IP and the momentum of growth
Kai Stornebel at Gramm Lins discusses six scenarios where challenges to the IP in technical innovations can interrupt the trajectory of high growth
As exciting as high growth is, it can easily lose momentum if the IP on which is based comes under internal and external pressure. Higher visibility brings more intense scrutiny, so the way in which IP, such as trademarks, designs and copyrights, as well as technical innovations and technical IP rights, is managed has to keep pace. Otherwise high-growth companies can suddenly find themselves out of position. Through a series of scenarios, this chapter discusses how risks can unexpectedly arise and how technical rights in an innovation can be managed to sustain a trajectory of high growth.
During the high-growth phase of an innovation, a whole series of changes will be made to personnel and infrastructure within a company. New employees are hired. Experienced employees who have been there from the start often opt to leave, because they want to take on different challenges or do not to follow the path chosen. New hardware and software is purchased, premises are upgraded, systems and structures are required.
Owners and managers are under time pressure to bring new products to the market or to carry out further developments. Vast numbers of new ideas are worked out and processed, often requiring external partners or new suppliers. All of these challenges are happening simultaneously, of course.
In addition, care has to be taken of technical IP rights, even if at first glance they seem to contribute little to growth in this hectic period. But IP rights might, and probably will, become increasingly significant, so it is worth appreciating the nature of the challenges you are likely to face.
Broadly, these will involve your own IP rights and the IP rights of third parties, who are starting to feel unsettled by the impact of your high growth. The position in which you find yourself depends on whether you are having to deal with the proprietors of IP rights or with those who are infringing them.
Third party IP rights
The main characteristic of a technical IP right is that the IP right owner is granted a special position and can, generally speaking, prohibit any third party from exploiting, using or possessing what is protected. In the case of technical IP rights, this is only possible for a limited period of time; in the case of patents, as a rule, for no longer than 20 years. For a company, this means that third parties protective rights must be observed, otherwise there is a risk that the protective rights will be enforced and that future production or distribution will have to be discontinued and compensation will have to be paid for the past.
Scenario 1: stop production, pay damages, disclose data
One company produces, among other things, an accessory for automobiles that makes it possible to mount electronic devices in a vehicle. The development of the accessory was entrusted to a newly employed employee who had already worked in the development department of a competitor and was hired from there. The development of the new product is running smoothly despite the very tight time frame. The management is enthusiastic about the project manager, as all deadlines were met and the project is running according to plan. Shortly after a large-scale and successful market launch, the management received an interlocutory injunction order from the competitor stating that no accessories should be manufactured, offered or sold, that products already delivered should be recalled and that comprehensive information on the sale of the products should be provided. In addition, the payment of damages is demanded. The basis for the issuing of the injunction is a granted patent in which, among other things, the project manager is named as the co-inventor. All appeals against the injunction were ultimately unsuccessful, the products had to be recalled and, information had to be provided on the number of products manufactured, the manufacturing costs, the distribution channels and the profit achieved with them, so that in addition to the purely financial damage, business management information had to be disclosed to a direct competitor.
Practical tip 1
When developing new products and especially when modifying existing products, it is advisable to check the existing IP rights of competitors to see whether your own product could fall within the scope of protection of one of the IP rights.
Scenario 2: cease and desist improvements
The development of a new process for the folding of paper blanks significantly facilitates and accelerates the production of packaging materials. This innovation enables the company to manufacture the products faster and more cost-effectively. A special gluing process is used in the manufacture of the product, which was chosen during product development so as not to interfere with a known patent of a competitor. This special gluing process deliberately accepts technical disadvantages in order to avoid infringing a patent. The success of the new process means that a new production line is set up at a different location without the product developer being involved. When setting up the production line, the production engineer notices that a small change to the gluing process would result in a further product improvement and carries this out independently. After some time, the management receives a warning letter and a request to issue a cease-and-desist declaration, to provide information and to pay damages. After firstly denying the possibility of a patent infringement due to the previous evaluation of the IP situation, the request of the other side had to be complied with after checking the own “improved” production process.
Practical tip 2
Even the knowledge of possible patent infringements is often bound to people. As soon as structures change and these people are no longer on site, there is an increased risk of patent infringement. Therefore, all responsible persons should be informed about the importance of respecting IP rights and the consequences of a patent infringement.
Scenario 3: a forced licence
Before the development of a new transmission gearbox, a search was carried out regarding the state of the art and the IP right situation. The evaluation of the granted patents of the competitors led to the development of a circumvention solution that leads outside the scope of protection of the relevant patents. The new transmission is a success. After 3 years, the company receives an enquiry as to why it feels entitled to offer, manufacture and distribute such a gearbox. Reference is made to a recently granted patent, which resulted from a divisional application based one of the observed and evaluated granted patents. Despite all efforts to identify relevant prior art to attack the asserted patent, no material could be found so that a license had to be taken.
Practical tip 3
When analysing the IP right situation, it should be borne in mind that IP rights with a very narrow scope of protection can be obtained from pending applications which are specifically directed to the attacked embodiment (Target Claiming). The filing date of such IP rights from divisional applications may date back 10 years or more, the determination of prior art for such "old" patents is extremely difficult. Due to the specific claim wording and the very narrow scope of protection, such targeted claim are very difficult attack and challenged.
Own IP rights
Your own technical IP rights serve to secure your own innovation against unauthorised imitation in the long term. The effort put into the development of new technologies can be economically secured by technical IP rights by a temporary monopoly position for the patented invention. For this purpose, these technical IP rights must be applied for and examined at the respective patent office. If the conditions for patenting are fulfilled, a patent is granted for the invention. As a matter of principle, a claim for injunction against third parties can only be asserted after a patent has been granted. However, it is often possible to obtain enforceable IP rights more quickly, for example by filing parallel design applications or utility model applications.
Scenario 4: defence against competitor
A new press with special, adjustable pressure punches is to be exhibited at a trade fair, which will make it possible to produce more products in a much shorter time. The time before the trade fair is running out, but a patent application is still submitted to a national patent office the day before the trade fair. The new press is a great success, the new pressure punches are examined with interest and many orders are received. Due to the success on the fair, a European patent application is filed on the basis of the national patent application and a positive search report is received. A competitor from Germany has launched a competing product on the market which also uses such pressure punches. In order to enforce its rights, the company has branched off a German utility model from the European patent application and filed an action for injunction with the competent regional court. Shortly after the action is filed, the European patent is granted and the action is extended and also based on the European patent. The attacks on the validity of utility model and the patent were unsuccessful, the competitor had to refrain from using the pressure punches, provide information and pay damages.
Practical tip 4
Own developments should always be protected by suitable protective rights. The own effort required for this is often less than expected. Even though patent granting procedures can take a comparatively long time, there may be opportunities to improve one's own position by taking legal action.
In addition to obtaining one's own IP rights to strengthen your legal position, which is fundamentally important, own IP rights applications also serve to document the state of knowledge within a company at a certain point in time and, moreover, to create prior art so that it is not possible for third parties to obtain their own IP rights.
Scenario 5: secure claims on growth
The newly introduced basic model of a device for manufacturing integrated circuits has become a surprisingly successful product. The integrated circuits are arranged on a base board. In addition to the expansion of the production capacities, another product is being developed which makes it possible to separate these circuits from each other and remove them from the base board in a particularly effective way. Employees have developed a principle solution for this, which still has to be implemented. For this purpose, an external cooperation company is contacted to jointly finalize the corresponding process and a corresponding device. The team of both companies, quickly put together for this purpose, works effectively and presents a jointly developed solution which is tested and used. After 2 years, the manufacturing company learns that the cooperation partner has applied for a patent on exactly this principle and solution developed during the project phase. The partner company is listed as the sole applicant, no other inventors were named but their own employees. After lengthy disputes and legal proceedings, it was finally possible to achieve that both companies are listed as owners in the application and that inventors of both companies are named. This prevented the cooperation company from being able to determine alone who is allowed to use the device and the procedure.
Practical tip 5
Before starting a cooperation with external companies, it should be determined which partner has which tasks, who is entitled to file IP right applications, who owns these IP right applications, how the results of the cooperation may be used and how the IP right applications should be managed. In principle, it is advisable to apply for IP rights for all innovations that already exist and are to be introduced before the start of the cooperation, so that it can be proven who knew and invented what and when.
A problem that should not be underestimated is you might have to proof that at a certain point in time something was already known and used in your company or had already been realized in your products. A fundamental prerequisite for obtaining a technical IP right is novelty and inventive step, together with industrial applicability and the absence of exclusion criteria. Novelty is defined, in simple terms, as not yet been published before the filing date, without going into details here. Publications are increasingly being published online, which makes it from a legal perspective difficult to prove the exact date and invites the other party to attack screenshots or the like as being manipulated. An audit-proof backup of all documents in a company very complex and data protection regulations sometimes mean that documents have to be destroyed after a certain time. Only digitally available technical drawings with a revision date make it difficult to prove that these drawings already had the relevant characteristics of a construction at a previous point in time. Archives or documents are also often destroyed automatically when moving or after 10 years to make room for new documents.
Scenario 6: hard to prove
A small, medium-sized printing company has developed a highly specialised printing process that makes it possible to incorporate special features into surfaces to produce forgery-proof documents. After lengthy testing for suitability and availability, the company receives a major order 12 years after finishing the development. A competitor company files an action for injunction with the competent regional court, based on a European patent with a one year younger priority date, i.e. the patent was applied one year after the development of the process. If the patent infringement suit would have been successful, the printing company would struggle for existence. The attacked printing company defends itself with the argument that the patented process was developed by itself, that a private prior use had taken place and that products manufactured according to the process had already been sold before the filing date. There is no detailed written documentation on the development of the process, nor is there any officially dated proof of publication. Invoices and delivery notes were destroyed after 10 years in accordance with the law after expiry of the storage period. The proof of the obvious previous use and the private previous use right only takes place with the greatest effort using private photographs and witness statements.
Practical tip 6
Especially in a successful start-up period of a company, little importance is attached to a comprehensive and audit-proof documentation of processes. IP right applications officially and indisputably document what the applicant's IP was at what time and when it was published. Some developments and innovations are in the air in the respective technical field. Parallel developments can take place so that two inventors independently of each other can make the same invention. In this case, it is helpful to provide evidence of an own IP application, especially since the perception of time is often deceived during the hectic period of high growth. The argument "We've always done it this way!" often does not stand up to the critical demand to prove this.
Technical IP rights, especially patents, are effective instruments to legally secure your own economic position. They are also weapons of competitors which should not be underestimated and which can massively threaten or severely impede your economic activity. It is therefore advisable, despite the time and expense involved, to provide legal protection to accompany economic growth and to install appropriate procedures. New developments should be checked for own inventions as well as for a possible interference with third party IP rights. Own applications for IP rights should be made as far as possible before publication and before the start of a cooperation. Applications for IP rights document the time of available knowledge in a company and prevent applications for IP rights of third parties. Monitoring the IP rights portfolio of competitors prevents negative surprises.