Once upon a time, protecting intellectual property was a boring necessity. Business owners went through the tedious legal processes required to register and then hoped the issue would never arise again. It was on a par with making sure the company telephones worked and staff toilets flushed.
That was then. Today intellectual property (IP) is becoming the number-one corporate battleground. For many firms it is the single most important commercial and strategic concern. It is the key to securing funding. Defending IP and winning licensing rights can be a goldmine. Losing those rights in court can mean ruination.
Online payments startup Paddle is in the midst of an existential IP battle. It had barely launched when Telefonica-owned rival Ensygnia alleged Paddle was infringing two patents relating to log-in and payments processes. Arbitration failed. Paddle claimed the fees demanded were uncommercial and disputed the validity of the patents, so the pair are in court.
Paddle founder Ed Lea says: “It is disheartening to be spending our limited resources on legal services, but we feel that we’ve been given no alternative.”
Ensygnia comes to the war well prepared, registering two patents in 59 countries. Its fourth hire was a chief legal officer. Patent conflicts between startups like this used to be rare. Ensygnia saw early on that the landscape is changing as mastering IP means the right to dominate lucrative fields. And it proceeded from the outset with that in mind.
There is a real value to intellectual property rather than the accounting view of intangible assets
Investors are ramping up the importance they place on IP. Iceotope makes liquid cooling for servers. It is a technology with huge global potential. Founder Peter Hopton attributes landing investment of $10 million to his focus on intellectual property. The high up-front cost of patent registration was no disincentive.
“When I started my career, I was in the position of having no patents and a lot of ideas,” he says. “I would often hear people comment on the pointlessness of patents and, as a result, chose to hold most of my IP as knowhow. Ultimately, experience led me to an understanding that badly written patents are pointless, but well-written and well-researched patents are hugely valuable, despite the expense. Patents have been one of the key factors in securing investment in my technology businesses.”
Gerald Brady, managing director of Silicon Valley Bank’s venture capital arm, works with entrepreneurs to help them use IP as security. He reports: “When Silicon Valley Bank started 30 years ago, we established a novel, highly differentiated model of lending, which was based on taking security on IP, rather than using the traditional asset-based model that is still used by most banks in 2014. We recognised then, and still do, that there is a real value to IP rather than the accounting view of intangible assets.”
If a startup fails to thrive, there may be value in IP during the fire sale. “This option simply did not exist for companies ten to fifteen years ago,” says Mr Brady. “Therefore, these days, even in a shutdown scenario, investors and management can recover some value from their investment.”
With such incentive to register IP, the question arises why more firms don’t protect it. According to Clifton Asset Management, only 6 per cent of firms value their IP at more than 10 per cent of business worth. A most prominent reason is cost. Some firms can’t justify the outlay.
Purple Wifi makes analytics software for public internet hubs. Founder Gavin Wheeldon says: “Trying to file a patent to cover all 50 countries that we trade in currently is simply too high a cost and just doesn’t make sense for a young SME [small and medium-sized enterprise].” Worse, he adds: “Defending IP is very difficult, particularly for companies like ours that are global by nature. For example, the chances of us defending ourselves somewhere like China are slim to none.”
Even firms that can’t use the might of the law need to handle IP very carefully. Board game entrepreneur Matthew Tidbury has avoided registering any IP for his game City of Zombies. Defending a claim is too expensive. Instead, he’s avoided making the game in China and won’t display it at trade shows, to frustrate copycats.
“My intention is to secure a licensing deal,” he says. “That way the game is protected under the umbrella of the licence too and a large licensing deal will published a massive number of the games in one go so my tenure is secured – at least for a while.”
Two new developments will increase the value of IP. A new European patent will grant rights across the EU at a stroke. There is also the Patent Box tax break designed to encourage UK entrepreneurs to register IP.
Both these mean intellectual property is an issue no firm can ignore. The incentives to master the issue are large and growing. And the price for failure may be extreme.
