Top tips for healthcare startups to protect their intellectual property

This post is sponsored by Lake Whillans, a distressed venture finance firm that helps companies facing litigation or arbitration.

Protecting your intellectual property is a long game even for entrepreneurs just starting out.

F. Nicholas Franano, MD, a radiologist and chief executive officer at two cardiovascular medical device companies, Flow Forward Medical Inc. and Metactive Medical Inc., notes that “intellectual property is a 20-year thing.” The first company Franano founded, Proteon Therapeutics Inc., a biopharmaceutical company addressing kidney and vascular diseases, was listed on Nasdaq last year.

Franano, who has led the intellectual property strategy at all three of his companies, shared some advice about how entrepreneurs can protect their intellectual property in a cost-effective way. The interview was edited for length and clarity.

Since entrepreneurs are often busy inventing or pursuing their business ideas, is intellectual property something that they can worry about later once they know if their ideas will be successful? Or do they need to have an IP strategy from the get-go?

It’s important to have an IP strategy from the beginning, if only to avoid early mistakes. Once I was looking to license a product and during IP diligence we discovered the inventor had given a talk at an awards banquet with slides and had shown what arguably was the essence of the invention prior to filing a patent application – that’s game over.

Young companies often have limited funds to invest in their intellectual property and have to follow a more cost-conscious model. Is it possible to build an IP strategy that is cost-effective?

Yes. If you have related subject matter you can file a large single patent application instead of three separate ones, if it reasonably fits together.

If your intellectual property attorneys have a high degree of confidence in your company and your technology, they’ll sometimes be OK with payments that come in over time rather than at the invoice date. Financings of early-stage companies go up and down and intellectual property costs are pretty steady. Law firms that work with early-stage companies understand that and will sometimes be flexible on the timing of payments.

The formula for Coca-Cola is famously protected as a trade secret, instead of through other forms of intellectual property. Are trade secrets tools entrepreneurs can use to protect their intellectual property?

I’ve seen people use it effectively, especially in situations where know-how is hard won but the likelihood of getting valuable patent claims is low. In that situation it might be better to keep the know-how as a valuable trade secret rather than make it public in a low value patent application. It’s always a discussion: “Would we be better served by not filing this?” If you decide to keep it as a trade secret, then you have to manage it diligently and make sure you have really strong confidentiality provisions in place with all your consultants, vendors and former employees.

Startups are often short on cash and turn to venture capitalists and other investors. But that also means you’re putting the IP and the business model at risk by disclosing information to people who are essentially strangers. Can you seek confidentiality disclosure agreements with potential investors?

I usually share non-confidential information first and don’t initially ask for a CDA. If there is strong mutual interest, then it can progress to a CDA later.

I find sometimes that, in the act of sharing, you learn a lot. [Investors are] constantly seeing proposals and things that work and things that don’t work. The act of disclosure can be uncomfortable, but oftentimes you’re sharing that information with people who are very experienced and very smart and they can give you a lot of good feedback: things to fix, things to think about, potential partners, risks to your business plan.

Sometimes I have not shared things with investors when I know they have a portfolio company or an operating role in a company that clearly is a competitor of ours. You have to be careful in that situation.

Overall, what role do confidentiality agreements and nondisclosure agreements play in protecting IP?

Everyone says, “Venture capitalists will never sign CDAs.” When you get serious with a venture capital group, plenty of them will.

If they are deep into diligence and you say, “Look, there’s some additional information I’d really like to share with you that I think would make you even more confident in our company, but I need a CDA in place,” then they’ll often sign one. After signing a CDA people do think more carefully about sharing your information with others, but keep in mind it is not a guarantee of confidentiality.

What about confidentiality agreements regarding employees and independent contractors and ensuring intellectual property is going to remain with the company rather than with the agents of the company?

A young company should have a standard CDA and use it regularly.

If you’re in a co-creation, co-invention environment, you have to own and control the IP. It’s important that your research, engineering, consulting and manufacturing contracts all have language saying that inventions are assigned to your company. One of the things you’ll often have to rep [represent] and warranty to [for investors] is that all of your agreements include such clauses. A new investor or partner needs to know that you aren’t co-creating with people who don’t have a clear obligation to assign IP to you because in that situation the company may not own all the IP it needs to commercialize its products, which can make it hard for a young company to attract investors and may result in the payment of royalties.

Another thing that’s very important is to maintain good will with your former employees. Things will come up along the way where you may need their participation to file an affidavit for a declaration or to help if there’s some rights dispute with a governmental entity like the NIH [National Institutes of Health]. You want to keep your inventors happy. You wouldn’t want a former employee inventor to come into court for a deposition on a case where you’re in dispute with another party about an invention and have that person say, “I hated working there. Those people were all jerks. And I don’t remember anything about this.”

Is there anything else you would like to mention about how entrepreneurs can build an IP strategy that fits a cost-conscious model?

You’re really trying to capture a piece of intellectual ground that is important enough that it makes it harder for other people to innovate around you. What this is really about is getting products to people who have needs, especially in the healthcare field. In order to be able to do that, you need to be able to raise capital. And in order to raise capital you have to be able to show you have a viable long-term business. And in order to do that you need to have valuable intellectual property. Another big issue I see is when companies are careless in their written communications about their IP or they’re careless in their public presentations. I’ve seen people stand up and say, “Here’s what my lawyer tells me about our intellectual property.” You should never say that! You’re essentially giving up attorney-client privilege and opening up your private communications to discovery in a dispute.

In closing, Franano said there are three purposes for intellectual property: it can be used as a shield, a sword and a badge. It is a shield against competitors copying an entrepreneur’s innovation and “allows you to build a business that can provide products to patients,” he said. It is a sword that can be used to disrupt competitors. And intellectual property, Franano said, is a badge companies can use to increase investors’ and partners’ confidence in their business.

This column is one in a series by Lake Whillans Litigation Finance. To learn more about us, and litigation finance generally, visit us at our website, lakewhillans.com. To ask a specific question, suggest a topic, or simply say hello, drop us a line at [email protected].