1.2.19 Intellectual Property Overview

Hi, everyone. David Hsu. Got me a session on Intellectual Property and my goal for this session is to give you an overview of the various forms of Intellectual Property that might be important to you as a startup entrepreneur. Now, why is IP important for entrepreneurs in the first place? Well, the traditional justification for granting some rights is to really give incentives for innovations. Let me give you two quick examples. One example is for you to incentivize you as the entrepreneur to invest your time, effort, money in innovating, we want to allow you the time to recoup that investment. And in exchange for you, as we’ll talk about in patents to disclose the information in some detail. We, as the government will give you some monopoly patent protection over your idea to use for a certain amount of time could be particularly important in the context of, for example, the pharmaceutical industry. Another form of intellectual property that we’ll talk about is the notion of copyright. That is the ability to control the distribution of a creative work. Think about how this could be quite important in the digital age where it’s very costless in some sense of copying, making another copy of the song or of the computer program. And so to incentivize you as the originator of a creative song or computer program, w e want to give you some protection so that you feel invested in really making that innovation. Now, what’s important is then to realize is that intellectual property is akin to real property. Just like a piece of property, a house that you own. In that, you can sell that property just like you can sell the rights to a patent. You could lease it out or license intellectual property much like you would with a real house. You would put your house on the market for a renter to come and occupy, but you would still retain ownership or any other type of analogy with real property and the provision for intellectual property is quite old. So written write there in the US Constitution, Article I in 1790 or 1787, as a prevision that allows for this incentive to really incentivize authors and inventors to disclose what they’ve been doing in exchange for protection. Now, what are the various forms of intellectual property we’ll discuss? Really, three or four different types. The first is patent protection. It really allows inventors to exclude others or try to exclude others from using a protected property for a given duration of time. After which then, reversed to the public domain. An example here would be, the cotton gin or the light bulb. These were method standards of patentability, which we’ll shortly talk about, but after the conclusion of that patent protection had entered into the public domain. The second form of intellectual property is copyright. It allows authors to control the duplication or distribution of their creative work. Think about musical lyrics, photography. This is really, the creative expression that we want to give some protection for. A third type is trade secrecy. Here, it allows firms to try to safeguard what they regard as their commercially valuable information. So, that’s not generally available to everybody. Examples of this would be business plans, recipes, methods, techniques, processes, patterns that really give a firm the ability to out compete others. An example here would be Kentucky Fried Chicken, the secret sauce is not protected by any other means, but trade secrecy and we’ll talk about that in little bit more detail. Finally, there could be speed. If you know what I knew 18 months ago, it may not be all that important, because the commercially relevant information could be moving at quite a brisk pace. And so we’ll give an example of that in a context of the semiconductor industry in a few minutes. Patent protection, it’s the right to exclude others In the United States for a period of twenty years from the time that you file a patent. In the traditional justification from the government standpoint is to really give an incentive to disclose and give a period of time for you, as the innovator to recoup your investments in the time and efforts that you put in to coming up with the invention. And so as a society, we’re not literally recreating the wheel, instead we are standing on the shoulders of giants as we progress in society and that will have cumulative progress. In the United States, it’s the first to file. That’s true for most of the world. That’s why there’s three standards for patentability. First, it has to be non obvious to an ordinary person who’s schooled in the art. Secondly, it has to be never relative to what’s been patented before. It has to be as well useful. Now to meet these three standards, what’s explicitly excluded is anything that’s naturally occurring. Any laws of thermodynamics, laws of gravity, anything that is naturally occurring phenomenon or abstract ideas. Those are not subject to patent protection. However, if you as the inventor innovator have genetically modified something? Come up with a new variety of apple or rose or sheep, that’s not naturally occurring? That can be subject to patent protection. Now the inventor in a patent application has to make specific claims as to what they’ve done, that’s new and novel and that helps demarcate where the scope or the space of the invention should and these standards also apply for business methods. A new way of conducting business. Some of you will be familiar with Amazon One Click patent. It’s a new way of conducting business and is true of other ways of conducting business, maybe optimization or analytics that is a new algorithm, that’s not naturally occurring.
Patents have been quickly moving in terms of its pace over time.
What you’re seeing in this diagram is the acceleration over time at which we are granting in the United States the next millionth patent. The first patent was granted in 1790. It took actually 121 years to get to the millionth patent.
That time has shrunken considerably as you go from say, the 8th to 9th million patent and that likely reflects a range of explanations. Now, what explains that acceleration over time as to why we’re being able to meet these milestones faster and faster? One hypothesis can simply be that we are as a society being much more inventive.
In alternative hypothesis would be that the utility or use of patents for whether it be for offensive means, defensive means or as bargaining chips has accelerated over time and this explanation or set of explanations is becoming quite importance among academic circles. To get illustrate one concrete example of this, it’s particularly domain for startup innovators is that pens not only allow US, the innovator to try to exclude or exclude others from copying or entering into a proprietary domain. It can also be used as signal, resource providers like venture capitalist that you have a real source of differentiation above and beyond what’s actually patented in your patent grants that could be quite meaningful in explaining the winning horse, that could be quite appealing for venture capital investors. There’s some debate, I won’t dwell on this particular set of concepts too much as to whether intellectual property protection is good or bad for innovation. On the one hand, we’re all very familiar with these patent trolls or nonpracticing entities that have been derided in the popular press were actually not being productive from the standpoint of commercializing or bringing products to market. This has been the subject of some legislation. President Obama, for example, has targeting these non-practicing entities. On the other hand, there’s been certain instances in which probably these innovations have been popularized precisely because they’ve not been the subject of intellectual property. Two examples here, the use of a particular financial option pricing formula known as the Black-Scholes formula, that was not the subject of international property protection. Rather the professors Black and Scholes disclosed their innovation in the context of academic article, and maybe that’s the reason why it’s so popular among Wall Street traders, and other financial individuals, and actors is because it was put there. If they decide to receive intellectual property protection maybe it wouldn’t have been as popular. And same thing, the quote there mentions the case of a very interesting game, Sudoku, which was popularized, perhaps precisely, because it didn’t seek patent protection. A second form of intellectual property protection is in the form of trade secrets. Trade secrets allow individuals and firms to really protect information, patterns, programs, techniques or processes that can give them a leg up compared to outsiders. Now, there some clear differences of trade secretes as compared to patents. First, it’s adjudicated at the state level rather than the federal level, which is true for patents. Secondly, trade secrets so long as they can be kept secret last indefinitely and that’s a stark contrast as compared to patents that we talked about before.
Now, what’s important is that you as the holder of a trade secret have to take reasonable precaution to safeguard those secrets. What’s not subject to protection is information that’s garnered through independent discovery, worked out by a competitor through by backward engineering or is you might of accidentally disclosed. So long as information isn’t illegally obtained by competitor, you’re able to invoke some trade secrecy law to help try to protect your trade secrets. Now, let me cover two specific contractual provisions that are important in enabling this protection. The first is a non-disclosure agreement. If there is a particular piece of information that you are trying to protect as an innovator, you can before disclosing that information to someone, draft a non-disclosure agreement that is a contractual covenant that protects that bit of information from being disclosed. A second form of intellectual property protection that falls under trade secrecy is a notion of a covenant not to compete. That precludes or helps to preclude an individual who is previously worked for you as their employer from going out and working now for a competitor. In which case, that former employee may disclose that information to the employee. And so what a covenant not to complete or not complete clause does is it, essentially prohibits that employee from going out immediately from competing and being hired by competitor firm for a certain duration of time. Finally, I want to quickly discuss this notion of speed as a example of how formal protection may not be that relevant if you’re operating in a very competitive context and the example I wanted to discuss with you is the case of Intel, in the case of different chip families. Here, you see a table that lists the different chip families ranging from the generation 386 all the way up to the various versions of Pentium. And what I’ve highlighted here is the lifespan of the particular chip family, as well as the price discount that holds for that given chip family ranging from the beginning of the life of the chip family to the end of the chip family. Take, for example, the Pentium III. This is a chip that had a shelf life of about a year and a half, 18 months. And over those 18 months, you can see that Intel was only able to charge a dollar at the beginning of that time period, but only $0.9 on the dollar at the very end of the period. So imagine that if you’re operating in that type of landscape in which knowledge really becomes obsolete very quickly, you’re going to be less interested in going through the formal channel, perhaps of the patenting process or the trade secrecy process, because that knowledge becomes obsolete so quickly. To recap this session on intellectual property, we’ve covered the different forms of intellectual properties and some of the institutional arrangements that could lead you as the startup entrepreneur to favor one type of intellectual property protection or another. Thank you.

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