As a software company, Arlington-based Opower says it has three assets: its employees, clients and intellectual property. And the way to protect the latter is through patents.
The business, which helps power companies show customers how much energy they use, says it has filed for patents more frequently as it’s grown over five years from a scrappy start-up to a small business with 230 employees. Patents are essential to protecting both the algorithms that power its software and the business methods it invented along the way.
“Patents are a necessary defense in case someone sues us and says we are violating their patented material,” said Michael Sachse, vice president of regulatory affairs for Opower. “They also protect us in case someone really comes in and steals our work and ideas.”
Patent battles between tech titans are the stuff of headlines these days. Apple and Samsung are at war over the tablet computer. Oracle and Google are fighting over Android smartphone technology. Google’s snapping up Motorola Mobility for its patent trove. Motorola is after Apple. Apple and Microsoft seized 6,000 Nortel patents in a sale. These fights over intellectual property are fierce and expensive and often resolved in lawsuits that sprawl across continents.
As patent battles heat up, many start-ups are also making the trip to the patent office. And an upcoming change in how the government awards patents could cause a stampede.
Historically patents have been awarded to the first inventor of a technology. But starting in March, they will go to the first person who files a patent for a particular invention — a change that could front-load the costs for a young company.
A well-prepared, comprehensive application can cost a company between $5,000 and $15,000. Under the first-to-file rule, the time element of a patent application becomes essential, which may cause the application costs to eat into start-ups’ cash flow at unpredictable times. But if they hope to be the next AOL, that might just be a cost start-ups have to swallow.
“Companies are really going to have to keep an eye on it,” said Bao Tran, a San Francisco patent attorney. “They can’t afford to just relax or think, ‘a year from now, if this makes it to product, we’ll hire a law firm.’ ”
Stephanie Hay is a prototypical patent-savvy start-up exec. The entrepreneur co-founded the Arlington-based FastCustomer, which connects people with other companies’ customer service without waiting on hold. Hay’s team regularly checks in with the company’s patent lawyer, whom she describes as “almost like part of the team.”
The company runs ideas past the lawyer whenever it has a tech development that may warrant an additional patent. “The most important thing is to make sure we protect ourselves on an ongoing basis,” she said. “It’s not ‘set it and forget it.’ ”
Lawyers and investors say that many start-ups are wising up to the value that patents confer on start-ups. Patents are used both as a bargaining chip in negotiations with venture capitalists and as a way to woo potential buyers. In the venture world, they’re seen as value that can live on beyond the life of an actual company, as Eastman Kodak has discovered.
“Patents are the currency that we’re using to identify assets that are really important to a business,” said John Calvert, an adviser at the U.S. Patent and Trademark Office. “It used to be that a business could say how many mills it has with which to produce bolts of cloth. These days, your patent portfolio is equally important.”
Academic studies have shown that start-ups that hold patents or that have filed applications are more likely to receive venture capital and to get it faster. Most start-ups are too new to have strong profits, so investors may view patents as a way to ensure they can extract value from a company even if it fails. Patents also signal that a start-up is onto something .
“Most investors, if they’re putting investment dollars into building an enterprise that’s based on a technology, they like to see patents,” said Julia Spicer, director of the Mid-Atlantic Venture Association, a trade association. “It shows that there has been a diligence that’s searched through what’s already out there.”
A well-crafted patent can add $250,000 to $500,000 when investors evaluate companies’ worth, according to Lawrence Au, a local inventor who consults with start-ups on their patent applications. (However, some experts say the range is much wider, depending on the patent).
“I’ve been talking with CEOs who say things like, ‘Would you value it as a million dollars per patent?’” said David Bailey, founding partner with the intellectual-property law firm KPPB in California. “There is a lot more focus on IP now than 10 years ago.”
Start-ups have even more reason to file patents quickly before the America Invents Act kicks in.
The existing “first to invent” process dates a patent application to the first time an inventor described a technology. (This method counts lab notebooks and other descriptions as evidence that an inventor was mulling an innovation before the first official filer took it to the patent office.)
The act became law in September, but the measure allows inventors to file applications under the existing system until March 2013. At that point, patents will be awarded to the first person who files an application on an invention.
Filing before the new law takes effect has its advantages. For one thing, those who file before the March 2013 deadline will have their “continuation applications” — follow-on patents that protect new aspects of the technology — grandfathered in under the first-to-invent system.
Dan Berger, who founded the D.C. social seating company SocialTables, said he’s working on a patent application and hopes to submit it soon so he can beat the inevitable 2013 crowds. He also thinks holding a patent will give him an edge when he pitches his business to investors.
“If the laws weren’t changing and time wasn’t an issue, we may not be so quick to work on our application,” he said. “Once first-to-file goes through, there will be a swarm of people filing.”
The White House has said the America Invents Act will bring the U.S. patent system in line with Europe’s and help entrepreneurs turn inventions into businesses faster. The law also contains a loophole allowing start-ups that use an inventive concept for one year before a patent filing to later lay claim to it — even if they are not the first patent filer. The system could also be a challenge for start-ups, which are usually understaffed and underfinanced and lack the experience to know when something is patentable.
“With the new regime, start-up companies are going to need to make much faster decisions about whether to file for patent protections,” Bailey said. “As soon as they have the idea, they need to get a filing together or risk losing the technology to someone who has the resources to make that filing straight away.”
Small companies are under-represented among patent holders. The Patent and Trademark Office says that “small entities,” which includes small businesses, nonprofits and universities, file about 28 percent of all patents, even though small companies make up the vast majority of all businesses. (Calvert notes that large companies often file multiple similar patents at once.) While a company such as Dell might have dozens of intellectual-property lawyers, even a big start-up like OPower has only three lawyers on staff.
Opower said the company’s growth has allowed it to afford more applications, and it has been even more vigilant about their filings. When an Opower engineer discovers something, it’s swiftly communicated to the legal team.
“At first, we were fairly conservative because applications are expensive,” Sachse said. “Now, we invest in patents and pursue as many as we can justify, and the shift to first-to-file underscores that thinking.”