Economics Innovation

Innovation In Action Series #2: How Intellectual Property Strategy Impacts Innovation

In my first post on innovation, I discussed the importance of understanding the four types of innovation agendas and the impact each agenda has on corporate open innovation/collaboration efforts. In this post, I will cover briefly the issue of Intellectual Property (IP)in the context of corporate open innovation efforts.

As anyone who has been involved in a corporate project involving startups and/or other external partners knows, the challenge of IP definition and protection is one of the first issues that arises. It’s understandable that all parties in such an effort want to define and protect their ideas, even as they understand that innovation is only possible by putting IP at risk in at least some way. The almost universal approach of most corporate legal teams is to insist that a non-disclosure agreement (NDA) be put into place as quickly as possible. The typical legal team has legitimate concerns about IP sharing, and their usual policy is to prohibit innovation teams from having innovation discussions that are not “protected” by an NDA. This is by far the standard approach, but is it always the best one? I would argue that while NDAs are needed once innovation projects are fully defined and underway, they are often not only unnecessary but actually dangerous in early stages of innovation exploration.

In order to understand my position above, it’s important to understand the three types of IP that are typically involved in any project where a large company is working with an outside entity. The three types — DonatedExchanged and Protected — are summarized below:

Donated IP: This is IP that is given to an outside entity at no cost. Examples of this category include information that is presented in a corporate magazine, web sites, conferences, developer kits, or shared in the course of meetings where no NDA is in place.

Exchanged IP: This is IP that is given to an outside entity in return for other IP or compensation of some kind. Examples of this category include IP shared in the course of a co-development project or in a commercial licensing agreement.

Protected IP: This is IP that is NOT given to an outside entity at any cost. Examples of this category include information about future products or technologies under development. It may also include information about consumer preferences that would be difficult or impossible for the outside entity to acquire.

In my experience, most innovation teams do not take the time to define and strategize their approach to the IP categories above when starting innovation dialogues or projects. The rush to NDAs is a good example of this phenomenon. An NDA, by its presence, implies that there is an IP exchange taking place at some value conversion model, what I call the IP Exchange Rate. However, while well-defined NDAs are common, the mechanism for setting the right IP exchange rate in innovation efforts is not. Time and again, I have seen examples where valuable corporate IP is exchanged to a startup at the wrong “price,” and vice-versa. A real world example is a corporate team that presented all of their product roadmap to a startup at a very early stage of engagement. The startup was eventually not chosen as a product development partner, yet it was now able to share the product roadmap with a competitor of the corporate.

It’s because of situations such as the one above that I advise my clients to avoid entering the IP Exchange phase for as long as possible. Contrary to popular opinion among many corporate innovation and legal teams, it is quite possible to have serious and value added discussion with potential innovation partners without an NDA in place. Moreover, not having an NDA forces the innovation team into a “share less and learn more” mode, which is inherently less risky than the behavior one often sees of teams working under the (potentially false) sense of security created by an NDA. A critical tool for adopting this approach is to develop and use what I call a “Negative NDA,” which is an agreement NOT to share anything confidential in early stage discussions. This type of agreement not only clarifies the open nature of the discussions but also protects the corporate team from any claim that it used share information wrongly in the future. After all, as I note to clients, every IP issue I have run into in my career occurred under NDA.

The claim above often seems fanciful to corporate teams until I inform them that the typical VC firm will not sign an NDA just to hear an entreprenur’s pitch unless there are extenuating circumstances. As a 2015 NY Times piece noted:

“V.C. firms and angels are looking at so many more deals today, that they could freeze themselves out of a given area by signing an N.D.A. with one person,” said Peter C. Wendell, a faculty member at Stanford Graduate School of Business and the founder and a managing director of Sierra Ventures, a tech-oriented venture firm in Silicon Valley.

Each time an N.D.A. is signed, it stalls the conversation for a week because of the legal work involved, Mr. Hwang said, and over time, that can give a competitor the opportunity to enter a market first. “In the life of a start-up company,” he said, “you might have to sign 30 to 50 N.D.A.s. That’s a week each time and a year of holdups. The risk of going slow is bigger than the risk of being copied.”

While some innovators to get NDAs in place, the reality is that most don’t. A big reason for this phenomenon is that NDAs are notoriously difficult to enforce.

My advice to clients is that they design their innovation efforts such that most contact can take place in Donated IP mode. In this mode, participants can explore the possibility of working together in a general way without speaking about specifics. For example, with one client we changed the “proof of concept” stage from one focused on their actual products to one using general conditions — a test that could be conducted even with competitor product in some cases. This change allowed the client to get 90% of the information needed from the innovator with only a fraction of the IP exposure of the old model.

Moreover, when teams finally do enter the IP Exchange stage, the best way to protect IP is to design a model where the partner is incentivized to protect it in the first place. Indeed, as W. Scott Blacker, Founding Partners of InfoLawGroup LLP, wrote in 2009:

Where possible, it is best to share secrets only with parties that have sufficient motivation and capability to protect your secrets [Emphasis mine].  Give them reasons to believe that they will share in the success if the ideas or data are protected and ultimately commercialized, perhaps in the form of a royalty-free or discounted license, an exclusive sublicense in a particular sector or geography, a lucrative supply contract, a joint venture, or an equity stake.  An expressly nonbinding letter of intent may be enough to help them visualize the “carrot” of potential profits…If the company wants to collaborate with an academic, it can raise the idea of a possible consulting contract if the idea appears to merit more development and offer to collaborate in preparing an article for publication in a scholarly journal when some of the concepts can be made public. The point is, there are very often ways to align the interests of the parties in maintaining confidentiality for mutual gain and joint risk management.

Thinking through this shared-value model, as Blacker mode, takes more effort that just asking for an NDA, but the rewards — both from a business and IP risk standpoint — are well worth it.

What’s important most of all is not to jump into any of three IP models noted above without first understanding how that decision aligns with the overall innovation engagement model. IP definition and protection are important topics to be sure, and it’s that importance that requires as much consideration and design time as one gives to the technical and financial aspects of innovation efforts.

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