Maryland Bar Bulletin
Publications : Bar Bulletin : March 2007

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 Bar Bulletin Focus

Intellectual Property     

Three Common Patent Pitfalls for Start-Up Companies

While novel technology and innovation are what drive new companies and attract potential investment capital, sound intellectual property is probably the most important issues for go/no-go decisions among investor's when looking at start-up companies. Clear legal advice, early in the development of the company and its technology, can help a start-up obtain needed patent rights and avoid potentially-fatal patent problems in the future. This article focuses on three often overlooked problems that arise during patenting of inventions.

Inventorship

One of the most important issues that surface in early-stage life science and technology companies is the determination of inventorship of the company's patents and patent applications. Inventorship determination is also the cause for much confusion, and it has the potential to invalidate a company's patent portfolio if not done correctly. This is because if a court determines that a patent has incorrect inventors, it can be declared invalid as a matter of law. While often confused with authorship, as on a scientific paper, inventorship is a legal determination based on whether an individual was involved in the conception and/or reduction to practice of the claimed invention. Note also that inventorship is linked to a "claimed" invention. This means that an individual could be an inventor on a patent application, along with others, and then later certain claims are cancelled in which that person was the inventor and not on others. In that situation, that person would no longer be an inventor on the patent. Generally, an inventorship determination is best left to patent counsel who can interview all the potential inventors and make a legal determination at a later time.

Ownership

As important as inventorship is the issue of the ownership of a company's patents and IP. In the United States, an inventor is automatically deemed an owner of the patent or patent application until his or her rights are assigned to a third party. It is important for a start-up company to make sure that their employees are obligated to assign their rights in a patentable invention to the company as soon as possible. One of the best ways to insure this occurs is through an employment agreement that contains an obligation to assign all rights in any intellectual property developed during employment to the company. By having an executed obligation to assign in place, even if the employee leaves before a patent application is filed, and later cannot be located, or refuses to make an assignment; the agreement will operate as an assignment of rights to the company.

Another problem is the determination of ownership of IP developed as part of a joint-venture with another entity, or as part of a sponsored research agreement. Under U.S. patent law, inventors who assign, or are under an obligation to assign their rights to different legal entities, create a situation where the resulting patent can be owned by more than one company. This can create later problems if the start-up wishes to exclusively license or sell their rights to the patent to another party. A separate license would be required from the joint owner to create an exclusive license, which could cause additional negotiations and costs. To avoid this situation, companies should insert language into their research agreements which designate ahead of time which company will be responsible for patent procurement, which company will have control of the licensing of the resultant IP, and also include an agreed-upon royalty distribution percentage for each company.

Correct Legal Entity Status in the Patent Office

Determination of a company's legal entity status (Small or Large) for the purpose of paying reduced fees is usually done during the initial filing of a patent and then easily overlooked during prosecution and maintenance of the patent. Companies that qualify as small entities receive a 50 percent reduction in patent office fees, which can add up to significant savings over time. It is therefore important to remember that a small entity start-up company can lose its small entity status in two ways. First, the company can grow so that the number of employees or annual income exceeds the standards set for small entities. Second, the company can enter into either an exclusive or nonexclusive licensing agreement for the patent with a large entity. Such a license would disqualify the start-up from claiming small entity status. Additionally, a small entity entering into an option agreement in which there is an obligation to transfer any rights to a non-small entity would also disqualify the start-up from claiming small entity status. The options affecting small entity status are not limited to only those appearing in option agreements, but also include those that are written into material transfer agreements, industry sponsored research agreements and other agreements that may be connected with the research that generated an invention. Although the error in paying fees associated with the wrong entity status in the USPTO are correctable, applicants who fail to pay correct fees during the prosecution or maintenance of optioned or licensed patents run the very real risk of having the patents invalidated during litigation.

Joseph G. Contrera, M.S., J.D., is a Senior Attorney at the law firm of Jacobson Holman, PLLC in Washington, D.C. He concentrates his practice in the areas of patents, litigation and licensing.

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Publications : Bar Bulletin: March 2007