Startups Between a Rock and a Hard Place
Chapter 1

This post is first in a series on startup IP issues.

Any startup raising money gets questions from investors about their unique product capabilities – their competitive edge – and their strategies to keep that edge. It’s an important question because it gets to the heart of the issue of value creation.

Historically, answers have included descriptions of their “secret sauce” and their IP strategy, which frequently centered around patents. That’s a good answer that has triggered many investments – resulting in startups that grow, create value in the marketplace and generate a good return for the workers and the investors.

Starting March 16, 2013, it’s the wrong answer.

Because after that date, if a startup describes their “secret sauce” to an investor without an NDA, they lose their ability to file a patent.

Pop-quiz: Do investors sign NDAs?
Answer: Rarely and certainly not in the early stages of the dialog.

Historically, startup entrepreneurs could discuss their secrets with investors because patent law gave inventors a one year grace period to apply for a patent. But the new patent law, the “America Invents Act,” (AIA) contains confusing language patent experts now believe to mean the grace period is gone. That means that a public disclosure (like talking to an investor or your girlfriend without an NDA) legally strips you of your rights to file a patent.

The AIA does have language about a grace period. But it’s not only patent experts that believe it’s confusing, even officials within the patent office admit the law is unclear and say it will be many years before the courts clarify the law. Startups can’t wait

Startups talking to investors after the new law takes effect on March 16th must modify the conversation, explain their reasons for non-disclosure and cross their fingers they’ll still be able to raise money. The other option is to file a patent application before talking to investors. An expensive proposition and an obvious catch 22 because it’s investment dollars that would pay for the patent application.

In the mean time, starting right now, you should contact your congressional representatives and encourage them to pass corrective legislation to remove the ambiguity within AIA Section 102(a)(1), specifically to clarify or remove the five words “or otherwise available to the public” from the law. While you’re at it, you should encourage your elected officials to clarify what is meant by the word “disclosure” in AIA Section 102(b)(1)(A). If you’d like to learn more, I recommend the Commentary by Ammon Lesher which appears on page 11 of the Westlaw Journal PDF called “Patents in the 21st Century.”

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