Patenting for Early-Stage Medtech Companies

Intellectual property (IP) in the form of patents and patent applications often comprises a core asset for start-up companies, particularly those in the medical device and biotechnology industries. These assets may provide the basis for valuations underlying early-equity investments, leverage in negotiations with strategic partners, or ultimately lead to a successful exit for a company. Obtaining solid patent protection is often expensive and can be an arcane exercise for those not familiar with the process. The value of a patent portfolio can be reduced or destroyed by mistakes such as inadvertent public disclosure of confidential information, a lack of appreciation for the difference between patentability and freedom to operate, the inclusion of unclear claim language, or poorly drafted provisional patents. The tension between the need for strong patent protection and a general lack of available financial resources makes IP management for start-up companies a significant challenge for entrepreneurs. It’s important to outline some of the issues pertaining to patenting by biomedical start-up companies, describe ways to mitigate costs, and offer practical tips to ensure the quality of patent applications.

The Core of Technology-Based Start-Ups
Innovation can be risky, expensive, and time-consuming. Once an invention has been made public, however, it may be easy for others to copy. Patents provide protection for the inventor by preventing others from using the invention. They therefore allow the inventor to receive financial benefits by selling a resultant product or service, or by licensing the patent rights to others. The process of deciding which inventions to protect through patenting can be complicated. Generally, one should consider cost, the likelihood that competitors will copy the invention regardless of IP protection, and whether the IP will have value in the near term. Reasons for moving ahead include prevention of copying by others, improved likelihood of obtaining outside investment, the potential for licensing revenues, improved chances of a liquidity event, and creation of leverage for a crosslicense or other negotiation. The barrier to competition that a patent creates and the economic value of that barrier depends on the relevant industry sector and stage of a company’s development. For example, patents are typically more important for venture-funded biomedical companies than they are for software firms, which often use copyright and trade-secret mechanisms to protect intellectual property.¹ Patents also tend to provide more relative value to startup companies than established firms, because those firms also enjoy the competitive barriers that arise from having manufacturing capability, process trade secrets, mature sales and distribution channels, branding power, strategic alliances, and easy access to credit. A start-up firm does not have any of this additional infrastructure and, as a result, corporate valuations rely much more heavily on the patent portfolio alone.²

Patentability and Freedom to Operate
To obtain a patent, an invention must be novel, nonobvious, and useful. It is generally easy to make a case for usefulness, but patents are often rejected or have claims narrowed because the invention is not novel enough or is too obvious. These rejections are often termed 102 or 103 rejections, from the sections in 35 U.S.C.3 that cover these issues. The term nonobviousness is used in the United States, whereas European countries may use the term inventiveness. Although generally consistent, there are differences in the interpretation of exactly what these two expressions mean among different countries, the U.S. Patent and Trademark Office, and the European Patent Office.

Demonstrating novelty to the USPTO recently became more difficult after the Supreme Court limited the ability of inventors to claim novelty based on combinations of previously known technologies in deciding KSR v. Teleflex case. It is now more important than ever to incorporate into patent applications well-constructed arguments describing why an invention is not obvious, or why a combination of known elements achieves nonobvious results. For biomedical patent applications, this argument could be based on initial clinical data showing the efficacy of a drug, drug combination, or device that is unexpected based on the scientific literature or the established behavior of each individual component of the invention acting alone.

New medical diagnostic tests based on the multivariate analysis of many biomarkers represent specific examples of such a patent. In such a case, each biomarker may be individually characterized in the published literature, but the simultaneous processing of data on many biomarkers through a complex algorithm leads to an unanticipated result. Furthermore, the inventor may seek patent protection on a process or the business method used to sell products or services based on the invention. Where is the biomarker algorithm actually used—on a hand-held device sold to a hospital or on a computer server back at company headquarters? Such business method patents recently came under scrutiny by the Supreme Court in Bilsky v. Kappos, but the law regarding business method patents remains unsettled. Finally, a recent decision by U.S. District Court for the Southern District of New York, in a case involving Myriad Genetics Inc. and others, invalidated patent claims on naturally occurring genes.4 Although this decision is being appealed, it brings into question the validity of many issued and pending patents relevant to the biomedical industry.

Prior art, which can be used to deny a patent application, can be found in patents and published patent applications in the United States and internationally in published articles and scientific papers, and in products currently offered for sale. In the United States, prior art from patents and patent publications can be from anywhere in the world, but prior art from products “for sale and use” must be in the United States. An effective way to mitigate the cost of a patent application is to perform a thorough prior art search oneself, rather than tie up a lawyer’s billable hours with what can be a timeconsuming exercise. Often, prior art from existing patents and published applications can be found in seemingly off-hand comments in the background or specification sections rather than the claims. Any prior art found must be disclosed to the USPTO. It is generally better to deal with the prior art during the initial patent drafting process than have the patent examiner discover a trove of additional material, leading to significant redrafting of claims and the expense associated with that process.

Inventors often confuse patentability and freedom to operate (FTO). A patent does not grant an inventor the right to use one’s invention, but rather excludes others from practicing the idea. It is possible to obtain a patent on a novel extension of a prior invention, but be blocked from practicing the new idea because of that prior patent. Thus, an FTO search is sometimes required to ensure that one’s patent application does not infringe on a previously issued patent. There is more to an FTO analysis than determining whether any claims of prior patents apply to one’s invention. If such patents exist, then it is important to determine whether such patents are currently valid or expired, which countries are covered by international filings, what is the scope of claim coverage, and whether the patents are vulnerable to a finding of invalidity or available for licensing. In rare instances, it may be fruitful to examine the full documentation trail of a relevant prior patent to understand how the negotiations between the inventors and the USPTO resulted in the final claim language. This collected set of documentation is called a file wrapper and is available on request from the USPTO. FTO opinions issued by law firms are legal opinions and therefore carry the burden of liability if issued in error. Law firms therefore carry liability insurance and have an obligation to do a thorough FTO search. Consequently, such opinions are typically expensive. Generally, early-stage companies will forgo such formal FTO analysis and establish on their own the level of confidence that they are free from infringement. This method can allay the concerns of their investors or inform the construction of their patent claims to avoid potential infringement. Forgoing the services of a law firm and the associated cost carries the risk, however, that someone inexperienced in patent searches or reading claim language may overlook relevant material.

Patent Prosecution Process: Provisional Patents
Once the decision has been made to file for a patent, entrepreneurs must next decide whether to file a provisional patent or full patent application. It is important to establish the earliest possible priority date for an invention, and that is often done through the filing of a provisional patent. These filings are not reviewed by the USPTO and expire after 12 months. Within that year-long window, the applicant must convert the provisional patent to a full application in order to preserve the priority date. In countries other than the United States, patent law has an absolute novelty requirement with respect to patent rights. Public disclosure of an invention prior to filing a patent application results in the loss of patent rights. Such disclosures might be important to a start-up company in the form of scientific publications or presentations at scientific or investor conferences. Most countries recognize the filing date for a provisional patent in the United States, so the provisional patent application avoids the loss of patent rights that would otherwise result from public disclosures related to the invention. Provisional applications can therefore fulfill an important business development function in facilitating financing or other deals.

Additional advantages for a start-up company lie in the low cost and speed of filing, deferring the cost and effort of a full application to a time when the company has more resources available. The filing cost with the USPTO for a provisional is generally less than $200 and it is often prepared with only the cursory involvement of a patent agent or lawyer, minimizing the total cost. Because of the cost efficiency, entrepreneurs may assume that all patent applications begin with a provisional filing. Some patent lawyers view provisionals with skepticism, however. One reason may simply be the self-serving fact that they make more money on a full application than a provisional one. There are legitimate reasons, though, not to pursue a provisional application if the application time and financial resources are available for a full application. First, a provisional patent starts the clock ticking on the one-year window for filing the patent application. If an inventor is not certain that they will be able to obtain the data needed to demonstrate novelty or that they will be able to fund a full application, then they risk losing the priority date established with the provisional. More importantly, the provisional patent must fully support the claims of any subsequent patent applications to establish the early filing date, satisfying the utility patent requirements of written description, enablement, and what is termed best mode. If a provisional patent is filed when the technology is still early in development, over time the provisional may become less relevant to the invention as ultimately conceived and the company that filed it may lose the priority date benefit. In that case, a better strategy may be to keep an invention proprietary as a trade secret with disclosures made only under the restrictions of confidentiality agreements, until a well-crafted provisional or full patent application can be prepared.

Patent Prosecution Issues
The cost of filing a patent in the United States is generally considered to be $10,000–$30,000. A recent survey found that the actual cost for start-up companies averages $38,000.1 This may be because start-ups tend to file for patents on inventions that are very important to their core business model and presumably are taking a deliberate and relatively costly approach to ensure quality. Start-ups also use outside rather than inhouse counsel for patent prosecution, and it can be difficult to track and manage the cost of outside counsel.1 It might be assumed that costs can be mitigated by having the inventors draft an initial set of claims. Although this may be helpful to the patent attorney, it may also take more time to revise a poorly drafted set of claims than it would to have the lawyer start from scratch. There are, however, several steps an entrepreneur can take to mitigate cost and ensure quality of a patent application, including the following

The Art of Drafting Claims
One of the reasons it can be important to use a patent agent or lawyer with at least three or four years of experience is that the art of crafting well-constructed claims is learned over time. When evaluating a set of claims, it is important to ensure that the claims include all of the elements necessary to describe the invention. If an element is missing, then the patent may be rejected or it will be vulnerable to an invalidity suit. It is important to think about the invention from the point of view of competition. OEMs should ask yourself how a competitor might respond to the claims or try to circumvent the patent, and devise claims or specification language that can prevent such responses. Ensure that the relationships between the elements of the invention as described in the claims are correct. Is A really connected to B, which is, in turn, connected to C? The underlying science of an invention as described in the claims or specification language must be correct. However, claims should not read like a textbook or be overly detailed as this can lead to claims that are too narrow in scope. An inventor must understand all of the claims. This is an important element of the declaration the inventors sign prior to submission of a patent application. Inventors should not dismiss claims as patent legalese, but rather insist that the patent agent or lawyer describe the logic of each claim in detail. Avoid terms in claims that impart absolutes, such as never or always.

Conclusion IP protected by patents, patent applications, and provisional patents often forms the core asset for early-stage companies, and for medtech companies in particular. Patents form a disproportionate percentage of the value of young companies relative to established corporations, which have the assets associated with mature firms. The cost of obtaining patents can represent a significant barrier to start-up companies, yet such protection is generally necessary as a business development tool for financing, establishing credibility, and extracting negotiating leverage with strategic partners. Through careful preparation and education, the proper oversight of outside counsel, and the judicious use of provisional patents, management of early-stage companies can mitigate the cost of obtaining patent protection. This will enhance the value of their firm, both through the acquisition of a patent as a tangible asset and through the demonstration of managerial effectiveness and capital efficiency.

References
1. Stuart JH Graham et al., “High Technology Entrepreneurs and the Patent System: Results of the 2008 Berkeley Patent Survey,” Berkeley Technology Law Journal 24, no. 4 (2009): 255–327. Available at SSRN: http://ssrn.com/abstract=1429049.
2. Scott Shane, “Technological Opportunities and New Firm Creation,” Management Science 47, no. 2 (2001): 205, 209.
3. MPEP—Table of Contents, [online] (Washington DC: United States Patent and Trademark Office, 2008 [cited 16 March 2011]); available from Internet: www.uspto.gov/web/offices/pac/mpep/ documents/appxl.htm
4. Association for Molecular Pathology, et al., v. United States Public Patent and Trademark Office, et al., United States District Court Southern District of New York., 09 Civ. 4515, 29 March 2010; available from Internet: www.patentlyo.com/ files/myriad-opinion.pdf