It’s not always best to follow the leader

A few months ago, I attended an intellectual property conference where the head IP counsel for Twitter discussed its new Innovator’s Patent Agreement, or IPA.

A few of the panel members hailing from academic institutions were drooling over the IPA as a revolutionary new path for companies to take with regard to their employees and intellectual property rights. As I was not familiar with Twitter’s recent announcement, my immediate gut reaction was that the only good IPA is one in a frosty mug that is full of golden, hoppy goodness. Upon delving into the Twitter IPA, I have come to the conclusion that my initial assessment was correct — well, at least for most of us out there.

Twitter claims that the development of the IPA came about as a result of the need to recruit the best and brightest software developers. Since these individuals grew up in a time that movies and music were expected to be freely available on the Internet, the new generation of developers do not like patents and want more control over how their software innovations are used.

Enter Twitter and the IPA. The IPA is basically a different breed of the Proprietary Information and Inventions Agreement. These types of agreements are the contracts used by companies to formalize the assignment of the invention from the employee to the company (if the employee is essentially paid to invent, they have a duty to assign it to the company under the law). Once the invention is assigned, the company can do with it what it wishes, including suing for infringement under any resulting patents.

The IPA changes things up a bit. While the invention is still assigned to the company, the company makes certain agreements on how the patent is used. Most notably, the IPA states that a company will not assert any of the claims of the patent unless it is for defensive purposes.

“Defensive” is generally defined as asserting it against another company or individual that 1) filed or threatened a patent infringement lawsuit against the company; 2) threatened or filed a patent lawsuit against any company in the last 10 years; 3) or to otherwise deter a patent litigation against the company. Otherwise, the company or any successor in interest to the patent must obtain the inventor’s consent before enforcing the patent.

While Twitter’s aims of reducing contentious patent litigation (which is a bit ironic because twitter does not have any issued patents and only has three pending applications) may be laudable, adoption of the IPA by young startups could prove to be disastrous. First of all, patents are just not good defensive weapons. Patents, by their nature, are exclusionary rights, meaning that you can only use a patent to exclude someone else from doing something.

Simply put, a patent is a deal between innovators and the government. In granting the patent, the government grants the patentee an exclusionary right to some product, process or other invention for a set term of 20 years. In exchange, the patentee is forced to basically disclose an instruction manual on how to create, manufacture or practice the invention, and at the end of the term the invention is dedicated to the public for anyone to use, manufacture or practice.

This exclusionary right is enforced through the filing of a lawsuit. Apart from the right to exclude competition, patents have no other intrinsic value. While you may put differing values on what that exclusionary right is worth, there may be a time in the future in which you wish to sell the company and/or some or all of its assets. Patents may be of great interest to the potential buyer.

By restricting your rights, you have essentially gutted the economic value of the patent and your fledgling company. Additionally, putting restrictions on how you may enforce your intellectual property will most likely negatively affect your ability to attract venture capital or other investors. Investors want to make sure that the company they invest in has the best chance to return their investment with a profit.

If a company puts restrictions on how it will enforce its hard earned intellectual property, investors may be wary that the company will not be able to adequately protect its market share. If a company is already generating enough revenue that it can self-finance its capital needs, this may not be a bad deal for you. However, if you are looking at using OPM (other people’s money) to help your business grow, such restrictions could have disastrous affects.

Lastly, the law itself makes patents a bad defensive weapon. Under the law, a party who knows of an infringement, but fails to enforce its rights may lose the ability to enforce its legal rights under the doctrine of latches.

Simply put, if I have known that your company has been violating our patent for 10 years, but I do not do anything about it until you file suit against me, I am most likely out of luck due to latches. Now that defensive weapon doesn’t look so menacing, and you may be without a lot of that leverage that you were counting on.

New concepts in business practices come and go. New and small ventures really need to take a look at whether the next up and coming thing will strategically work for their business, or if it could possibly do more harm than good.

Just because Twitter’s IPA may seem to work for them does not mean that it works for every company out there. Putting these sorts of restrictions on a company’s intellectual assets may cost some companies significant value down the road in terms of the purchase price in an acquisition or the price received for assets in a spin-off transaction.

It always pays to take a look at a proposed strategy and see if it fits into your business plan prior to taking any action.

Categories: Management & Leadership