, the ability to defend your claim to the IP comes with a cost.
Suits against small copycats and large companies attempting to cash in on your idea may only be valuable after development. The payout and length of litigation are uncertain. Especially during early stages like seed funding, the protecting IP may come at the cost of further development. Even getting to the point of litigation can be prohibitively expensive.
The tradeoff between protecting your IP and resource allocation is significant. Following, it is essential to consider where IP fits in your business strategy. How important is IP to your future success? Suppose you have made large investments into research and design. In that case, the extra costs associated with IP protection may be necessary (and you should be taking advantage of R&D Tax Credits). In determining how IP fits within your startup’s business model, here are some important factors and resources to consider.
A Brief Overview Of IP
Intellectual property refers to creations of the mind: inventions; literary and artistic works; and
symbols, names and images used in commerce. While the range of what qualifies as IP is vast, it can almost always be broken down into three categories:
Because these subgroups of IP have different requirements for protection, I will quickly describe each of them and the distinctions between them. For a more comprehensive and in-depth look at intellectual property law, check out the free IP resources offered through the Stanford University Library.
A patent is an exclusive right granted for an invention – a product or process that provides a new way of doing something, or that offers a new technical solution to a problem. A patent provides patent owners with protection for their inventions. Protection is granted for a limited period, generally 20 years.
A trademark is a distinctive sign that identifies certain goods or services produced or provided by an individual or a company. Its origin dates back to ancient times when craftsmen reproduced their signatures, or “marks”, on their artistic works or products of a functional or practical nature. Over the years, these marks have evolved into today’s system of trademark registration and protection. The system helps consumers to identify and purchase a product or service based on whether its specific characteristics and quality – as indicated by its unique trademark – meet their needs.
Copyright covers literary works (such as novels, poems and plays), films, music, artistic works (e.g., drawings, paintings, photographs and sculptures) and architectural design. Rights related to copyright include those of performing artists in their performances, producers of phonograms in their recordings, and broadcasters in their radio and television programs.
The Hidden Costs of Protecting IP
Trademarks must be registered both on the state and federal level. For a state trademark registration, the typical filing fee can be anywhere from $100-$200. Obtaining a Federal trademark registration will offer broader protection of your brand. Still, it will cost an additional $300-$400 for each class of goods or services you are trying to protect.
Every 10 years, you must apply to renew your trademark registration. The USPTO’s fees for trademark registration renewals are approximately $300 for an electronic application and about $400 for a paper application.
Filing IP Yourself
Unlike other legal and regulatory responsibilities you may encounter within your startup, you don’t necessarily need a lawyer to file for patent, trademark, or copyright. Depending on application requirements, whether you use paper or electronic filing, and the specific class of IP you are filing for, the price can vary. However, expect to spend anywhere from $300-$600 to account for the various state and federal registration fees.
Online Legal Services
Filing using an online legal service will usually be about $500. There’s a number of online services available. Typically, these services include search and review on your topic as well as a digital filing of your application. Depending on how extensive the IP is, costs may be affected.
In the event that you hire a lawyer to conduct your IP search for a filing, you will also have to pay upfront legal fees. Trademark and copyright attorneys will either charge a flat rate fee or by the hour. Depending on the complexity of your IP, flat rate fees will start around $1,000 per good/service. Hourly rates among lawyers can vary greatly, but except to be paying at least $150 an hour. Note that patent requirements may be far greater, and lawyers will usually charge a premium for patent filing services.
The Costs of Litigation
Intellectual Property disputes can be very costly for startups. Even after you have a patent or trademark issued, it could cost millions to sue anyone infringing on your IP rights. Patent cases involving $1-$25 million at risk, will require around $2 million to litigate through trial and appeal. With the cost so high, its no wonder lawyers refer to patent litigation as the sport of kings!
The high price of litigation goes beyond patents as well. While your trademark or copyright attorney may only charge around $150 an hour for filing, the hourly cost for representation during a dispute can be much greater. The cost to simply file a complaint of copyright infringement in Federal Court is $1,200! With attorney’s fees, an AIPLA report found the average cost of litigating a copyright infringement case in federal court is $278,000.
Total Costs of Protecting IP
- Filing Fees: ~$400
- Using an Online Legal Service: ~$500
- Filing with an Attorney: > $1000
- USPTO Renewal Fee: $300
- Cost of Litigation: Starting at $1,200 + Attorney’s Fees
For an applied view on how these costs add up, lets take a look at a hypothetical copyright infringement claim. Let’s say that you just recently released a book outlining your method to becoming a millionaire Founder (Congrats!). You decide to use an online legal service to obtain a copyright on your work, only to find someone has taken your millionaire founder methods and attempted to copy them for their own book.
At this point, you have already spent about $500 on filing fees with your online legal service. Now, with the cost of litigating your case, your legal fees are now around $278,500! As most self-published authors typically make around $60,500 selling a fairly successful book, maintaining your property rights in the millionaire founder method will result in a net loss of $218,000.
Steps to Take Before Taking Action
Alongside evaluating your business need for safeguarding IP, other steps can be taken to lessen the overall cost of operating. Whether you choose to use an attorney or file yourself, here are some things you can do to insure your ability to protect your property rights.
Check Your Freedom to Operate
Before going through the costly processing of IP registration, you should make sure that their aren’t any major conflicts in your ability to obtain IP rights. Hiring a patent attorney to conduct a freedom to operate search typically costs around $30,000. With the right tools and a couple hours of your time, you could save this money by conducting a search yourself. This can be particularly useful for a startup in seed funding.
Much like when you get an oil change on your car, bringing a freedom to operate search to a lawyers will almost always result in the finding of other small issues. These issues can become a much large issue when in seed funding because of your duty to disclose any IP related issues to future investors. Following, you should leave only the specific questions for your IP attorney.
To conduct your own freedom to operate search for trademark filings, you can use the Trademark Electronic Search System (TESS) to find any similarly filed trademarks by a competitor. Not only with this help you reach the ultimate goal of understanding the success of your trademark claim, but it will also give you the opportunity to learn more about your potential competition. While Patents can be more complicated, you can also conduct a preliminary freedom to operate search for patents using the USPTO Patent Database.
Prepare The Necessary Legal Documents
Additionally, startup’s should look into preparing the necessary legal documents for registering IP as well as creating other internal and external protections. Intellectual Property Assignment Agreements should be given to every employee or contractor prior to their ability to work with your IP. Non-Disclosure Agreements can also help internally to ensure that your IP remains yours. For more complex agreements, consider building out a Joint Developer Agreement or other more tailored agreements.
For more information on preparing internal legal documents for before and after filing, check out Pillar’s Building an IP fortress.
Is your startup ready to start protecting its IP? Is IP at the center of your business model? As you continue to scale your startup through funding rounds and beta testing, IP should be a constant consideration throughout the process. While protecting IP can bring about high costs, sometimes these costs are necessary for your continued success. Hopefully, some of these tips can help better prepare you for any future challenges with IP. In the meantime, save valuable time and money by checking out the free document library offered by Law4Startups so you can spend money where it matters the most.