By Candace Stuart
Small Times Senior Writer
Aug. 24, 2001 — Patenting can be a small tech company’s best friend. But it can be a costly relationship, occasionally risky and sometimes not worth the effort, legal and industry experts say.
“It’s always a balancing act because patents can
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Nanoscale Materials is a private company that develops and plans to market highly reactive nanoparticles based on a dozen patents, co-patents and exclusive licensing agreements with Kansas State University.
The U.S. Patent and Trademark Office’s basic patent filing fee can cost a few hundred dollars or more than $1,000, depending on the size of the company and type of patent. Legal counsel can add between $2,000 to $15,000, according to Oppedahl & Larson LLP, a law firm in Colorado that specializes in intellectual property.
If the patent is deemed worthy, the inventor gets a governmentally sanctioned monopoly on the idea for a period of time. In return, he or she pays more fees — one when the patent is issued, and an annual and escalating maintenance fee throughout the patent’s life.
Few venture capitalists will risk putting money into a start-up that relies on trade secrets instead of patents, said Howard Anderson, cofounder of the Boston-based venture capital firm Battery Ventures. “That’s the only thing you have to protect yourself from big corporations, to stop them from infringing,” he said. “We’ll spend a lot of money on patents.”
“Trade secrets are only as good as your ability to protect them,” agreed Don Freed, vice president of business development at Nanophase Technologies Inc. in Romeoville, Ill. “As you get bigger, it becomes more difficult to keep things a secret. … With the Internet and people’s ability to get information, keeping a trade secret is hard.”
Nanophase was launched in 1989 based on an exclusive licensing agreement with Argonne National Laboratory to use a vapor synthesis process for making nanoparticles. The exclusivity deal gave Nanophase “instant credibility” with backers, Freed said. Nanophase now is a publicly held company that owns and controls 30 patents and applications.
Having patent protection is even more critical if a company wants to go public, said Ken Lyon, president of Altair Nanomaterials Corp. in Reno, Nev. Altair Nanomaterials is a wholly owned subsidiary of Altair Nanotechnologies Inc., which went public in 1998. Shareholders need to be informed, and be assured their company has a competitive edge that is protected, he said.
“It’s the cost of doing business,” he said.
Altair Nanomaterials has filed for six patents and will seek a seventh by the end of the month as it converts an existing pilot plant into a commercial unit for manufacturing nanomaterials, Lyon said. Altair makes its patenting decisions based on the markets it wants to maintain or develop.
“The most important decision is what to work on and who to work with,” Lyon said. “Those are the critical considerations when you have limited resources.”
Patents not only protect the owning company but also its clients, Freed pointed out, because they make it more difficult for a competitor to duplicate the clients’ products. Nanophase supplies BASF and other companies with nanoparticles for everything from cosmetics to flooring products.
Patenting costs don’t really begin to pinch “until you get well down the road,” Freed said. Maintenance fees grow exponentially, based on the theory that the inventor is reaping profits from an invention that rivals can’t mimic. After 10 years, a company holding 10 patents could face $300,000 to $400,000 in maintenance fees, Freed said.
Under the Paris Convention, an inventor has a year after filing to seek patent protection in foreign countries. Companies can file directly with individual nations or work through blanket organizations such as the European Patent Office and the Patent Cooperation Treaty.
That’s where the costs can really kick in, according to Paul Janicke, a law professor at the University of Houston and director of the school’s intellectual property and information law program. “The cost of patenting in the multinational world is enormous,” he said, sometimes as much as $100,000. “It’s a cost that a start-up is not going to pay.”
Other executives said the bill can be even higher, but not necessarily out of reach.
“It certainly gets expensive to cover multiple territories,” said Gerard Wills, chief financial officer of Nanogen Inc. Nanogen markets its NanoChip technology to scientists and laboratories conducting genomic research. The publicly held company holds 27 patents in the U.S. and three foreign patents.
“You do what you can,” he said. “The U.S. is the largest market so we of course start there. We have to make decisions.”
There is a flip side to patenting, Janicke warned, and it can be the most costly of all — litigation. Start-ups might avoid confrontations in the courtroom by taking a defensive stance, identifying and monitoring “troublesome” patents filed by others and any lawsuits associated with them.
“For a start-up, it’s not in the cards that they can litigate,” he said.
Litigation is a final resort, executives said, but not one to shun.
“The last thing you want to do is go to court,” said Nanoscale Materials’ Sampson, who earlier in his career handled patenting issues for Procter & Gamble Co. “That’s a risk for a small company. It’s difficult for a small company to take on a big one because they can get outspent in court.
“But there is no point in getting a patent unless you’re willing to defend it.”
Wills said a large corporation is unlikely to take legal action against a start-up until the smaller company has an actual product on the market, and start-ups are unlikely to initiate a battle. When it happens, it can drain finances and distract management for both parties.
Few patent infringement cases actually go to trial, according to the Federal Judicial Center. Only 3.9 percent of the 2,197 cases filed between September of 1999 and September of 2000 reached the trial stage, according to the center’s annual report. The previous year was slightly higher — 4.5 percent of the 2,187 cases filed.
Litigation is a fact of life in the biotech arena, said Wills and Randy Berholtz, senior corporate counsel and director of business development at Nanogen. And the rewards can be worth the fight, they said.
Nanogen resolved a 15-month-old patent infringement case with Motorola Corp. on July 24 by agreeing to pay Motorola and two other groups $5 million in cash and stock for licensing rights. “This was a great result from our perspective,” Berholtz said, because Nanogen got access to Motorola’s technology without cross-licensing its own.
The rare but real risk in patenting is not getting patent approval, Freed said. The U.S. Patent and Trademark Office received 293,244 patent applications in fiscal 2000 and issued 165,504 patents. Many applications remain under review for 12 months or longer, so year-by-year comparisons aren’t valid. But a fraction gets rejected.
As part of the application process, the patent is published and available for anyone to see. “You could read my application and it’s not protected,” Freed said. “If the patent is never issued, I’ve shown you how to do it.”
And the fast-paced world of science and discovery in some areas may make today’s filing worthless by the time the patent is issued, Sampson said. “It’s a dilemma,” he said. “Things are moving so rapidly that as soon as you get the patent, things are obsolete.”
But fail to file and someone else surely will take the initiative, he said. “There’s always someone right behind you.”
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CONTACT THE AUTHOR:
Candace Stuart at [email protected] or call 734-528-6290.