what to consider regarding intellectual property when planning to enter us markets

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IP-What to protect, when and where?

Susanne Somersalo

September 29, 2014

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START UP

Where do you want to be?

Estonia

Europe

USA

Indonesia

1 year

3 years

5 years

7 years

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What do you need right now:-Business idea-Space to work-People to work-Start up money -- sales from toothpaste, government grant, business angel, gift from a rich aunt

-Business idea: BATA BING

- vitamin supplement and weight loss formula for senior citizens; packed in a special container with tamper proof cap- distribution online via website; want to get into retail stores,

huge potential market in medication management programs in US retirement homes

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Think the IP environment

Estonian IP European IP US IPGlobal IP

What is there to be protected?

Formulation---- Patent? Trade secret?Special cap--- Patent? Design patent?Bata Bing– TrademarkWebsite--- CopyrightSoftware for medication management- copyright? Patent?

The challenge is to make sure you have the rights you will need in the future!

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Copyrights: - Generally cheap to file– make sure you own the copyrights

Trademarks: - valid as long as mark is used and properly renewed. Filing costs relatively low

Design patents - limited protection, relatively fast to obtain and relatively low cost

Patents:- long examination times, expensive, 20 years monopoly

Trade secrets: no filing costs but managing the secrecy may be tedious

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Do I really need to have a patent?

NO- -if the product is short lived - if you can keep the idea (e.g. formula) secret - if you can’t get a patent - if the patent is not enforceable

YES especially: -if the product is such that others would and could copy if - if your plan is to license or sell your rights down the way

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Where do I need to have a patent?

Your manufacturing process takes place in Estonia– you should have a patent in Estonia

Your plan is to start selling in Belgium--- you should have a patent in Belgium

There is a potential likening partner in Italy– you should have a patent in Italy

The big market is in the US but you will not enter there but in five years: you should file in USA– cannot wait five years

You may have sales in Indonesia in seven years--- the additional cost of filing in Indonesia is low, however you may trust on trademark protection

You don’t plan to sell in China but you are afraid competitors will go there—patent would give you basis for negotiation with competitors

File a PCT – it gives you 30 months to figure out which countries to choose.

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Establishing a business entity in the US and some practical points to consider

Sales representative: solicit orders form U.S. customers that your company may accept or reject. Is paid on commission + Out of pocket costs to enter the U.S. are low. + Possibility to avoid U.S. taxes. - Usually geographically limited representation. - Rep. may represent many companies.

Distributor: buys your products at a discount and resells at their own price. + Out of pocket costs to enter the U.S. are low. Usually exclusivity. + No U.S. taxes if you do not have presence in the U.S. -The business relationship with the client will be built by the distributor, not by you. - Probably less profit to you per sale than if you had a sales rep.

Note: computer software is protected by copyright law. Under copyright law only the author of the software or its licensee is entitled to reproduce, modify or distribute the software. Therefore some type of license agreement would be needed.

Also, when ever you want the business partner to be able to modify, manufacture, reproduce a patented (or copyrighted) technology, you should have a licensing agreement.

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Physical presence

-branch– easier to set up but puts the assets of the foreign company at risk -subsidiary --- separate legal entity, liability limited to your investment

US Subsidiary

-location: where are the clients? West Coast, East Coast, Alaska? time difference

state corporate taxes are different: ND, WA, WY 0%; PA 9.99%; NY 7.1%, CA 8.84% (maximum federal corporate tax is 35%)

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Type of entity:

C- corporationS-corporationLimited Liability CorporationLimited partnership

All of these give protection against personal liability. LLC is easy to set up.Corporation has stricter rules

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Other important issues:

Visa : -business visitor visa B--- allows participating meetings, conferences, negotiations - H1B visa --- specialty occupation -L1 visa – company transferee - E2 visa- substantial investment in the US business (usually 1 mil. Dollars)

Insurances: liability insurance employee insurance

has to comply with state and federal laws

Product markings/ warranties etc.

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Freedom to operate and value of IP portfolio

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Patent search

• Is your invention patentable?

• Novelty, obviousness

• Any disclosure • Any where in the world

Freedom to operate

• Can you make, use, sell your invention?

• Infringement scenarios

• Valid patents, claims• The geographic area you

are entering into

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Timing:

Patent search before you file a patent

Freedom to operate study: you get an idea from the patent searchdetailed study before seeking funding, before making any

major steps to enter new market

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Costs:

FTO may cost $4000-10 000

But: you avoid triple damages if you have well done FTO has to address the three types of infringement

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35 U.S.C. section 271(a): liability for direct infringement requires performance of all steps of a method patent to be attributable to a single party

Direct infringement

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35 U.S.C. section 271(b): Whoever actively induces infringement of a patent shall be liable as an infringer

The Supreme Court held 2014 in Limelight v. Akamai that Limelight was not liable for inducing infringement under section 271(b) because no one had directly infringed under section 271(a). Because all the steps of the patent claim were not performed by one party, there is no direct nor induced infringement. (Limelight did not tag the data itself)

Induced infringement

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Contributory infringement

35 USC 271 (c ) “Whoever offers to sell or sells within the United States or imports into the United States a component of a patented machine, manufacture, combination or composition, or a material or an apparatus for use in practicing a patented process, constituting a material part of the invention, knowing the same to be especially made or especially adapted for use in an infringement of such patent, and not a staple article or commodity of commerce suitable for substantial noninfringing use, shall be liable as a contributory infringer."

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What if you get a cease and desist letter?

-can you change your product in a way that it is not infringing?

-file re examination?

-can you invalidate other party’s patent?

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Cost of Bata Bing patents

Years 1-3 Years 3 -10

FTO Prov. appl

PCT Nat. filings

total Pros. Annuities etc

Total

Formulation 5000 5000 4500 14000* 28500 8000 10 000 46 500

Container 5000 5000 4500 4000** 18 500 4000 1000 23500

* USA, EPO, China, Indonesia ** USA, EstoniaTotal: 70 000

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Portfolio Valuation* - 10 year product cycle

Product Profit = $10 million over 10 years

($1.00 per bottle profit x 1,000,000 bottles/yr = $1 M/yr x 10 years = $10 million) Patent Value

25% rule – 25% of estimated net profits = $2,5 million

Total Patent Cost = $70 000

Trademark cost = $5000 (protects 100K in branding)

Total IP Cost = $70K + 5K = $ 75,000 Total IP Value = 2.5 million

Potential return on IP Investment: Value/ Cost ~ 33X

*The Tools presented herein for IP Valuation are tools for generating estimates only, and the actual value could vary widely based on the actual facts of your situation. The assumptions and speculative nature of these estimates should be brought to the attention of any investor they are discussed with.

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Where does the value of your patent come from?

-can you keep competitors away?-can you sell with higher price?-do you have wide protection?-Have you covered variatons/alternatives?-Can you license out what you don’t use your self?

-Clever license agreements (PCR patent – e.g. Stanford Univ. made over $250 mil. with cheap nonexclusive licenses)

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what to consider regarding intellectual property when planning to enter us markets

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