Deep pockets

21 August 2006

Protecting your intellectual property can be expensive - particularly if you end up in court. In the first of two reports, we look at IP insurance and other practical options that may save you money

Dr Paul Leonard, director of the IP Institute in London (www.ip-institute.org.uk), acknowledges that protecting intellectual property doesn't come cheap. If you hire a specialist agency to do a search on existing patent protection, sort out all the paperwork and file a patent to protect your product, you could be looking at around £50,000. More important, if you get into a legal battle to enforce it and end up traipsing through the High Court and the Appeals Court, the cost could stretch into the millions - a cost that a larger rival might be more than willing to bear. And if you're looking at enforcement in the US - well it just gets worse. '

Frankly, if you're a small company, enforcement is a big problem,' says Leonard. 'It's relatively cheap to litigate in certain jurisdictions - Germany, Japan and China are not too bad. But if you're in the UK or US, you need deep pockets. It's relatively cheap to buy IP rights - it's phenomenally expensive to protect them through the courts.'

So if you're a really small company, is it worth laying out the costs to protect your IP in the first place? The answer is usually 'yes', particularly if you believe that what you're creating has real value. For one thing, investors will often want to see that the asset they're helping build is protected, so if you're looking for external funding you may not have a choice. Secondly, fear of litigation isn't a particularly solid basis to make a business decision, given that there are so many unknowns attached. If you were to end up in a legal dispute, for example, it may be that your investors would back you all the way through if they really believed in the asset value. Thirdly, patents do act as a deterrent in their own right - sometimes enforcement can amount to as little as a warning shot. 'You've got to think what your business is worth, and how much you're prepared to invest in a good idea,' says Leonard.

Equally, it's important to look at the other side of the patent issue and make sure that your work isn't infringing on anyone else's IP. Some VCs argue that start-ups spend too long trying to work out how to use their IP to block competitors, rather than establishing whether they're in danger of being sued themselves - in other words, it's about Freedom to Operate, not Freedom to Block. That's a view Leonard supports. 'You need to understand where your competitors may block your initiatives. There's often a lack of understanding of a company's licence to operate in a particular area, and of the threat of interference from competitors in specific areas.' It doesn't cost a great deal to do a search on existing patents, and the money spent upfront could save a whole lot of hassle further down the line. 'IP rights generally only get considered when someone gets their head above the parapet and is making money - it's then that people take a snipe at you. If you've not got your ducks in a row, there are always people out there looking to steal a nice little earner.' That's particularly true given that most inventions are rarely completely ground-breaking - there'll usually be someone doing something in a similar area.

The problems of litigating IP haven't gone unnoticed in the UK, and there have been several initiatives designed to ease the problem. Firstly, the UK insurance market has developed niche policies specifically for this sector. Leonard suggests that it would be prohibitively expensive to insure against general third party litigation, but you can insure against specific events related to certain aspects of IP. This type of insurance is often used more for its investment value than to cover the actual litigation risk: if an investor sees that you have a watertight patent of your own and that you're insured against the most likely forms of attack from third parties in the areas you operate in, that could positively impact the way they look at your company.

Secondly, the UK Patent Office is taking steps to ease the burden. It actively encourages mediation and arbitration as a way of resolving disputes, and has its own team of accredited mediators (www.patent.gov.uk). Since the introduction of the Patents Act 2004, it also offers opinions on patent validity and infringement for £200, a process that usually takes around three months and includes time for interested parties to file observations. These opinions are not based on litigated proceedings and are not legally binding, but as Leonard points out, they may support a legal case and be useful in raising investment. *Next month: The commercial realities of IP for start-ups

By Keith Rodgers, Webster Buchanan Research