Is your business innovative? How patents can help it grow

Written with:EIP logo

Spin-outs and IPR ownership

Many startups begin their journey in university settings, with students building, or helping to build, exciting business propositions out of projects and experiments. These projects may be progressed with the guidance of university staff, or students might be working in support of staff leading these initiatives.

These startup businesses are often called ‘university spin-outs’. They raise questions over who owns the intellectual property rights (IPRs) – often patents - in what has been created: is it the student founders exclusively, or does the university own them/a part of them?

Recent UK case law in the High Court has confirmed the following:

  1. If it looks like a project/experiment will transition into a business proposition, it must be clear in writing from the outset who owns the IP in the technology/other elements fundamentally underpinning it. Universities must ensure they are clear on this – and students should check this too.
  2. Inventor postgraduate student contracts (especially PhDs) should be reviewed to ensure that any position taken by the university regarding IPR ownership is fair and in good faith – particularly if the student has carried out research/related activities in their own time or gone beyond the assigned project covered by their contract. If a student has done this, they might have a successful argument that they have ownership over some of the core IP.
  3. Universities should be prepared for students to ask for these contract terms to be revised where a spin-out is emerging.
  4. Challenges to IPR ownership could now argue that it is in the public interest to ensure educational fairness and that universities should act to uphold this interest, and their own duty of good faith, by not including significantly imbalanced terms in students’ contracts that act to the detriment of those students. The High Court was willing to consider all students – undergraduates and postgraduates – ‘consumers of educational services’ for these purposes.

So, if you’re a founder of a spin-out and your university is claiming rights over what you have created, you may be able to challenge the claim for these reasons. It will depend on your situation and your contract terms. Speak to an adviser for tailored support.

Innovative, unique, or cutting-edge. It’s easy for businesses to describe themselves or their products or services in this way, but how many truly are?

Is your business innovative in the sense that it’s generating products or processes that no one else has developed? Or do you consider your business as innovative because it is getting something to market faster or doing something a little better than the competition?

If it’s the former, then you’re one step closer to establishing whether your business is ‘innovative’ to the extent where your products or processes can be protected with a patent.

Patents protect the way something works – their value can be enormous and can be realised in many different ways.

What sort of companies are most at risk of creating valuable patentable items but not realising it?

Why protect your IP with a patent?

It’s a common misconception that patenting is only about litigation.

In reality, it goes far beyond that.

The majority of patent and design rights never see the light of day in a court; but used effectively, they can bring far more immediate benefits to a company, including:

Attracting investment

Investors will ask about IP protection at an early stage of negotiation. IP will play a key part in their due diligence process and, ultimately, in their decision whether or not to invest in your company. Well-protected IP demonstrates to potential investors that you have substantial value in your business, an additional, possibly key, competitive advantage, and that your ‘house is in order’. It also evidences a proactive, responsible and astute management.

Deterring potential competitors

Patents are publicly available information and can act as a ‘hands-off’ warning to competitors. You may even decide to mark your products with your patent registration number for increased visibility in the eyes of competitors and potential customers. If it’s not yet patented but you have an application in progress, you can still mark a product with the label ‘patent pending’ or ‘patent applied for’.

Licensing for revenue

Patents are a recognised asset that can be licensed to others in return for a licence fee. Done properly, licensing should not affect your ownership rights to that patent.

It can be a very lucrative activity.

For example, UK technology company Arm Holdings, which designs microchips used in most mobile phones and tablets, generates revenue by licensing its IP (patents) to other companies who can also make its products. Arm was bought in 2016 by Japanese company SoftBank Group for £24 billion.

As a negotiation tool

Startups and SMEs have an edge over established businesses, in that they do not have the baggage or inertia that typically goes with big firms (so-called ‘market incumbents’). As a result, startups and SMEs can generally innovate and get products to market more quickly.

If your product is starting to attract customers away from the incumbents, it’s not at all unusual for these larger players to try to use their own patents to block your progress. Having patents that cover your innovation, and in particular the features that have caused customers to switch to your products, gives you a negotiating position – and important operating freedoms – that you otherwise will not have.

To create an innovative image

Marketing your company as innovative attracts a certain kudos. Dyson make no secret of the fact their products are patent protected. It helps create an image of being at the forefront of technology and customers buy into this image – and, in Dyson’s case at least, are willing to pay more for it.

To cut your tax bill

You may be able to apply for a tax break – in this case, a lower rate of corporation tax – on profits earned from patented inventions.

To achieve this, as a starting point, you must be registered for UK corporation tax and making a profit on the patented invention.

The patent must be exclusively yours, or exclusively licensed to you and you must have been involved in the innovation activity lying behind it. You can check your eligibility according to the government’s qualifying criteria here.

If it looks as though you fall into these criteria, we strongly recommend that you take expert advice on your eligibility and how soon you can start applying for – and enjoying the benefits of – that relief.

We can connect you with a relevant expert if you’d like to explore this further.

How to identify and capture IP

At its most basic level, the four core areas of IP protection cover are:

• Protecting how things work (patents)

• How they look (designs)

• How they are presented or recorded (copyrights)

• The reputation and goodwill in brands (trademarks)

This following section will focus principally on patents and it will also touch on designs.

Depending on the nature of a business, IP may be created within an internal R&D department, by an external contractor, by the founder of a business, or a combination of all three.

Wherever IP is being created, it’s important that those creating it are aware this is happening, so the IP can be identified, ownership over it is clear and it can be protected, if appropriate.

All employees of a company who are likely to innovate, or be involved in innovative activity, should be educated about the types of IP protection that may apply to the sort of creations they are working on – and of the benefits to the business in identifying and protecting that IP.

How to successfully record what’s being invented and what needs protection

An ‘invention disclosure form’ is a useful way of capturing this internal information. You can use our template to help you.

In this form, you try to capture as much of the following information as possible:

• What the invention is

• What problem it solves

• Any similar solutions/products

• Who invented it

• When it was created

A formal process such as this keeps IP at the forefront of all involved in the business. An additional, substantial benefit is being able to use your invention disclosure form to build the basis of a patent application.

When and how you should use an invention disclosure form

Employee incentives could be offered to encourage a culture of innovation in your company.

Secrecy is paramount – take real care with storage of records and with conversations

You must ensure that these forms, any input to them and the activities of those whose innovations are recorded within them, remain strictly confidential to the company. Keeping records and raising awareness of the protectable nature of innovative activity is really important. However equally critical is the element of secrecy that accompanies any patent application. If the invention is not secret, it will not be capable of patent protection. (See our guide to patents for more information.)

Ownership of IP

Having successfully identified IP that has been created, before proceeding to protect it, it’s essential to establish who owns the rights to the IP, as it’s not always clear cut.

Usually, IP created by an employee is automatically owned by the employer. That arrangement remains in place even if the employee leaves the company and starts their own business, provided the invention is conceived when the inventor(s) were employed.

There are ways in which employers can protect themselves against employees using confidential information, such as trade secrets and know how, both during their period of employment and once they leave. (Take a look at our guide: Confidentiality: are you keeping your IP and data safe? for more information. Our guide to restrictive covenants and our guide to keeping your data and IP safe may also be relevant.)

If the IP was developed externally, then it will most likely require an assignment of IP rights from one party to your company. Without an agreement to the contrary, patent and design rights may continue to reside with a product design agency who created the product.

Product design agencies sometimes subcontract, so you’ll also need to make sure those subcontractors assigned their rights to the agency first. Make sure your terms of engagement with that external agency cover both scenarios.

Don’t forget that paying a contractor to design a product does not equate to you automatically owning the IP in that product. If you need a good B2B services agreement to cover your relationship with an agency, you can use our template agreement.

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