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Intellectual property can provide powerful legal rights that can build a business and drive valuation
It seems like everyone is becoming a healthcare entrepreneur: from Amazon and Apple to health systems with dedicated innovation teams to two women in a garage inventing the next great thing. Investors are fueling this trend with record levels of healthcare investments, particularly in health IT. One thing these entrepreneurs and investors have in common is that their businesses may be generating assets that are more valuable than they realize. In addition to their system, product or solution, they may also be creating valuable intangible assets known as intellectual property (IP).
This leads to some obvious questions for both entrepreneurs and investors: What are the different kinds of intangible assets? Why are they important? How can they determine what IP they have? What, if anything, should they do about it?
“Shark Tank” Is Wrong About Intellectual Property
We love the television show “Shark Tank,” in which aspiring entrepreneurs pitch their business plan to a panel of experienced investors (the “Sharks”) who then choose whether to invest as a business partner.
One of the first questions the Sharks ask is: “Do you have any patents?” It’s a good question, but it’s too narrow: intellectual property is much more than just patents.
There are four general areas of IP: patents, trade secrets, copyrights and trademarks. It’s important to understand the four types and how they differ.
Patents protect inventions. An inventor files an application with the U.S. Patent and Trademark Office (USPTO) that explains the invention in enough detail to enable a person with the typical skill level in the relevant field (e.g., a competent engineer) to make or use the invention. Once the USPTO publishes the explanation, the U.S. government grants the applicant a monopoly over the invention for twenty years from the date of filing the application.
Trade secrets are in some ways the flip side of patents. Trade secrets are information that provides value to a business so long as it remains secret. Trade secrets can include just about anything, whether technical or non-technical—even a soup recipe that has customers lining up around the block.
The law protects trade secrets as long as a business takes reasonable measures to protect their secrecy. What’s “reasonable” generally includes keeping confidential information under lock and key, restricting disclosure to a “need to know” basis, requiring signed nondisclosure agreements before discussing outside the company and training employees on how to keep trade secrets confidential. If properly maintained, trade secrecy can last forever.
Copyright protects a specific “expression” of a general idea. This protection is relatively narrow compared to patents or trade secrets. Although copyright originated with protecting artistic works, such as novels and paintings, it has since expanded to specific software code as another tool to safeguard the embodiment of a process or system.
Trademarks protect your brand identity from unauthorized use. Trademarks can be used without registering with the USPTO, but federal registration creates the presumption you own that mark in all 50 states.
- Patents can protect devices, systems, processes, medicines, materials and software inventions.
- Trade secrets can include customer lists, business plants, product development roadmaps, areas for future investigation, technical know-how, etc.
- Copyright legally prohibits the unauthorized use of copying artistic works and software.
- Trademarks can protect logos, slogans, catch phrases, symbols and word marks.
A company can own all four types of intellectual property. For example, Google owns the trademark for its name, one of the world’s most valuable trade secrets (its search algorithm), numerous patents and all its software code (protected by copyright). It’s safe to say for Google and many other companies, intellectual property is their most valuable asset.
Why Is Intellectual Property Important?
A company’s IP makes a direct contribution to the company’s valuation. IP provides a legal right to exclude others from using it. This allows companies to protect the fruit of their innovations and development work. If there is sufficient demand for this IP, they can charge others for the privilege of using it and earn licensing fees for their ingenuity.
Investors care about IP too. For example, they usually want to see an IP portfolio and often base the amount of their investment on the development of IP. Similarly, in the mergers and acquisitions world, many companies buy a target company to acquire their patented inventions, software and trade secrets.
On the flip side, a competitor’s IP can present a legal minefield that can have a negative impact on value. A company that moves forward with a new product without analyzing the patent holdings of the competition may later discover they are infringing on a competitor’s patent. At best, the company may be forced to license that patent or design around it, increasing their costs and delaying entry to the market. At worst, they may be forced to change their existing product or cease production. Moreover, good due diligence on third party IP must look beyond patents. Just ask the CEO of Uber, which settled a lawsuit with Alphabet-owned Waymo for $245 million in Uber’s stock, all because Uber hired three ex-Google employees who allegedly stole Waymo trade secrets.
Intellectual Property Best Practices
Given the importance and value of IP for entrepreneurs and investors alike, it’s well worth the effort to adopt and follow common IP best practices.
1. Know what IP you have. Conduct an audit, internally or with the help of an outside expert, to determine the extent of your existing IP. Consider whether any of your products, services, techniques or other ideas might be better protected by patents or kept as trade secrets. And, especially for trade secrets, you should determine which staff members need to know these valuable secrets.
2. Determine what IP your competitors have. Issued and published patent applications are publicly available. The USPTO and several private companies provide searchable databases of patents, trademarks, and applications, many free of charge. The most serious concern is avoiding unintentional infringement of third party patents.
3. Evaluate your IP. When you know what you have, you can ascertain its value. As with physical assets, value can be a relative thing. Whether a patent is weak or strong depends on its scope and on what other patents are extant in your field. A patent with narrow scope in a crowded field may be less valuable than a broad patent in a new field.
4. Secure your IP. Identify key inventions and file patent applications for them. A good patent attorney will not only understand your technology area but can also help identify patent ideas you have not considered or previously discarded. Apply for trademarks to protect your branding.
5. Ensure process compliance. Ensuring legal protection for your trade secrets requires that reasonable procedures are in place and consistently followed. A protection regime may include: using non-disclosure agreements, employment agreements that require proper handling of confidential information, physically or electronically locking up key confidential information, putting “confidential” notices on documents and emails, and notifying recipients of your confidential information that “this document is confidential, and only provided to you for [a specific reason].”
6. Audit your software code. This is especially important for embedded software products that may be difficult to update or change after their release. For example, software that includes open source code must properly incorporate the related compliance in its license terms. Use of almost all open source software is governed by licenses that bind a company merely by using the open source code. Some open source software licenses, such as the GNU General Public License (GPL), require a company makes all software code that incorporates code covered by the GPL available for review.
Intellectual property can provide powerful legal rights that can build a business and drive valuation. Ensuring the protection of a company’s IP and being aware of the risks posed by infringement on third-party IP are vital to success. Otherwise, you could end up bankrupt like the real Soupman: “No soup for you!”
Dave Levin, MD is the Chief Medical Officer for Sansoro Health where he focuses on bringing true interoperability to healthcare. Dave is a nationally recognized speaker, author and the former CMIO for the Cleveland Clinic. He has served in a variety of leadership and advisory roles for Health IT companies, health systems and investors. You can follow him @DaveLevinMD or email Dave.Levin@SansoroHealth.com