This week, we’re looking at IP, and the importance of protecting it – before someone beats you to it and patents it out from under you!
People tend to assume that the value of patents and trademarks is either commercial – allowing you to protect your position against competitors – or intrinsic, that is that someone will come and pay significant sums to acquire or license the patent.
But there’s a third aspect to IP protection: preventing other people actually patenting something that you’ve developed.
This is probably best illustrated with an example. (A true story of a previous client of ours, mildly tweaked to protect anonymity.)
This company had developed its own technology which it used internally and provided to others on a white-label basis. It had been developed by a third party but all IP rested with the company; this had all been well-documented and was pretty watertight.
The company had taken high-level advice that the technology couldn’t be patented in the EU. However, unbeknownst to its management team, a US-based competitor had patented in the US its own version of the system, copying heavily from the company’s.
On the day that first-round offers were due in on the sale of the company, its competitor submitted a low-ball bid, and a patent infringement suit, seeking back-dated royalties, penalties and interest, and an ongoing royalty payment – and almost scuppering the process.
The situation was resolved, but it cost the shareholders of the company US$1m in legal advice across the UK and USA.
Although its case was strong, the company chose to avoid the cost and uncertainty of an extended litigation, and instead agreed a no-fault settlement – including a significant cash payment to the competitor, another major cost to the company’s shareholders.
The sale process itself was delayed significantly. The issue and its proposed resolution had to be shared with potential purchasers, as it affected the longer-term strategic value of the company in the large US market; when they heard the news, some purchasers simply withdrew, reducing competitive tension in the process.
The deal ultimately completed, but the process was longer and more difficult than it should have been, and the shareholders had to bear some significant costs along the way.
Avoiding This Situation
Clearly an unfortunate situation, intensified by its emergence during an exit process. What could the company have done differently?
It’s important to remember that different jurisdictions have very different approaches to patents. While it’s expensive, you need to take advice in each major jurisdiction in which you trade, or intend to trade. Even if you aren’t active there, you should also think about countries which might offer key strategic value to an acquirer, such as the US or the EU.
Monitoring relevant patent filings is also important. In our case above, the company could have delayed or prevented the granting of its competitor’s patent because it had been trading in the US with a similar system – so-called ‘prior art.’ They didn’t see the application, didn’t file a submission, and were caught unawares when it was granted.
Monitoring patent filings in this way can also be an interesting gateway to an M&A discussion – if you’re in a position to prevent a competitor being awarded a patent, they might want to acquire you to make that problem go away…