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Trae Nickelson: Hello, welcome back to Starting Up & Right: Conversations with a Startup CFO. I am your co-host, Trae Nickelson. Joining me is our startup CFO, Ryan Keating. Ryan, good to see you again.
Ryan Keating: Trae, nice to talk to you. Good to be back.
Trae: Good to be back. This is going to be a good episode. Joining us today is Hogene Choi, a partner at Morrison & Foerster in their Patent Strategy + Prosecution Group. For more than 20 years, she has been advising startups and tech companies on intellectual property. Today, we get to enjoy a conversation between you and Hogene around IP and patents and how that can play a part in informing your startup, in forming your pitch, and informing your approach to your technology and your IP. Hogene, welcome to the show. Thanks for joining.
Hogene Choi: Thanks, guys. Thanks for inviting me to join you.
Ryan: Thank you for coming. This is always an important topic for our early-stage clients, especially when it comes to fundraising and protecting, obviously, what they think at least is their intellectual property and there's always a lot of concern and secrecy around stealth mode at the very early stages, so I'm really looking forward to this. I think people will find it very helpful to understand really how do patents play in, especially in early stage.
How do investors perceive them? How does the market look at them in terms of defensive or even license? How does a founder even understand, "What do I have that is something that I should think about patenting?" I think that's exactly Hogene, where you and your firm and others come in. We'd love to get into some of the questions and share some of this information.
Trae: Let me throw out the dumb question, if that sounds good, just back up to the very beginning, assume I'm a startup founder, I know nothing, what is intellectual property and what is a patent?
Hogene: Thanks, Trae. There are a number of different forms of intellectual property, patents is one form. You've also probably heard of trademarks, copyrights, trade secrets, a lot of those different forms of intellectual property are well known, but patents are a little bit more mysterious to most folks. It's important to define exactly what you get with a patent, it allows you to block your competitors from making your invention, selling your invention, or practicing your invention.
That means that you can block out the marketplace. It does not actually permit you to create or make your invention. That's a fine distinction there. You can block others from the marketplace, it's not about permission to create. You can actually patent something that is not technically legal, such as online gambling.
Trae: Hogene, you mentioned the word protection, it's a little bit of the idea behind protection. I'm a startup founder, I've thought of something pretty neat, pretty unique that I think, how do I protect my inventions? What are some of the questions you'll start asking me to help me build a strategy around protection?
Hogene: Sure. With a patent, it needs to be directed to an invention. That means something that is new and non-obvious over what's already existing in the state of the art. Most entrepreneurs know what the current state of the market is for their business model, for their technical inventions, and they're trying to launch something that they think is new and different. You want to take that knowledge and apply it to what you think your patentable inventions are.
Your patentable inventions may include technology that is used internally, it could be technology that is external facing. For example, it could be an app that your customers use, it could be your internal process for manufacturing a product, it could be the interactions that occur between your servers and another company's servers, and maybe your customers' app. There's a lot of different areas for potential patenting. It really depends on what your business offering is, what the service or product is.
Ryan: Hogene, in a follow-up to that, how do you work with early-stage companies, entrepreneurs, to even help them identify what things could be worth patenting? If they don't come to you with already these ideas figured out, like, these are the three things that are unique and patentable, how do you sit with them to help flush that out?
Hogene: Sure. That's one of the early and important conversations that I have with entrepreneurs. It requires some inventor education. The entrepreneurs need to understand what is a patent? What does it get you? How do you identify patentable inventions within the entire space of products and/or services that you're building, and how would you capture those inventions?
Oftentimes, that last aspect, how do you capture inventions, is one of the most important and difficult things. Having regular meetings with your engineers, with your inventors, really encouraging them to elicit ideas to offer ideas about what they are working on, what could be new, what could be different, and to really think about that along the way, all of that is really important.
Oftentimes, for early-stage startups, you have an idea at the very beginning about what is new and technologically different, what differentiates you from other competitors in the marketplace. I try to have a conversation about that with the entrepreneurs, helping them to understand what is it about that particular aspect that is new and different.
This is where it's very important to distinguish between business innovation and technical innovation. Patents cover technical innovation. There are some aspects of business that you can try to file a patent application on, but that's usually directed more towards how the technology plays into your business innovation, and are you innovating in a technical way that enables that business innovation.
Trae: You mentioned that the distinction between the business uniqueness and the technical uniqueness, I guess, and software patents. I'm not an engineer, but I do dally and code a little bit and there's a temptation as a software engineer to think everything was obvious about a software patent. How do you approach the question of obvious? That's such a vague term. Is the definition getting easier to define now?
Hogene: Sure, Trae, the definition of obviousness really comes down to whether or not someone who's familiar with that technology and the state of the art would have thought to combine two different sources, three different sources of information in order to come up with the solution that you're trying to patent.
That idea where it's obvious because perhaps one patent that's already out there on a technology informed you about a lot of the bulk of the invention, then when you take a look at some other technical white paper, someone else's patent, something like that, it fills in the holes for you and really teaches you how to combine those things and come up with what is the equivalent of your invention.
Obviously, in the software space in particular, there are a lot of people constantly developing all different kinds of software. You also have a fairly low threshold for innovation when it comes to starting companies with a life sciences company, with a pharmaceutical company, the threshold for starting a company is quite a bit higher because you've got to invest a lot more into R&D upfront.
You have the entire FDA regulatory process and all of those various hurdles add time and requirements for additional investment. When it comes to software, it's a lot easier for two guys in a garage, just like the HP model, to just start writing software and creating something that is different and new. In those cases, you really want to come back to two core questions.
First of all, why did you even bother to start this company? Did you think that you had something that was really valuable, new and different? We need to talk about that. The other question to ask is, was there some problem out there that had been out there and existing for a long time, and you're the one who came up with the great solution, or you're the one that came up with a better, faster, more powerful solution. That's another topic we should talk about.
Ryan: I think maybe related to obviousness, I think is this temptation for the entrepreneurs that we work with a lot to try to go out and search for what's out there. Basically, I think in art language, it's called prior art. How do you advise, or how do you think about entrepreneurs or talk to them about how much should they be looking for when it comes to this notion of prior art, and what is that, actually? Yes, that's a good place to start.
Hogene: Sure. Prior art covers all of the documented technology and disclosures that were out there before your app. It's really, these days, a patent application filing date. It's not even about the date when you invented your invention. The US is now on the same timeline as the rest of the world. When you invented something, doesn't matter, all that matters is the date when you file a patent application. Everything prior to that date is potential prior art.
Prior art is what can be cited by an examiner at the US Patent Trademark Office to reject your patent application. These are the references that they'll point to and say your invention is already effectively disclosed to the world because when you look at this technical white paper, this other patent that is issued, this other patent application that was filed, and maybe even it didn't issue into a patent, but that's still prior art.
It could be a blog post. It could be a user manual. I've seen a lot of different forms of prior art cited against patent applications where they're typically patents or patent applications that have been published.
Ryan: What kind of advice would you have for entrepreneurs, just to keep using our client base, and like looking for prior art before they come to you, is it better for them to do research or for them to maybe not go out searching for something that could invalidate their patent?
Hogene: The problem with searching for prior art with getting on Google Patents and looking for whatever might seem similar to your invention, is that you are now under a duty to disclose every single reference that you might have found that is deemed to be material to patentability, is the phrase that the Patent Office uses.
Any reference that you might've found that the patent examiner might've found interesting when examining your patent application, you are now under a duty to disclose all of that. If you go off and do a Google Patents search and you just put in a few keywords, and you end up with-- in the software space, it wouldn't be unusual to come up with maybe several thousand references.
Now, you need to go through all of those, to figure out which ones are material to patentability, which ones you might be under an obligation to cite to the Patent Office. Simply taking that entire list and providing that to the patent examiner is going to be rejected. The patent examiner is going to say, "No, you need to do the work to figure out which of those references are actually material to patentability." They will basically keep at you until you come back with a much shorter list, maybe at most 100 references or so.
Now you are incurring the time and effort and potentially attorney's fees, if you're asking your attorneys to review all of these documents because they will probably understand best what is actually fitting into that legal standard of material to patentability. You're now racking up, I don't know how many hours, how many dollars trying to identify the references that actually meet that standard. What happens if you don't do that? If you just say, "I'll just do a quick search. I'll just see if there's a lot or a little bit. Maybe I'll look through a few of them, but who's going to know that I searched Google?"
The problem is, if there's any record of that, if you talk to anybody about the fact that you did that search, if you create any sort of written evidence, and if you just forget and mention it to someone later on, all of that is potential evidence that later on, if you actually filed your patent application, you actually get a patent issued, let's say later on you try to assert it or someone else that you sold the patent to tries to assert that patent, and someone else during litigation, during discovery, where you're compelled to produce all of your documents, all of your files, all sorts of things you may have to testify, that information could be discovered that you did that kind of a search.
At which point the fact that you did not satisfy your duty to disclose any of those documents that were material to patentability, that now can invalidate your patent. Of course, once that patent is invalidated, that can have a number of downstream effects.
Trae: The fact that I would have done that research is potential evidence that I didn't come up with my creation independently? Like I was using the patents to actually enable my own creation?
Hogene: It's not about the fact that you didn't invent it independently. It's really about the fact that the Patent Office and most folks assume that you are the person, you as the inventor, are the person who has the best knowledge about what else is out there that's reasonably similar to your invention.
They assume that you are generally familiar with the technology in that space, the other products in that space, the services in that space, that because of your general familiarity, that is why you bothered to go pay all of the US PTO Patent Office fees, to pay an attorney, to prepare a patent application, and you made that investment into filing a patent application.
Because of that assumption that you know best about what is out there and also it's not just a onetime at the time of filing duty of disclosure, it's a continuing duty. Throughout the time that it takes to actually get from filing to an issued patent, which may be several years, typically it's several years, you have a continuing duty throughout that entire time to disclose to the Patent Office anything that you find that appears that it may be material to patentability.
This could include research on your competitor's website, if you find some technical data sheet that appears to be important, in that something that maybe the patent examiner would want to know about, it is your duty to disclose those documents. If you are handling prosecution on your own, or if your attorney is, that's the point where you would prepare what's called an information disclosure statement, citing those references. If it's not a patent reference, you may have to provide a copy of the references as well.
Trae: Do you have a preference? If a client walks in your door, do you have a preference? I always come back to the thought, is it better to ask forgiveness or permission. Is a client that walks in your door that paid no attention to patents that they may have been infringing upon or they did no research. They show up green with something they've built and they just hand it off to you to say, "What have I got? What do I need to do here to protect myself?"
Is that easier than somebody who walks in and they've done prior art research. What's your preference? How should I prepare myself as a startup founder for a visit with Hogene?
Hogene: I think as long as you've really done the market research on your business model, you will have enough information. If once you've done whatever technical research you needed to do to feel comfortable, to feel like this product or service has potential, it can work, the business model has legs, if you're ready to come pitch to Ryan and tell him that you've got a viable business idea, then you are ready to talk to me as well.
In either scenario, we may handle them slightly differently, but I want to also, getting back to your question, I want to make sure to differentiate whether or not someone is infringing someone else's patent from whether or not you should file patent applications on your own inventions. Those two are totally separate and different and don't have any relationship to one another.
It's entirely possible, and given the volume of patents out there, perhaps even probable that you may be infringing someone's patent, but that has nothing to do with whether or not your inventions are worth patenting. I will say this additional point on that.
If it turns out that your competitor has a patent on something that is involved in your invention, if you get a patent on something that your competitor is also doing, or maybe just your competitor is doing, even if you're not doing it yourself, if you happen to later on get into competitor lawsuit, where they're now suing you for infringement of their patent, if you have a patent on their technology that you can then counterclaim with, you have some ammunition in that fight. If you don't have any patents and they just have patents on your invention, it's pretty one-sided fight.
Ryan: We've seen that, quite a bit with our clients. I have to say more so 10 years ago, I think there was a lot of software patents that were issued and maybe not a lot of real understanding of the uniqueness of them. I remember there was a period of time where we had several of our clients try to assert patents that ultimately would end up being disqualified. I forget what the proper term is. Invalidated.
Hogene: Invalidated.
Ryan: Yes. How do you think about that when you actually own a patent, and do you assert it, or do you save it for a defensive move, like we'll swap patent portfolios, or is that trend eased up because the patents that survive are solid ones now?
Hogene: I'll say this, if you got a patent related to software that issued before around 2014, mid-2014, that's when the Supreme Court came out with their decision in what's commonly known as the Alice Case. That decision really not only changed the entire landscape for software patents, it threw everything into a lot of indecision and upheaval for a while. The patent office examiners were having a lot of difficulty understanding how they should be examining software-directed patent applications.
In addition, a lot of different people out there who are patent holders or defending themselves from patents, also were facing a lot of uncertainty as to how to identify which software patents were problematic, which ones were fine. There was a period of a few years where a lot of that was shaking out, but if you have a software patent that issued from prior to mid-2014, that is where I would really think about potentially putting your patent, your issued patent.
Again, this applies to issued patents, not patent applications that may have been filed before that time and are still in prosecution or more recently issued. If your patent issued before mid-2014, I would really take a look at the cost of putting it through a re-examination process. Now, with the ex parte re-examination process, you can take your patent, throw it back into the prosecution process, have an examiner look at it again under the current standards for subject matter eligibility.
They'll be able to give you a much better idea of whether or not you need to amend the claims, or, perhaps, hopefully not, but perhaps there isn't anything in that patent that is going to withstand that new standard for subject matter eligibility.
Ryan: I'm assuming a re-examination process could end up with them deciding that this patent shouldn't have been issued in the first place, is there that risk or is it--?
Hogene: There is that risk, however, you will have the opportunity to amend your claims. It's possible that you just need to tweak them a bit and then you'll be able to have an issued patent again, albeit something that's probably a little bit more detailed and verbose. The alternative is, it does cost money and time, so if you are in urgent need of running out and suing a competitor right now because of what they're doing, it's important to recognize that the re-examination process does take some time and it's not going to be a free process.
You do have to pay the usual attorney's fees and go through that entire process. It's important to make a careful assessment of how business-critical it is to have that time to maintain those claims and whether or not it might even be possible to get something of value in the end. One additional aspect to mention, Ryan, in response to your question, is that you can also file what's called a reissue application.
A reissue application is where you think that there may be some defect in your claims and you're able to clearly state what the defect is. This is another way of going through the process of having the patent office look at your patent application again, but it's from a slightly different perspective.
You would need to identify precisely, and it's difficult with subject matter eligibility because you want to say that you still think your software patent should be patentable, so you can't make the statement that there is a defect in the claims, however, it's possible to make that statement with respect to the scope of the patent claim. If there is something in the patent that you did not claim that you should have been able to claim, you can file a reissue application.
If you are within two years of the issue date of the patent, you can actually file what's called a broadening reissue application, so you can attempt to broaden the scope of the claims. Again, that's only up until two years from that issue date, but that is another basis for filing a reissue application. Of course, during that process, the examiner would look at subject matter eligibility, especially for a software patent.
Trae: Hogene, help me think through the difference between trade secrets and patents. I always think of the secret formula for Coke or Google's PageRank, they didn't patent those. They guard those very zealously. What's your advice to me if I think how do I weigh out? Should I keep a trade secret or should I patent this?
Hogene: Thanks for asking that question, Trae. One of the important things to ask yourself is, what is detectable about your invention? With a product, if you take it apart and you're able to see after taking the product apart or maybe even just from looking at the product, if you're able to see the invention, then your invention is detectable just from the product, looking at the product.
If you're able to look at your app or the service that you're providing through a web browser, and see the invention or figure out the invention just by interacting with it, then your invention is detectable purely by using the app or the software. There are other ways of finding an invention, especially with respect to software, that are much more honorous and more challenging but still possible, such as if you can look at the software code for your product and figure out by looking at the code whether or not a particular invention is being used, then it's also detectable in that way.
That can sometimes come up when companies provide libraries or interfaces to outside parties who may need to interface with their software. That's the question you need to ask yourself, is your invention detectable based on the products or services that you're putting out in the marketplace? I'll give you an example of something that may not be detectable.
For example, if you have a very specific process for combining certain chemicals and processes inside of your factory and you are heating them for some period of time and then cooling them and heating them again, and all of that is purely being done within your factory, the final product that goes out may have no ability whatsoever to actually detect what that process was. What chemicals you used, what were the various heating and cooling steps and for how much time.
That is something that may be best kept as a trade secret, that process. If that's your secret sauce, that enables you to-- for example, I have this protector on my cell phone screen that's supposed to be incredibly not possible to break, not possible to scratch, super clear all the time, whatever technology went into that glass is something that was in the manufacturing process at the factory.
That thing may be very, very difficult or impossible for anyone who just has that product in their hand to figure out what that patented invention was, if you patented it. In that case, it may be better to not patent it. The important thing to understand with a patent application is that because you are getting a 20-year monopoly, enabling you to block other people from practicing your invention, the reason why the government is willing to grant you that benefit is because you're also providing the benefit to the public of educating them about your invention.
You're disclosing, you have to disclose the full extent of your invention to the public. It's that exchange, benefit for the public in exchange for a temporary monopoly on that invention. That's why the patent system exists. You have to completely disclose your invention, and the protection only lasts you during that 20-year term. The recipe for Coke, as I understand, has been a secret for a very, very, very long time.
Trae: How do they do that?
Hogene: Much longer than [crosstalk].
Trae: How do they keep that secret?
Ryan: [crosstalk] they would have patented that, that would have been able to be reproduced probably in 100 years ago at this point.
Hogene: That's right.
Trae: That's an important note. The patents are-- they're not intended to be blockers for innovation. They're intended to enable innovation. Actually, if you patent something, you can license to other people who can reproduce your manufacturing for this magic, for the magic glass that's protecting your cell phone or something. If it's a trade secret, though what is your theory, how does Coke keep that recipe protected? They're can sue people if it gets [unintelligible 00:30:55] the employees. There's some lockdown around that recipe.
Hogene: That is important to understand that. A trade secret is only protected as long as it is a secret. One of the most common scenarios that happens in Silicon Valley is that employees move around a lot, they go from company to company, and they take that knowledge with them, they take all the knowledge of what could have been your trade secrets when they go to their new employer, and oftentimes, that is their value to the new employers.
The fact that they have work experience in that area of technology, your employees, I'm sure, if you are working with good employment counsel, are being going to be asked to sign some agreement confirming that they're not going to use any trade secret information and not going to take any trade secrets with them. Any materials related to software code or technical specifications, anything that's the property of the company, they're supposed to return all of that.
They're not supposed to take it with them to their new employers, but oftentimes, even assuming the best of intentions, it's really hard to eliminate that knowledge in their heads. This is how most litigation around trade secrets manifests, is when one employee leaves a company, especially those key high-level engineers and architects, when they leave a company and go to a competitor coming out with a very similar product, that is when a lot of trade secret litigation tends to get triggered.
Ryan: Let me ask a question about funding. Almost all of the clients we work with are fundraising, they're all very early stage. They're all working oftentimes with venture capital investors for the first time. How should an investor think about the value of having patents when it comes to working with investors? Do investors see it as a significant plus?
I've often thought of it as if you have it, then you may be forced to assert it, and if you're forced to assert it, you may get it invalidated. Where does the value really fall out on a patent that's maybe been filed for, untested, maybe even unissued, when you think of it in the eyes of how an investor thinks about that value?
Hogene: There's a few questions in there, Ryan, so I'm going to try to unpack that a little bit. Oftentimes, when a startup gets started, you're really only going file a few patent applications direct at your most important core inventions. That's often the core and the basis of what the company's products and/or services are going to be based on. Those important core patents are part of what will be left over in the potential occasion that your company fails.
Thinking about it from the investor's perspective, you're investing a whole lot of money, there is a risk that a company will fail, that risk is fairly high when you look at the percentage of companies that fail, which is somewhere in the, I understand, it's the high 90%.
Thinking like the investor, what do you have left when the business failed, either due to marketing or inability to actually complete the technology, inability to deploy the technology, whatever the reason may have been, oftentimes, the employees, after they're all gone, and if the equipment was all rented and what's left at the end of the day that you can try to extract some value from, it's really the patents and the patent application filings.
Obviously, there's no guarantee that by the time your company is closing down that you will actually have some patents that have
issued off of the applications that you filed. However, all of those applications that you filed, they have some potential value. It's not just about the patents that issue, there's also the potential for mining those applications. For example, if you filed a really strong patent application that described the entire breadth of, not only the core thing that your company is focusing on actually building and delivering to the marketplace in one and a half years from now, but if you start really thinking more broadly about what might your company do to extend that product, extend the feature set, think about what might you be doing in 10 years from now, and include all of that description.
As long as you're able to describe it at a level of detail where someone else could then go and build that, you should be able to really capture a broad array or range of the potential inventions off of that original core invention that will help to really increase the value of that patent application filing. You can imagine that maybe the investor and some other folks who're involved realize that that business model was not optimal, or maybe the product or service wasn't quite right.
They may try to tweak it and do something slightly different, or they may simply sell the IP to someone else who's interested in taking those patent applications, mining the parts that are of value to them, which may be slightly different than what you're focusing on, and then using the power of those patents to go and build a company.
Ryan: Something that has come up with our groups quite a bit because, generally, our clients tend to have very, very few people in the company, they're very early stage. I think they have a tendency when there is something that they want to file a patent around, to list everybody in the company as an inventor. How do you see that, and what do you recommend when it comes to listing inventors on a patent application?
Hogene: Listing the inventors on a patent application, that's not the right time to have a team-building exercise. There's actually a legal standard, and a legal definition of who should be named as an inventor on a patent application. It's really, really important to get that exactly right so that you're including everyone who should be included, and you're not excluding anyone who should be included.
This can come into play for example, if you hired temporary workers, contractors, grad students to help out with your product and building it, and maybe you decide, let's not include so and so on this patent application. The legal standard for inventorship is it's everyone who contributed to the conception of the ideas that are being claimed in the patent applications.
One complication here is that it has a reference to the patent claims. The claims are different than the specification and figures, which are relatively similar to any technical specification that a lot of entrepreneurs are very familiar with. This isn't just about describing your invention, the claims actually define the metes and bounds of your legal rights in terms of blocking others, preventing others from practicing or making your invention.
Once those claims are drafted, and that's ideally done with the help of an attorney because the claims are legalese, they're not just technical description again. Once your attorney has helped you to craft your claims, it's important to take a look at the claims, and then have the inventors, whoever is currently thought of as being inventors, people who contributed to the ideas, it's important to have those people look through the claims, and really think about, "Well who contributed to that idea and who contributed that idea?", and just walk through the claims, and really think about who came up with the ideas.
It's not about who built the concepts, it could be that one guy came up with all the ideas, but then the entire team worked on building the product. That does not mean you include the entire team. It is just the one guy who came up with all the ideas describing the claims.
Ryan: What happens if there are people that are listed on the patent that ultimately shouldn't be? What's the harm, I guess?
Hogene: Sure. The harm is that if your list of inventors is not correct, if it includes people that it shouldn't, if it dropped people that it should not have dropped, then that can be the foundation for invalidating your patent later on. When you're at the point where there's a competitor who's worth suing, because their market capitalization has gotten to a certain point, or they're starting to eat into your market and you decide, "This is the right time when I'm going to go assert my patent to make sure that they back off." That's the point when attorneys from the other side will start to look at your patent and start to see where they can poke holes.
If it goes into litigation and they start to get discovery on all of your documents, and they discover any casual comments, any messages exchange between people that seemed to indicate that the list of inventors is wrong, they can now go use that as a basis for invalidating your patent, and that's complete invalidation of the entire patent. You can see it's a pretty severe consequence.
Ryan: Okay.
Trae: I'm throwing out this is a little bit. I don't think this is a loaded question, but what is a patent troll?
Hogene: Patent troll? That term is often used for someone, an entity or a person who doesn't actually make the invention, doesn't actually practice the invention, but is simply trying to find other companies who are practicing, making, selling the invention and, then goes and tries to sue those other companies. There are a lot of different ways to look at this and there's a lot of different circumstances.
I will tell you, I had one client before who was a non-practicing entity, as they're sometimes also called. He had come up with these great ideas. He had patented them, and he spent all of his time doing heart surgery for free, for the poor and destitute. He was counting on making a living from licensing his patents. He is one example, where he actually invented it himself. He was the actual original innovator and he came up with these great ideas and, they're very useful ideas, and so they were being incorporated into some products.
On the other hand, you also have other situations where there are companies out there that will look for what they think are really good, valuable patents, and they will go and buy them. These aren't-- At this point, the person who is asserting the patents, who is suing other companies or people, they are not the people who actually invented, came up with that invention. There's a bit of a range there in terms of people who you'll see, but the term patent troll in particular, oftentimes, more often than not, is used to apply to the latter scenario.
Trae: Right. The bad guys there.
Ryan: Yes. Let me, maybe a little know nitty-gritty questions here, but how much does it cost and how long is the process to work on getting a patent filed?
Hogene: Sure. Those are, those are great questions, Ryan. I'm going to be very precise with my language now, just so we're very clear. You first file a patent application, so you apply for a patent. You don't actually get a patent until the patent office decides to issue a patent based on your application. During the time between the filing of the application, and the issuance of the granted patent, that period of time is called examination.
That's when the patent office is taking a look at your application, the specification, the figures, and the claims, looking at the space of prior art out there. They're doing their own searches based on the databases that they have access to, sometimes even go on the web and look for stuff. They will review all the materials that they find and figure out whether or not they think that your claimed invention based on the claims section in your patent application, describes something that is patentable, with eligible subject matter, and new and non-obvious, over the entire space of what they're seeing with their search results.
That process takes some time. Oftentimes, you don't get the first indication from an examiner about whether or not, what's their initial response to your patent application, until anywhere from 18 months to 2 years after you filed the application. At that point, on average, there are 2.5 office action cycles. The first time you hear from the patent office, you'll receive what's called an office action. That office action, on average, will reject your patent application based on the claims as filed. You have an opportunity at that point to try to overcome those rejections by amending your claims, and you can file a response to the patent office.
They will then look at how you amended your claims, or if you simply provided arguments, because you think the examiner is wrong in his rejection, you can also simply traverse his rejections and say, "This is why I think you're wrong." After he gets that response, he or she gets that response, they will then take a look at your response, look at space of prior art again. Then either, if you're lucky, come up with a notice of allowance that they'll send out to you, or more typically, they'll issue another office action.
That office action is then your next opportunity to really assess the examiner's position, what the space of prior art is out there, whether or not it makes sense for you to amend your claims again and try again. On average, like I said, it takes 2.5 office action and response cycles before you get to the point where whether or not this is going to be allowed, or whether you should consider just letting it go.
This range can vary quite a bit. I've had some patent applications that took six, seven, eight years to get to an allowance, for a number of different reasons. Once you get to a certain point during the examination process, if you have at least two office actions that you've received, you can also appeal the examiner's rejections. The appeals process goes to a different body, the patent trial and appeal board, and the appeals process can take quite a bit of time. They are working on bringing that time down at the patent office, but I've seen it in the past take anywhere from a year to two years, two and a half years, three years. It can be a fairly lengthy process that can add to the overall timeline.
I'd say that's an outlier when you get to six years, seven years for a prosecution, but on average, it's probably right around three years or so, from the date of filing until the date of issuance. That's a lot of time, and every time you're asking your attorneys to handle an office action for you, you have to pay them for that time and effort to analyze the examiner's office action, figure out whether or not a response should be filed, and to advise you on whether or not they think you have a good chance of overcoming the examiner's rejections or not.
Now, your attorney can never guarantee anything. If you have a good attorney, they will never guarantee an allowance, but they should be able to provide you with their thoughts on potential strategies. That's what we typically do is when we get an office action, we take a look at it, analyze it and provide a recommendation to our clients about whether or not we think they should file a response, whether they should appeal, whether they should consider just abandoning the application.
Sometimes we have to make those recommendations as well, but it's important to keep that entire cost and timeline in mind, as you're deciding what to file patent applications on. Oftentimes, if you're an early-stage startup, you don't have the money to file patent applications on everything that you might be doing. It's really important to think about what are the high-value inventions? What are the inventions that you truly think are new and different? That's where you want to really focus and invest your time, and energy, and money.
It's also important to think about, and this is where it's good to get advice from your investors as well, is what would have value if this company failed? What would the investor want to be left with as a portfolio of patents and/or patent applications?
Trae: It sounds like even if the even if the patent were abandoned, even if you gave up on the process, there's still some pretty good value in going through that process and examining all that. It sounds like the two to three years of talking with your investors, talking with you, what are some of the side benefits of the process of examining your IP?
Hogene: You will get a very good sense of what is out there, and a very good sense of what is old, what is new, what has already been done and who is doing what. The US Patent and Trademark Office offers what's called an assignment database. Typically, any company that has filed a patent application will have recorded proof of their ownership of that patent application, and you can see who those patent applications and patents are assigned to. It's possible to get a sense of who else is innovating in this space.
Now, the patents and patent applications are not published. They're not publicly available until 18 months after filing. In addition, of course, the assignment's information will not be publicly available until that time either. Once you get to a certain point, it provides a lot of really good strategic intelligence in order to understand what the space of the marketplace for innovation in that area is.
Trae: Once a patent is approved, it's essentially approved by the US Patent Office. Then there's this whole notion of how do you protect this internationally? How should a company think about it? It's not the same, it's not one approval covers you worldwide. How do you advise around that, and what's that process look like?
Hogene: That's right, Ryan. A US patent is only good for blocking out your competitors within the US, it does not apply internationally. In fact, internationally, when you look at the overall space, there are patent offices pretty much in every single country out there, and so those patents are only going to be good within those countries.
This is why it's really important to do a really rigorous analysis when you're deciding whether or not to file an international patent application, either the broader one called a PCT application that has the ability to eventually provide a stepping stone to covering various different countries or if you want to go straight to a patent application filing in one other country because you are very sure about where your future lies.
Most startups are not that confident and that sure about where the will need international protection. Especially as the space of industrial development evolves, and certain countries well-known for semiconductor development, or for software development, or for different types of innovation. It's really hard to predict. That's why one of the tools that's often recommended to our clients is something called the PCT application.
PCT stands for Patent Cooperation Treaty. There are over [153 countries to date] around the world that have signed onto this international treaty. It basically enables you to file a single application that can then, within 30 months of the original priority date, you can then make a decision and push out that decision, which is very good for most startups that are just trying to find their feet and find their marketplace in the US. You can push out that decision point 30 months from that priority date, and make the analysis later on about where you want to invest, again, invest your time, and your money, and your energy into pursuing actual patent protection.
I'll let you know, most of my software clients, they're interested in countries that are doing a lot of software development, so they typically file in Europe. They may file in Asia, in certain countries in Asia, but they usually have a pretty good sense of the specific jurisdictions that they're interested in. With the PCT application, there is something called the World Intellectual Property Organization that will receive the PCT application and actually do some examination on the claims that are filed and will also send you what's called a search report.
That search report is very similar to what's called an office action in the US, and it will let you know about this space of prior art that the examiner at WIPO, the World Intellectual Property Organization, found when searching your patent claims, your patent application claims. Later on, the nice thing about that international search report is that you're not obligated to respond to it. You don't have to amend your claims at that time. You have the opportunity to push off that decision point again, meaning you save on that cost of responding to that international search report until you decide which countries.
Maybe by the time you get to the 30-month point, hopefully not, but maybe your company has failed by then. That way, you didn't have to incur that cost of the attorney fees earlier on to respond to that international search report. Oftentimes with startups, it's really the game of trying to push out risk, lengthen the timeline, give you enough runway to get to the point where you're a successful viable business, and you have the money to invest and spend on these other important objectives. The PCT application is one way of doing that.
In Europe, where a lot of our clients are interested in getting protection, either on the life sciences side or the software side, Europe has what's called the European Patent Office. As you know, the European Union involves a number of different countries. European Patent Office covers some subset of that, but it is possible to file a patent application with the European Patent Office, go through the prosecution process at the EPO, and that way, you can actually get to an allowance.
All examination can be completed through the EPO, and then at the end of that, you do have to validate your patent in the specific countries where you want to gain protection. This is where we're going to come back to a discussion on cost, because once you get your patent issued, you still have to pay. You still have to pay what's called maintenance fees. In the US, you pay maintenance fees at 3 and a half years after issuance, at 7 and a half years after issuance, and again, at 11 and a half years after issuance.
Those fees are increasingly larger and larger amounts as you get further away from the issue date. That's because there's a presumption that as you're further away from the issue date, the patent probably has more value, because the marketplace for your invention is probably more mature. There are more competitors potentially practicing your invention. The product marketplace is probably more well-developed, and so there's just a lot more money at stake.
Aside from the US Patent and Trademark Office, every other patent office out there has its own maintenance fees. When you get your patent application allowed by the EPO, and then you're picking which European countries matter to you, you want to think about the fact that you will have to pay maintenance fees in each and every country that you validate your EPO-allowed application in.
It's important to keep all of those various costs in mind. One thing that we do for our clients is that we'll provide them with an estimate ahead of time, of all the various filing costs. The other big thing with international protection is that you do have to consider translation costs. In order to file your patent application in China, you have to translate your entire patent application into Chinese. Same thing with Japan, same thing with a number of other countries.
Luckily, for the EPO, you can file your patent application in either English, French, or German, and go through examination. Then later on, you may need to do a translation into other languages, depending on which countries you choose to validate in, but translation cost can often be a pretty costly part of filing internationally as well.
Trae: Ripped from the headlines, we're ending, what we think is the light at the end of the tunnel and the pandemic. US has vaccines well in circulation. Headline recently talked about the Biden administration support of waiving certain patents that pharmaceutical companies have in place to protect the work they've done on the COVID vaccines. What's going through your head right now as you read those headlines?
Hogene: Thanks for that question, Trae. I'm going to be careful about responding to your question because we do have some clients who are in that space.
Trae: No, don't be careful.
Hogene: I heard someone say on the radio that just because you have the cookbook to make some dish, it doesn't mean that you're going to be able to reproduce that dish. The same is true for patented inventions. Oftentimes, although a patent may describe how to make an invention, it may not provide every single little detail that perhaps was discovered after the patent application was filed. Oftentimes, there's continual refinement of an invention, of a technology, that doesn't necessarily get incorporated into the patent application that was filed or even the subsequent one.
If the process for making some vaccine was tweaked, it may be that the patent doesn't even describe the actual way that a company is using right now. In addition, just because you have the patent, it does not mean that you have people with the technological know-how to actually do everything that's described in that patent to build what's required to run those manufacturing processes. There's a lot of additional technical know-how that goes into actually making those vaccines. That would not be provided simply by licensing the patent, simply by allowing them to practice the invention. There's just a lot that goes into being able to successfully, not only manufacture, but distribute tons of vaccine shots.
We saw that within our own country, distribution is a significant challenge to be solved on its own. Manufacturing is a significant challenge. Providing high-quality input materials for that manufacturing process, all of that is very, very important. Simply storing the final product in a manner that will preserve it until it can be administered, all of that is very important, and none of that is necessarily provided just by licensing a patent. There's a lot that needs to be provided. I do think it's important to enable other countries to be able to vaccinate their populations. I just think there's a lot more that goes into it than just licensing the patents.
Trae: Now that's a great point, very well put. From someone who's messed up numerous recipes, it's not as simple as having access to the recipe for sure, and there's much more at stake here, for sure.
Ryan: More to it.
Trae: One more question. I want to start doing this, we haven't done it in the past, but we've talked about very deep technical information here. We haven't asked about you. I want to start getting to know our guests a little better. Can I ask you just questions, friends, family, fun, what do you do when you're not thinking about patents, that sort of thing? If that's okay to ask, I'll ask it now.
Hogene: Sure.
Trae: Okay, good.
Hogene: What do I do? I have family in the bay area. I spend a lot of time with my family, and I have a small dog. He is my buddy and my companion, especially right now during shelter-in-place, working from home all the time. Let's see, what else? I guess you could say I'm a foodie, although some people cringe at that term, but I'm thinking enthusiast of all types of cuisines, whether it's cooking or eating. I like to go on trips where the entire focus is finding new types of foods to try out, and restaurants to try.
After law school, I went on a long post-bar exam trip. It was seven weeks. I spent driving through the countryside in eight European countries in Western Europe, and just occasionally pulling over to go to a cheese cave, or a winery, or a mushroom farm, or a country fair. I have to say, even the gas station sandwiches in France are a bit better than the gas stations sandwiches here. I had a lot of really great meals, and it was an amazing trip. It was entirely food-focused.
Trae: You are a food hunter.
Hogene: I am.
Trae: But that's not all you hunt. Come on, you know what I'm getting at. You got to rotate the camera a bit.
Hogene: Okay, Trae. I have a-- I guess I might as well show.
Trae: Yes, you have to.
Ryan: Got it.
Trae: We can cut it.
Hogene: I have this guy on my home office wall, and you can see it on the camera again there, but that is a trophy size boar that I got on a hunting trip with some friends in Central California. I feel very honored to have gotten the opportunity to find him and to bring him home. There a whole lot of sausages, and chops, and steaks still in my freezer. It's an amazing experience to really do the entire end-to-end experience in terms of how do you get your food.
Personally, I feel a huge amount of respect for the boar, for other animals that I eat. I am an omnivore, and I love my meat, but I have a lot of respect for the animals that I'm eating. I think it's really important to have that level of respect. It really makes sure that you have a much more mindful approach to the consumption of meat.
[music]
Trae: I like that. That's good. Hogene, thanks. We learned a lot. I learned a lot. Ryan?
Ryan: Yes, absolutely. I really appreciate your taking time, and coming on, and speaking with us, really enjoyed it.
Hogene: Yes. Thanks for inviting me, Trae, Ryan. It's always a pleasure, and this is a lot of fun.
Trae: Thanks. Talk soon.
Hogene: Bye.
