You Can Have a Successful Business Even if You Don’t Have a Patent

I recently met a software developer who wants to start a business. He immediately started talking to me about obtaining a patent. Condensed a bit, our conversation went roughly as follows:

• Dana: Without giving away information that would jeopardize your ability to obtain a patent, what would the software do?
• Developer: It is enterprise customer relationship management (CRM) software.
• Dana: What is novel and non-obvious about it?
• Developer: It will be based on a unique algorithm.
• Dana: You cannot patent an algorithm.
• Developer: I can get a patent on software that implements an algorithm.
• Dana: Perhaps. But there are other means, such as trade secrets, that might adequately protect the software [cut off in mid-sentence]….
• Developer: VCs want to invest in companies that have patents.

Leaving aside the singular focus on VC funding – something that few entrepreneurs obtain (see Realistic Financing Options for Startup Companies) – the would-be entrepreneur was similarly myopic in focusing on a patent as the only type of intellectual property that matters.

A patent grants its owner the right to exclude others from making, using, offering for sale, or selling the invention, or importing the invention into the United States. Note that this is not the right to do things – it is the right to preclude others from doing things.

In an industry where development costs are exceedingly high, such as development of drugs or medical devices, patents can be crucial to prevent competitors from quickly selling inexpensive knock-off products.

Patents do have their disadvantages, however:

• Patents can be expensive to prosecute and maintain, especially if they are sought in multiple countries.
• It can take several years for a patent to issue, during which time a fast-moving marketplace can undergo significant changes, perhaps undermining the value of the patent.
• Litigation to enforce a patent can cost hundreds of thousands of dollars.

As a result, software developers often find it easier and more cost-effective to rely on trade secret protection for their products, even if they suspect patent protection may be available.

Trade secret protection is inexpensive and easy to obtain. California Civil Code Section 3426.1(d) says that a trade secret is “information…that [d]erives independent economic value…from not being generally known to the public…and [i]s the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”

This means, in effect, that by using confidentiality provisions in agreements and by providing only object code to customers, developers can gain immediate protection for their software while getting to market as quickly as possible – which is a sensible recipe for building a successful business without a patent.

Related post: Professors Confirm Limits on Startup Interest in Patents

Dana H. Shultz, Attorney at Law  +1 510-547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.