Startups seeking crowdfunding: Avoiding patent pitfalls

by DLA Piper

Many startup companies want to change the world with their great new ideas – but, in an effort to raise funds, some jeopardize their ability to protect those great new ideas with patents. This doesn’t have to happen. With a little foresight, startups seeking funding can avoid the patent pitfalls.

A typical startup story may go like this: A few entrepreneurs form a startup company because they have developed a great new idea for the next “must-have” product. To raise funds, the entrepreneurs ask relatives, take out a small loan or turn to a crowd-source funding program like Kickstarter. These crowd-source funding sites allow the startup to disclose its new ideas to the public and raise funds by allowing anybody to give money to the startup in return for some small benefit. Such small benefits can be anything the startup chooses, ranging from promotional items, to a beta product the startup is still developing, and even to pre-sale orders of the finished products whose development is being funded and that will eventually be mass marketed.

After its crowd-source funds dwindle, the startup then looks to more substantive investors to grow the business. It is at this point that startup entrepreneurs may first think about patent protection – often because of inquiries from potential angel and venture capital investors. It is also at this point that the startup may learn that it is too late to properly protect its great new ideas with patents. A startup that has reached this point without protecting its patents may pay the price in diminished support from potential angel and venture capital inventors, not to mention the long-term loss of protection that a patent portfolio could provide.

This story illustrates, for a startup seeking crowd funding, the two big patent pitfalls: disclosure and sale.

Pitfall #1: Disclosure

The first pitfall is disclosure. In the US, under 35 U.S.C. §§102(a)(1) and 102(b)(1)(A), public disclosure by the inventor starts a one-year clock. During that one year, the inventor must file a patent application, either provisional or non-provisional. After that, the disclosure becomes prior art, even to the original inventor. In the rest of the world outside the US, notably, there is no such clock. Disclosure immediately becomes prior art.

Pitfall #2: Sale

The second  pitfall is sales or what is known as an “on-sale bar.” In the US, under the current understanding of 35 U.S.C. §102(a)(1) and 102(b)(1)(A), an offer to sell a product anywhere in the world starts a one-year clock in which the inventor must file a patent application. After that, the offer for sale bars patent protection for that product. Such an offer for sale may not even result in an actual sale, and therefore no shipments of products are required to trigger it. Merely offering to sell the product is enough to start the clock. Pfaff v. Wells Elecs., Inc., 525 U.S. 55, 67, 48 USPQ2d 1641, 1646-47 (1998).

This is also the case for pre-sale orders, as well as offers to sell a beta or prototype product – things a startup may want to try in an effort to raise funds.[1]

Outside of the US, there is no such on-sale bar, just the disclosure bar described above. Therefore, an actual sale and shipment of the product may be a public disclosure that kills non-US patentability.

Pains of pitfalls

Thus, disclosure and sales will at the least limit the startup to filing patents only in the US and start a one-year clock to file. At the worst, the disclosure and sale, if over one year before filing an application, will kill the ability to file for patents anywhere. Debate may be had about the effect that different levels of disclosure have, but even a suggestion of disclosure is a bad skeleton to have in the patent closet.

Another concern is that a detailed disclosure or sale could put the startup company’s intellectual property on display for all to see, without any form of patent protection. Under the new “first inventor to file” system in the US, another entity could win the race to the patent office by an independent inventor, leaving the startup without recourse or protection.

A straightforward remedy for pitfalls

The remedy for these common pitfalls is straightforward – file a patent application 1) before public disclosure of the technology and 2) before offering the products for sale.

If a startup feels it necessary to disclose something about its technology to raise funds, care should be taken. On an individual investor level, non-disclosure agreements are useful. But for public fundraising like crowd-sourcing, disclosure should be calculated and very limited.

As for sales, if the startup wants to offer something before filing a patent application, say to entice funding in a crowd-source campaign, the startup should sell promotional items and avoid selling the product containing the substantive new ideas. Such promotional items would not be considered an offer for sale of the substance of the patent application, and could not be considered under 35 U.S.C. 102(b) as prior art.[2]

In short, for startup companies, it is never too early to think about protecting great new ideas. By filing patent applications early, or limiting disclosure and sales if applications haven’t been filed, a startup can still seek funding and avoid the patent pitfalls.

[1] Under Pfaff, to invoke the on-sale bar, the product need only be “ready for patenting,” which a beta prototype may well be. Id.

[2] Note that good trademark protection is also advised for logos and brand names!


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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