The European Patent Office (EPO), the body responsible for ruling on patent applications submitted by companies across the continent, has come under fire recently as a result of growing concerns about the quality of patents it has been granting. While the EPO’s management team has celebrated recent increases in the overall number of patents granted as a sign of flourishing European innovation, an explosive letter sent to the organisation’s Administrative Council last month has cast doubt on the legitimacy of several of those patents. The letter – signed by more than 900 patent examiners working for the EPO – expresses grave concern that directives designed to increase the quantity of patent awards has led to a sharp decline in quality, with a growing number of patent applications being approved that should instead have been ruled invalid. It follows public criticism of the EPO leadership’s quality-first approach from politicians in Germany and the Netherlands, as well as from unions representing the patent examiners, who argue that conditions imposed on them are making their position untenable.
This development has – perhaps understandably – gone largely under the radar. After all, not many people outside of all but the most specialist circles are paying a great deal of attention to the inner machinations of international intellectual property authorities. Fortunately, it has been occupying my mind, as it has profound implications both for start-up founders and leaders whose businesses are dependent on their ability to protect their innovation and for investors who are looking for the best companies to back.
Why do patents matter?
Patents offer essential security and assurances for start-ups, especially those whose business is built on proprietary technologies or processes. Whereas copyright protects content and trademarks protect branding, patents protect technical innovation. They give the company holding them the right to prevent other companies using a specified technology or process for commercial purposes. A patent also grants the right to license that technology or process to third parties, creating additional revenue potential. Additionally, patents can make a start-up more attractive to investors or acquirers, representing an additional layer of protection to their investment. In short – if you want to monetise a technology or process you’ve invented, or control how your competitors can use it, you probably need a patent.
I run a start-up, what does this mean for me?
The big threat posed to start-ups by the ongoing situation at the EPO is that they may have been operating on the basis that the patents underpinning the key elements of their business are valid, when in fact one or more of them may not be after all. That’s no problem for now, but if a competitor were to challenge the validity of one of those patents, or if an investor were to discover an issue during their due diligence, it could have severe consequences.
If a competitor proves that a patent of yours is invalid, you stand to lose the competitive advantage stemming from the monopoly right on that technology or process granted by the patent. You could even be blocked from doing business if the competitor goes on to file a valid patent for the relevant technology or process before you do. If an investor discovers a key patent is invalid, on the other hand, the amount they are willing to invest – or the valuation they invest at – will almost certainly decrease; my colleagues and I have seen valuations take a hit of as much as 70 per cent. They may even withdraw from investing entirely, if they think it will be too costly or complicated to secure the necessary patent, or if they don’t think your business can achieve its goals without that protection.
It’s important, therefore, that start-ups are proactive in addressing the threat and immediately scrutinise their patent portfolio so that they can take action to amend anything that might be questionable. While there’s no legal requirement to engage a patent attorney to draft and file your applications, going it alone is risky – especially when trying to ascertain the quality of patent that’s already been granted. The slightest error could invalidate a patent – or at least significantly restrict its effectiveness – and the long-term cost could significantly outweigh the upfront expense of working with a professional. It’s also important to keep tabs on patents filed and held by competitors and other third parties, especially those that limit what you want to do, to catch any that might not actually be valid.
I invest in startups, what does this mean for me?
The key issue for investors is making sure that they aren’t currently invested in – or about to invest in – a start-up whose underlying patents are questionable at best and invalid at worst. As such an important store of value, intellectual property should always be a core part of an investor’s strategic due diligence, but the revelations about the EPO show just how vital it is not to treat IP checks as a simple yes/no tick-box exercise. Investors need to know that patents are valid and useful, not just that they are there. It’s never too late to fix a problem with a patent that hasn’t already been spotted, but you need to get in before a third party notices anything’s wrong – so investors should also be carefully auditing the IP of their existing portfolio companies, not just those they hope to invest in in future.
How and when is this issue likely to be resolved?
The EPO is under concerted pressure to reduce the amount of time taken to examine and adjudicate on patent applications. Without a significant increase in manpower to counterbalance this – and none seems to be forthcoming – it seems unlikely that the uncertainty over patent quality and validity is going to go away any time soon. It’s more important than ever to proactively police your own IP portfolio, and not simply rely on the patent office to take care of everything for you.
Ian Jones, Associate, Gill Jennings & Every LLP