Patents and Small Business

The Up and Running blog has an interesting post on patents and small business.  Although it is still somewhat expensive to go through the entire process, patents have become much easier and cheaper to file.  They are also increasingly viewed as extremely important assets by investors and potential acquirers, so most venture backed businesses file a large number of patent applications.

Patent lawsuits are extremely expensive.  I recently met with a small tech company that had spent roughly $5 million over the last two years on a single patent infringement suit.  Obviously most small businesses cannot afford to do this (it was also not clear to me this suit was a good use of funds by the company I met with). 

While I'm no expert on intellectual property law, I agree that patents generally provide limited protection from competitors copying ideas and/or inventions.  Work arounds that avoid infringement are often easy to do, and beyond the cost of IP suits proving infringement is very hard.

So why should a small business bother with patents??  I see three reasons:

• The MAD defense - The US and the Soviet Union used the fear of mutually assured destruction to help avoid nuclear conflict during the cold war.  Filed patents provides a similar defense.  It is so expensive to sue over IP, and so hard to prove infringement, that having patents gives a small business the ability to threaten counter suits and/or the ability to make a lawsuit so expensive that others will choose not to sue.  I've seen this defense effectively used on multiple occassions.  Of course the MAD defense also works against a small business if they want to sue a competitor with patents.
• Becoming an attractive partnering/acquisition candidate - Many big companies prefer to acquire small companies with strong IP positions.  If a small business plans include possibly being acquired, then having patents is a major plus.  They also like to do partnering deals with companies that have strong IP positions.
• Fundamental patents - a fundamental patent covers technology that is so fundamental to the business or technology involved that there are no work arounds and others have to either respect or license the patent.  These patents are rare, but very powerful.  For example, Qualcomm has built a huge and highly profitable business by owning fundamental patents on various aspects of cell phone network operations.  If a small business has fundamental technology, then filing can be a huge win.

Intellectual property (IP) is going to become even more important and valuable over the next decade.  Global patent filings are growing very rapidly (see this report by the World Intellectual Property Organization for more information) and will continue to do so.  Small businesses with the ability to file patents should stongly consider filing, even if the direct protection relative to the competition is somewhat limited. 

While I'm no expert on intellectual property law, it seems clear that IP is going to become even more important and valuable over the next decade.