Fast Hardware Product Development Doesn’t Have to Lead to Slow Lawsuits

By Joel Nied

Protecting your product innovation from lawsuitsThe time between hardware product idea and product development has shrunk from years to months. CAD design has been around for a while, but the advent of  user-friendly and inexpensive 3-D printers allows for the near-immediate creation of a prototype and, in some cases, the finished product by professional and amateur alike. PCH International, which manufactured $10 billion worth of retail products last year, recently announced that it has created an incubator and accelerator program – not for software development, but for hardware development. Y Combinator has adapted to hardware innovators by providing lab equipment for entrepreneurs to develop prototypes. The pace of hardware development has accelerated dramatically in the last few years.

Unfortunately, the law hasn’t caught up with the velocity of invention. Neither has human nature. As a result, it’s easy for innovation to get ahead of what entrepreneurs and inventors should be doing, in addition to developing a product. There is no benefit to coming up with an innovative product if your competitors can copy it, or if the employee you fired three weeks after you started the company is now suing you for 30% of the profits.

Protecting the company early in the process has become harder. Historically, if two inventors each claimed to have patent rights for an invention, the US Patent and Trademark Office would evaluate who came up with the invention first.  This “first-to-invent” rule, however, is now inapplicable to all patent applications filed after March 16, 2013.  Now, the “first-to-file” rule governs: whoever files a patent application first wins, regardless as to who came up with the idea first.

For that reason, it is important to file a patent application early in the development process. The patent application procedure is expensive and lengthy—it can cost tens of thousands of dollars and take years.  Often, inventors, and even companies, are reluctant to spend that much money and effort on an unproven idea.

The solution is to file a provisional patent. A provisional patent is like a placeholder: it gives the inventor a year to file a full patent application, but isn’t as expensive as a full patent application. When done correctly, it gives the inventor time to flesh out the idea and determine whether the invention can yield a marketable product.

Human nature can also cause problems with rapid product development.  Inventors and companies like to do what they’re good at—coming up with ideas and putting them on the market.  No one likes to figure out how to split up the profits.  People have a tendency to either procrastinate on that issue or hastily send an email outlining the deal. Both routes often lead to the same place: a lawsuit.  In the past, there used to be more time to figure out who was actually part of the team bringing a product to market and to develop the relationship among and obligations of the team members.  The faster pace of innovation, however, can often result in a market-ready product before those relationships are resolved and documented.

The solution is easy: document the relationships early in the process.  There are time-proven ways to create a flexible organization from the outset that can adapt to the participation (or lack of it) among the team.  An example is an equity vesting schedule. If someone doesn’t stick around past the first few months of the project, then he or she will only receive a fraction (or none) of the ownership of the project that he or she would have by staying for the duration.

Prevention is always less painful than the cure. Forget about the tens or hundreds of thousands of dollars that the initial team will spend suing each other, versus the few thousand dollars they could have spent to prevent it– the cost of the emotional drain of a fight, and the ruined relationships, cannot be measured.

Transactional Group

Transactional Group