Consider these strategies for turning your product idea into a business reality.
One of the strengths of our free-market economic system is competition. After all, because of competition, we have choices in both quality and price in the services we use, the places we shop and the products we buy. However, if you are an inventor or manufacturer of a new product, competition can be a major problem. For this reason, I am often asked how to protect an invention or new product from being stolen or "knocked off."
In my experience, the answer to the competitive challenges is to create a strategy based on the goals for the invention, the specific product itself, and the approach to be taken.
Inventors take one of two main approaches to making money with their invention: licensing the invention to another company or becoming a manufacturer themselves. There is some overlap in strategy for these two approaches. However, there are also some differences, especially in the underlying thinking. I will first talk about strategy for a licensing approach.
Before outlining some strategic options, I should mention that the magnitude of fear of showing others an invention at this stage is often overblown. In my experience, it is rare that a company will knock off an invention at this stage. Most product companies, including those inclined to knock off products, have dozens of new products in progress at any given time. They are focused on finishing and launching the backlog. In many cases where "theft" is assumed, it is very likely that it is mere coincidence. I am frequently presented with very similar ideas from people who could not have known of each other.
I should also address points I have made elsewhere about patents and nondisclosure agreements. They are tools that can be useful, but in general, they’re far less powerful and effective on their own in the real world of competitive consumer products than most inventors and many advisors believe them to be.
Disclaimer: I am not an attorney, and while I will address several of the legal tools used in this process, this is based on my own experience and should not be considered legal advice.
Strategy for the Licensing Approach
When licensing an invention, the main objective is to create the perceptions with the company you are approaching to license your product that your invention would be of value to them and it is in their best interest to enter into a legal licensing agreement with you and pay you for it rather than simply copying it and saying "thank you for the suggestion."
Here are several ways to create the perception of value:
- A prototype that clearly illustrates the functionality, creativity and utility of the invention is a useful, if not essential, tool. Despite the fact that these people look at products every day, the impact of being able to hold and try a new product vs. describing it or showing a drawing, is substantial.
- Provide information. Product teams at companies, especially small or midsize companies, are wearing many, many hats. This is, after all, one reason inventors can be helpful to them. When a product manager advocates for launching a new product, being equipped with critical market data that supports his decision can radically increase his commitment to an invention. Therefore, market research can have a major impact. And by this I mean information about safety issues and competitive products, and useful market statistics or stats they may not have considered to be relevant. And personally, we love it when inventors have actual focus group data from the core target customers.
- Be someone they would want to work with. While this may seem secondary, based on first-hand experience, I can say that for companies who have licensed products before, the perception of the inventor and how easy (or difficult) they think it would be to work with them is a real factor. As many business gurus have said, people do business with people they like. When speaking with potential licensing partners, focus on success, supporting their efforts and working together--and be yourself. Be smart but not overly distrustful or suspicious.
Once the value of the invention has been established, it’s important to be clear that to secure rights to take this product to market, the prospective licensing partner will need to execute a licensing agreement. In licensing negotiations, intellectual property protection, or at least the appearance of protection, is often essential, in spite of the inherent weaknesses I mentioned above.
Learn and understand the available options from a qualified professional. While technically it is possible to write and submit intellectual property filings oneself, I recommend using a qualified and registered patent attorney or agent. There are nuances in the use of language, and leveraging and applying IP law is difficult to pick up from scratch.
In this process, the most important phrase I can think of is "patent pending." Being able to present your product as patent-pending adds to the perceived value and it conveys a warning ("We better not copy this or we could get sued"). So file what you can to be able to legitimately write "patent pending" on your sell sheet, prototype, website, business card, and anywhere your product will be displayed.
Depending on complexity and the attorney or patent agent’s rates, having a utility patent drafted and filed by a professional can cost thousands of dollars. However, if you believe licensing to be a viable approach, having been issued a viable utility patent, or having one in process, is a useful tool in this situation.
If filing a utility patent immediately is not an option, there are other ways to achieve patent-pending status. Perhaps the fastest and least expensive way is to file a provisional patent application. A "provisional" never actually becomes a patent but acts as a place-holder (or date-holder) for when, and if, you do file a patent.
An inventor has 12 months from the date a "provisional" is filed to then file the utility patent application. In addition to being able to use the words "patent pending" during this period, it also provides time to find a licensing partner. At this juncture, a number of options exist:
- Once a partner has been found, the utility patent can then be filed.
- The "provisional" can actually be licensed as part of the negotiation--as well as the burden to file the utility patent.
- The licensee may license the "provisional" and find they are content to proceed without the utility patent as any number of current products lack patents.
Strategy for the Manufacturing Approach
Many of these steps can be taken if the approach is to take a product to market. However, the philosophical approach will be different.
When taking the product to market, there is no need to create the "perception" of value with another manufacturer. In fact, in this approach, the assumption should be made that once the product has begun to garner meaningful market share, competitors will take notice. And since licensing the invention is not the main goal, securing IP for the purpose of creating an asset to license also has less relevance. Therefore, the defensive strategy in this approach is going to be designed to hinder the competition’s ability to copy you by increasing the risk and cost--perceived or real--of knocking you off. This will buy precious lead time to market. So the strategy is to use whatever legal tools are available--and cost-justified--to create hurdles to being copied and to win through marketing.
While some inventions are patentable, in my experience, patentability of an invention is often uncertain. I have frequently spoken with inventors who spent the majority of their available capital on their patent applications to find that the end result was either a declined application or drastically narrowed-down, less-useful version of their original application; this is why many product companies don’t even bother with patents. That same money is used to develop a great product and to win at marketing.
If the cost/benefit of filing and maintaining a utility patent is questionable, then it may be useful to file a provisional patent application at a fraction of the cost of a patent. This will delay the need to file an actual patent for 12 months, which may or may not be the chosen path, and provides 12 months’ lead time with the ability to use the warning of "patent pending" on packaging during this period.
While the cost/benefit of a patent can be questionable at this stage, the benefit of a trademark is clear. First, a trademark can be asserted by simply starting to use the ™ after the brand and product name (done by typing "tm" between parenthesis). Second, filing for a federally registered trademark costs significantly less than a patent, and the bar for demonstrating infringement is less stringent. The goal here is for your customer to think of your company and product name when they think of the product, e.g. "iPhone®" or "BlackBerry®" rather than "cell phone."
While brand awareness--and legal ownership--is clearly a part of winning at the market, there are many other strategies that can be part of your strategic marketing plan:
- Create a great product and offer your retailers and consumers great value from the start.
- Design packaging that is both eye-catching and easily merchandised.
- Develop a targeted advertising and PR campaign that fits your budget. Note: Limiting advertising to trade publications targeting retail buyers and at trade shows and using PR to create national brand awareness and demand from end users is often most cost-effective early on.
- Get placement in major retailers first. This means you must sell aggressively. While not a guarantee, many retailers will think hard before granting a peg or shelf space to an item that is similar (a knock-off) to yours. They will choose your competitor if the new item wins at marketing (is of better quality or is priced in a way that improves their margin).
- Be a reliable vendor with excellent customer service.
- Secure your brand footprint in the retailer by developing complementary products quickly.
- Reserve as many URLs as you can financially justify that are related to your product and brand names and concepts.
- Be generous, make friends in the industry and build your competitive intelligence.
- Know who the most likely competitors are and watch them carefully.
Regardless of the path you choose to take, there will always be risks. And in business--especially the product business--the threat of competition is always present. However, if defending the invention/product is incorporated into a cohesive strategic plan with multiple tactics based on the approach to be taken, the chances of success will be dramatically improved.
The Reality of Patents and NDAs
Some would say that the "obvious" way to protect your product is to file a patent. And sure, there are some situations where a useful patent has been issued to an inventor who has the financial wherewithal to police and defend it.
By now I hope the limitations of patents are clear. Let me summarize the reasons:
- Most products are not patentable. (Don’t believe me? Go to Target or Walmart and read the packaging of 50 products. How many are patented?)
- All patents are not equal. A design patent, which covers the precise design of a product, is much more limited as a defensive tool than a broad utility patent. Even if the product has a utility patent (or is patent-pending), the patent will have limitations as to what is actually considered to be the protected intellectual property (IP)--the "claims." In other words, a patent doesn’t necessarily protect the entire product; it may only cover some small aspect of it. Given the number of new patents being issued each day, there are fewer available claims for basic products every year.
- There is no "patent police." If someone knocks off a product and it can be shown that someone has infringed on a patent, it is up to the inventor to engage in, and pay for, the legal battle to prove and to stop the infringer from continuing. Since the argument may not be clear-cut, this can be a costly legal proceeding. Many inventors lack the financial capital to fight a legal battle with a well-heeled knock-off company.
It should now be clear that a patent is often not the end-all answer that many inventors and professional advisors assume it to be. That’s the bad news. The good news is that knowing this, an inventor can focus on creating a winning strategy.
I would also like to briefly touch on another often-misunderstood legal document: the nondisclosure agreement (NDA). While there are benefits to using an NDA, its usefulness is generally overstated. Here’s why:
- First, many--probably most--manufacturers will not sign an NDA. They see no reason to obligate themselves to an inventor with whom they have no prior relationship.
- Second, an NDA is not a patent. Most NDAs don’t say anything about not stealing the product idea, so the parties to the NDA are simply promising not to tell anyone else.
- Third, there is the potential of including a noncompete clause of some sort in an attempt to address the last point. However, doing so will further reduce the number of companies to whom you will be able to actually pitch your invention as few will sign these. I have also personally found very few venture capitalists and professional investors willing to sign NDA agreements.
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