Peter Fasse has patents in his blood. He comes from a family of patent attorneys. He is a highly respected partner at Fish & Richardson, the storied Boston-based (now global) firm that represented Alexander Graham Bell, Thomas Edison and the Wright Brothers. Peter’s work continues that tradition by representing some of the leading technological innovators of today. Peter also invests as an angel in technology companies. In this practical and accessible conversation he revealed valuable insights and resources for founders and investors in technology companies. He also relayed some interesting and instructive stories of intellectual property success and calamity.
Among the topics covered were:
- Peter Fasse Bio
- Young Cornell Grad in Textiles & Fabrics Becomes Patent Office Examiner
- Peter Fasse’s Practice
- In What Areas Is it Important to Have Patents and Why?
- Software Patents, Why Have Them and Why Not?
- Supreme Court Taking Harsh Views on Patents
- Patent Attorney Horror Stories – Theft, Suicide, Rogue Wave, Bear Mauling & Hasty Firing
- How Institutions Can Claim Intellectual Property of Employees
- Freedom to Operate – Should Be a Big Concern for Tech Startup Founders & Investors
- “There's a common misconception that if you have a patent on something, that it allows you to practice and commercialize that invention, but that's not true.”
- Different Levels of Freedom to Operate Analysis
- Two Extreme Freedom to Operate Cases & Outcomes
- Strong IP Position a Vital Ingredient in Sale of Tech Startups
- Mass Tech Transfer Center (MTTC) Is a Great Resource for Technology Startups
- Transcytos & SQZ Biotech
- Most Patents Are Not Commercially Viable, But Fish & Richardson Has a Special Package for Highly Promising Startups – Fish Steps
- Unsolicited Client Testimonial for Peter Fasse!
- Why Investing Through a Vehicle Rather than Directly Can Make Sense
- Trade Secrets – Formula for Coca Cola
- Trademarks – Frequently Overlooked
- Trouble with Chinese Partners – Capital Controls & Theft of Intellectual Property
Transcript of Peter Fasse, "Patents Are in His Blood," Ep. 11
Guest: Patent Attorney and Angel Peter Fasse
Peter Fasse Bio
SAL DAHER: Welcome to Angel Invest Boston, conversations with Boston's most interesting Angel investors and founders. I am Sal Daher and my goal for this podcast is to learn about building successful new companies. The best way I can think of doing this is by talking to people who have done it; people such as patent attorney and angel investor, Peter Fasse. Peter, it's awesome you could be here.
PETER FASSE: Thanks very much for having me, Sal.
SAL DAHER: Awesome. Great. Peter Fasse is a partner at Fish & Richardson, the prominent, intellectual property law firm. Peter is a highly regarded professional in his area of work. In a way, you can say patent law runs in his veins. He received degrees in electrical engineering and biology from MIT and then attended George Washington University Law School. Because of his work as a patent attorney, he has been an angel investor in technology startups and we're going to get into some of those today. As usual Peter, I'd like to start the conversation talking about how people got into their careers. It's a service to young people that are still trying to find their way in a career path. Your way into patent law ... By the way everyone, Peter Fasse is married to my sister, he's my brother-in-law, so I know a little about him, the normal amounts. Anyway, the way you got into your work is really unusual. Can you just tell me a little bit about that?
PETER FASSE: It is unusual and I don't know any other patent attorney whose father was also a patent attorney.
SAL DAHER: And whose brother is also a patent attorney.
PETER FASSE: Yeah, I'd like to tell people that I think we have a genetic defect that makes us like patent law because it is a very arcane practice of law. It is, however, quite interesting to us. As I said, my dad was a patent attorney, but I think the key to my going into this field was that he never really pushed either me or my brother to go into this field. When I was at MIT, I was thinking about what my father does as a potential career. I was also thinking about medical school and maybe going into some sort of medical device area after medical school, but over time I realized that patent law was really going to be a good fit for me, my personality, my background. It's worked out very well for me. I've been at Fish & Richardson almost 30 years now and have really been able to use both the biotech and the engineering aspects of my background.
SAL DAHER: Awesome. Just to add a little color here. When Peter talks about his father’s law practice… his parents were immigrants from Germany in the 1950s, a difficult time. They came here and his dad was an engineer. He trained to be a patent attorney. That was his ambition. They moved to a beautiful place up in Maine and there he established his practice and became very, very active with German firms doing patent work in the United States and then firms from other countries as well. It's really a tremendous story. It calls to mind a little bit, for example, the Shattuck family here in Boston. It was a family that had a lot of physicians in the family. It was the traditional of the family that they be physicians. There is a German ... There's a small flute called the recorder, a little wooden flute. The best recorders in the world, I'm told, are made by a German family transplanted to the Boston area, like one tunes the flutes, the other makes them, the other one does the accounting, and the other one does this and that. This family tradition of work is a German thing, also and New England thing.
PETER FASSE: Could very well be because my brother actually took over our father's practice and he's continuing the office up in Maine.
SAL DAHER: That's tremendous. So you went to MIT and then George Washington University Law School. Can you tell me about those two places? How they served you in terms of preparing to be a patent attorney?
PETER FASSE: At MIT, I double majored, as you said, but within electrical engineering, I took as broad a course load as possible, and really am interested in all different technologies. I guess my strength is being able to understand a lot of different technologies and the intersection of biology, electrical engineering, mechanical engineering, and so on, so MIT was great for that, and George Washington University was one of the few that had specialized patent law courses because by that time I already had made the decision to go into patent law. In between MIT, where I had an extra semester to get the two degrees done, I had basically six months to fill time before going to law school in the fall. I actually got a job at the patent office where they had just started hiring people with biology degrees for their genetic engineering art unit, where the first patents were being filed in that area after a Supreme Court decision called the Chakrabarty case in 1982, which was really opening the doors to the patent world for the biotech community.
Young Cornell Grad in Textiles & Fabrics Becomes Patent Office Examiner
SAL DAHER: That brings to mind a friend of my daughter's, a young woman who graduated from Cornell University with a degree in fibers and textiles. She was looking for job and she thought she was going to work in the fashion industry and so forth. Well, she now works in the patent office in Washington.
PETER FASSE: Interesting. You can get a patent on any different type of technology and so they do have thousands of patent examiners, each with their special backgrounds.
SAL DAHER: Little tiny specialty, so that's a possible career path that people can think. As a patent attorney, when someone comes in, you're basically writing a research paper that explains why this technology is an innovation and then you try to justify that to the patent office?
The Work of a Patent Attorney Described
PETER FASSE: Basically. I mean a patent application is really a written description of the invention, how to make and use the invention. As you're writing-
SAL DAHER: But there's always background for that.
PETER FASSE: Yes absolutely, there's some background. In general, you try to draft the application in a way to make it also a sales document because not only a patent examiner is going to be looking at your patent, but investors, VCs, angel investors, might be looking at those patents as well. If you're working for a larger company, the patents are also important for the individual inventors often get some incentive and so on. You really want to draft the patent application for a wide range of people who might be the audience reading it.
SAL DAHER: So you strive to make it a document that's widely readable and well and also pitch this a little bit as a sales document to put that technology in the best light.
PETER FASSE: And it has to be understandable to people, not only people in the field because if the case should ever go to litigation, the jury is going to be just a jury of your peers who are not going to have any special technical background.
Peter Fasse’s Practice
SAL DAHER: Specifically, what kind of work do you do?
PETER FASSE: I work with a wide range of clients from individual inventors to startups, middle size companies, all the way to international companies, such as Roche and Ferring Pharmaceuticals, Illumina, companies like that. In general, at a very basic level, as we protect the ideas of these companies, we help them, as we said, draft patent applications, but also to provide guidance to create a portfolio of patents that protect inventions from multiple angles, different inventions that might be within the company, both in the US and abroad. Also, to help guide companies to avoid infringing other people's parents.
SAL DAHER: Yes, we'll get to that later on. What kind of technologies do you work on?
PETER FASSE: I have a wide variety of clients, but the overall the focus seems to be on medical devices and biotech in general.
In What Areas Is it Important to Have Patents and Why?
SAL DAHER: That's an area that's very active here in Boston. Peter, in what areas is it particularly important to have patents and why?
PETER FASSE: I guess as a patent attorney, I'm somewhat biased, but I would say really all areas of technology. There is some discussion out there that maybe software because it becomes obsolete so quickly it may not be that important to get patent protection, but certainly the big software companies, if you're selling software to the public, they're still filing for patents on software.
SAL DAHER: Right.
PETER FASSE: In terms of other technologies in biotech in particular, where a patent has a 20-year life after the filing date, the technology is only commercialized maybe 10 or 15 years after the original invention, so I think in those kinds of technologies where you have a really long term horizon for commercialization patent protection is really very important.
Software Patents, Why Have Them and Why Not?
SAL DAHER: I always hear in discussions with startups that I'm thinking of investing in, "Oh, forget patents on software," so the reason that people say that you think it's because they become obsolete, they have to be refashioned very frequently, so that doesn't offer a lot of protection?
PETER FASSE: That's certainly one big reason. Another reason that has really developed over the last five or six years is that the US Supreme Court seems to be on a warpath against software patents and ironically also biotech patents. Under this statute, it's part of the United States statutes on patent law, that over, past many decades, has really been just a very low hurdle to patentability. It's a question of what is patentable subject matter. The statute really just requires that the invention is either a process, a manufacture, a composition of matter or a machine. Typically, most inventions fall into those categories and historically that was the only question. Something very abstract like an equation, such as E = MC squared, that was not patentable. If you took gold from the ground, you couldn't patent gold or a leaf from a tree because it was just basic natural products.
Supreme Court Taking Harsh Views on Patents
The Supreme Court recently has taken a turn that I think it's has been quite harsh on patents and it has developed to the point where the natural products exception has become kind of the rule in terms of killing biotech patents. There was a decision by the Supreme Court about five years ago called the Myriad case, where they decided that a nucleic acid was not patentable subject matter because it was just a natural product. That threw away over two decades of patent law developed by the United States patent office and the courts that said that, "If you had an isolated or purified form of nucleic acid, that was fine. That was a patentable subject matter."
It goes back to what I mentioned earlier, the Chakrabarty case, which really dealt with some cells that had been manipulated by people and the Supreme Court said, "Anything under the sun that is touched by the hand of man is patentable subject matter." Fast-forward to the Myriad case, they don't even mention the Chakrabarty case in their discussion, but they decided that nucleic acids are just natural products, even if they've been isolated or purified. That's had quite a serious impact on the biotech industry. Similarly, diagnostic patents have been attacked because they are merely using a natural phenomenon and then some kind of routine manipulation of that phenomenon to kill many diagnostic patents, but we started with software and those have been attacked as being merely abstract ideas and covering just algorithms that in and of themselves are not patentable subject matter.
SAL DAHER: It seems to me that the original intent when patents were created was that you gave an exclusive license to an inventor to promote innovation in things that were difficult to do. You shouldn't be able to patent things that are obvious and easy. You should be able to patent things that are really difficult to do and new and difficult, so that you create an incentive for people to innovate in difficult areas. For example, precisely in biotech, where it requires tens of millions of dollars to develop a product, you want to have some sense that someone is not going to be able to compete with you, if you are successful taking that product to market, at least for some time, but they're kind of taking that away, which is disappointing.
PETER FASSE: Absolutely. There have even been cases where the Supreme Court admits that this is a wonderful innovation and a wonderful discovery, but it's just not a patentable subject matter in their view. The Court of Appeals for the Federal Circuit, which is where all patent cases go on appeal from the District Court level, has shown its frustration with the Supreme Court guidance in a number of cases, where they essentially say, "Our hands are tied and we have to invalidate this patent if we follow the Supreme Court precedent."
There was a case last summer where there was a significant hope by the biotech community that the Supreme Court would take up a case that dealt with the innovation that there are actually cell free DNA segments floating around in a mother who's pregnant in her blood. Everyone in the past had thought that that was just a waste, had no useful value, but it turns out that some really brilliant scientists figured out that you could actually pick out some of these segments of DNA in the mother's blood that are from paternal origin and you could use those to determine whether the fetus has some sort of genetic defect. A wonderful innovation, but the way that the claims were crafted, the Supreme Court said, well "The Federal Circuit properly decided that under our guidance that those claims were invalid," and so refused to take the case up on certiorari from the Federal Circuit. That was a big disappointment because the biotech community felt that this was a good opportunity for the Supreme Court to clarify its position on these natural phenomenon cases and the court refused to do so.
Patent Attorney Horror Stories – Theft, Suicide, Rogue Wave, Bear Mauling & Hasty Firing
SAL DAHER: Very good. Peter, can you relay some interesting stories? Because I know you've had some colorful, shall we say, patent attorney horror stories that you've confronted in your time.
PETER FASSE: Sure. Some of them relate to claims that I've invested in at the firm. The firm has a policy that if any partner wants to invest in a client, they're free to do so, but they also have to open it up to the rest of the partnership to if anyone else is interested, to also be able to invest. I hadn't done it often, but in one of the situations I had a client so that was very excited in their work and knew everything about the invention, actually offered to give demonstrations of the device on my mother-in-law, your mom.
SAL DAHER: Yeah, I was there. I saw the demonstration. It was very impressive. I don't know if it was a placebo effect, but it seemed to really be helpful in terms of improving circulation and so forth.
PETER FASSE: They were well-funded. They give us a retainer upfront, which is very rare for a startup to do. I was eventually convinced to invest as well, but I had a gut feeling that something wasn't quite right. The inventor was a very dynamic individual, but on questioning about the origins of the invention and where he got the ideas and so on, there was just something in the back of my mind that said, "Something wasn't quite right." Nevertheless, I made the one initial investment, thankfully not a large investment, because ultimately the horror story part of this is that this fellow actually stole the idea from one of his colleagues quite a few years ago.
SAL DAHER: Oh my gosh.
PETER FASSE: I guess my basic message there to investors is go with your gut. If everything looks really good but something is telling you that there's something not quite right, follow that instinct.
SAL DAHER: I think that the man committed suicide. It was horrible-
PETER FASSE: Ultimately, he did because the theft came out and he was under investigation and so. Other horror stories that are very tragic but less dramatic in a company sense, and this is also I guess a word of warning to companies, is to get all of the inventors to sign important paperwork as early as possible. I've had a couple situations over the years where prominent inventors, university professors and so on ...
One professor was in Hawaii giving a talk and on the weekend he was unfortunately at the seashore and a rogue wave swept him away. He was never seen again and we had then some difficulties in getting the estate to do the proper paperwork and so for the patent that he was an inventor on.
Another situation, for a big international pharmaceutical company, one of their inventors was traveling in Alaska, he was an avid hiker, backpacker, very experienced and unfortunately he was attacked and killed by a bear, a grizzly.
SAL DAHER: Oh my God.
PETER FASSE: Again, we had a lot of documents that he hadn't signed yet. My warning to companies is that it's important to get these kinds of documents signed early.
Another situation, where a client, a startup, had actually fired one of the inventors not thinking about getting him to sign the documents before.
SAL DAHER: A release from him.
PETER FASSE: He had not signed an assignment to the company or the declaration that has to be submitted to the patent office and it took a lot of negotiating and quite a bit of cash to get him to finally sign these documents.
How Institutions Can Claim Intellectual Property of Employees
SAL DAHER: I know that in looking at one firm that you and I looked at together, this is a firm that came out of ... The inventor is from Georgia Tech and he spent time at MIT and so forth. We needed to know, very well, very clearly, that neither university had any claims on his invention. In this case, he had actually gone through the trouble, he's a very careful guy, of getting all the letters from both the universities saying that they had no interest in the invention that he had and the patents that had been granted to him. I remember having that discussion with you. You can have someone who is working ... Let's say someone is even part-time in a lab, the institution can make a claim to be the owner of the invention.
PETER FASSE: It's possible. It depends on the employment agreement. You see this all the time, a lot of startups are based on technology that was developed in either a university or a hospital and some of the founders or co-founders might be professors or doctors from these organizations.
I have one clear recollection of a client, was one such startup, they had a wonderful invention for measuring glucose through the skin. They had a prototype product. They were starting to raise money. The technology had been developed at a university and one of the co-founders was a professor. He had, as you had mentioned, the letters, the assignment documents from the university to give him the rights in his patent application. Interestingly, as the company started developing and raising funds and so on, the university all of a sudden came back into the picture and argued that, "Wait a minute; we only assigned your rights to you. There were two other inventors on that patent application. We never gave the rights back to them and we didn't give their rights to you, so we're still in the picture and we want a part of your company." This put a cloud on the basic rights that were involved and that were the crown jewels of the company.
While I was in negotiations with the university, this took a long time, they really dragged their feet and were being unreasonable, I believe, but in the meantime, the company had this cloud and one significant investor pulled out. All of a sudden, a $1 million that they were expecting were no longer there. They were just unable to raise sufficient funds to keep the company going and they went under.
Freedom to Operate – Should Be a Big Concern for Tech Startup Founders & Investors
SAL DAHER: That is startling. We're talking about here the problem of someone claiming ownership of a patent, claiming ownership of the intellectual property that's been developed by an inventor, but there's another problem also. If you're a high-tech inventor, you think, "Okay, I've got a patent on this, so I can keep people from copying what I'm doing," but there are other types of startups and so forth where they can be threatened by problems related to freedom to operate. Could you explain that a little bit?
PETER FASSE: Sure. This is something that I always encourage clients to look into, even if they are at an early stage, but freedom to operate generally means that you do an analysis of the patent landscape to see if there are any patents that your commercial products might ultimately infringe on. Startups often don't consider this as a real issue because they figure, "We're not going to be commercializing for a long time," but I think it's important that as you go on your path to commercialization, you take a look at what's out there. It may help guide you in different directions on what elements ultimately you decide to put into your commercial products because it could be a minefield of patents out there that any one part of a system might infringe.
The worst thing I think that could happen to a startup is that they have their first commercial product, let's say they are a biotech company and they just got FDA approval and as soon as they are on the radar scope of big companies, they get a letter from some company saying, "Hey, you should actually take a look at this patent that we have which covers this aspect of your invention."
“There's a common misconception that if you have a patent on something, that it allows you to practice and commercialize that invention, but that's not true.
There's a common misconception that if you have a patent on something, that it allows you to practice and commercialize that invention, but that's not true. A patent really is just a way in which you can keep others from practicing your invention. Just because you have a patent, it doesn't mean that you have a right to practice your own invention. That is determined by what other patents might be out there in the US or in other countries, if you're interested in commercializing outside the US.
SAL DAHER: The problem of freedom to operate is it's a much bigger thing than a patent because, at least what I've heard, it's perhaps many may times more expensive to do freedom to operate analysis in an area than it is to actually get a patent, so that someone might have to spend hundreds of thousands of dollars to really do a thorough freedom to operate. A lot of startups can't afford that. They might have raised half a million dollars and they can't spend $200,000 on a freedom to operate study. I guess in that case, what do you think they should do?
Different Levels of Freedom to Operate Analysis
PETER FASSE: There are different levels of analysis that can be done for the freedom to operate. In general, a quick review of the patent landscape isn't going to be anywhere near $200,000. I mean, in general, when we're doing an initial review for a company, it's going be more in the order of $20,000-$50,000, but clearly it can get more expensive and the results can be very dramatic for the company. I can give you two examples, kind of two extremes.
Two Extreme Freedom to Operate Cases & Outcomes
One with a negative outcome was a spinoff company from a large pharmaceutical company and the spinoff was looking to get into the home healthcare field, patient monitoring. They had certain ideas of the way they wanted to proceed and they engaged us to review the patent field and it turned out to be quite a crowded field. We spent probably about six to eight months working with them narrowing down their focus as to what they were planning to commercialize, which is an important first step in the process because you don't want to have just a very vague idea of what to search. Then once you have a more concrete idea of what you're going to commercialize, then you can do a search as to what patents might be out there. We probably looked at about 1000 patents and winnowed it down to about 15 or 20 that were actually quite relevant to what they were planning to do. Some of those patents were held by companies that they knew would not be giving licenses and to try to invalidate those patents would be a huge expense in litigation, so they ultimately closed their doors. They decided this was not going to be worth going into.
On the other hand, we represented a local startup, Constitution Medical, which was our client. Within two years, we had filed probably about 50 patents for them on an automated rather complex system of analyzing blood. Taking just vials of blood, test tubes of blood at one end, and the system would automatically extract the blood, mix it with the proper dyes and fixatives and so on, plate the blood out automatically onto a slide, dry that, image it at high and low resolution, and then capture images of each blood cell on the slide. Then have software algorithms to analyze whether or not that blood sample had any aberration in terms of some signal that there might be cancer cells or whatever in the blood. It's a complex system. We did actually 20 different searches because each element of a system might be infringing someone's patents.
Over a two-year time period, we looked at 15,000 different patents, but ultimately it was well worth it for our client because they then put themselves up basically for auction with five different multinational companies. We spent literally weeks with these different companies analyzing their patent portfolio, looking at the freedom to operate issues, and because the client had really engaged us to such a level of detail none of these big company's teams of patent attorneys could find any other issues. Ultimately, Roche purchased this startup for $250 million up front and $250 million more in milestones, so the couple hundred thousand dollars that they spent on preparing for those meetings with those potential buyers was well worth it.
Strong IP Position a Vital Ingredient in Sale of Tech Startups
SAL DAHER: That reminds me because a lot of the investing that I do is in a software field and when a company gets acquired in software, they do a code audit. The acquiring entity does a code audit to make sure that there are no bits of code that don't belong to the company or that are problematic and so forth, but I guess we also should think in terms of the IP audit as well. If you're a company that relies on IP, you are going to have an IP audit when you try to sell. Investors should know ahead of time that if you're counting on an exit based on intellectual property of the company, based on patents, then that has to be very well thought through before you start investing really large amounts of money, tens of billions of dollars in the technology, spend a few hundred thousand and make sure that you have freedom to operate. If you don't have freedom to operate, make sure that you have the ability to license the technology that you might need because that's another route.
PETER FASSE: Absolutely. Many of my clients take that route, they will seek licenses. If the patents are from a university, hospital, things like that, a license might be available, but if it's such a direct competitor, then it's perhaps unlikely that you're going to get a license. The alternative is to look for possible chinks in the armor of that patent and to try to invalidate the patent. There are a couple of routes that one can do so, but they're all expensive. You really want to try to avoid that and that's where I think, as I said earlier, it's important to look at these freedom to operate issues early on because you might make decisions to avoid a particular troublesome patent and still be able to pursue your invention, just in a slightly different angle perhaps.
SAL DAHER: Very good. Next, we're going to talk to Peter about companies that he's invested in, some of which I've also vested in, and get some of his thought on those. Before that, I'd like to invite our listeners to please take a moment and go to iTunes and give us a review and let us know what you think of how we're doing. I would also invite you to if you have any comments or suggestions about the show, suggestions about people who you might want to see on the show or questions you might want to have me ask on the podcast, if you can please go to firstname.lastname@example.org and let me know and I will answer you back.
Mass Tech Transfer Center (MTTC) Is a Great Resource for Technology Startups
Anyway, let's resume our conversation with Peter Fasse. Peter; let’s talk about some of the startups you've invested in.
PETER FASSE: Sure. As I've mentioned, I've invested in a few clients of the firm, but I've also come across other opportunities through ... For example, one company that I've invested in, I first met through the Mass Tech Transfer Center because they have a wonderful platform for educating entrepreneurs on how to do their first pitch to the investment community and Fish & Richardson hosts those meetings every once in a while.
SAL DAHER: That it is called the Massachusetts ... ?
PETER FASSE: Technology Transfer Center.
SAL DAHER: MTTC.
PETER FASSE: Correct.
SAL DAHER: If you're an entrepreneur and you're unsure about patents and so forth, that might be a good first place to go.
PETER FASSE: Yes, they provide coaching for startup companies on how to put together business plans, how to put their pitch together. I think it's a nice platform. That was how we first met one of the presenting companies that I ultimately invested in. So far, that has worked out and that they still exist and they're still plugging along.
Transcytos & SQZ Biotech
SAL DAHER: Are you free up to mention to the company?
PETER FASSE: It's Transcytos.
SAL DAHER: Transcytos? Oh, I'm an investor of the company as well.
PETER FASSE: Yes.
SAL DAHER: Can we talk a little about what Transcytos does?
PETER FASSE: They have licensed technology from Tufts University on inserting nucleic acids into cells, which is generally a traumatic event for cells when it's done either chemically or through electroporation or other more harsh methods, but they figured out a fluid dynamics approach where just compressing the cells through certain specially designed glass pipettes can force the nucleic acids into the cells. It works for wide variety of cells, including very delicate cells such as nerve cells and so on. It's a very interesting technology and it currently meets an unmet need.
SAL DAHER: The idea is get the nucleic acid into the cell, into the nucleus of the cell, and it transforms the functioning of cell.
PETER FASSE: Correct.
SAL DAHER: The cell that does one thing because the cell does something else, transfection or transfectation. Their technology is to subject the cell to fluid pressure around it.
We're also investors in a different company that does something similar by a different process. We're talking about SQZ Biotech, which pushes the cells through small microfluidic grids that are slightly smaller than cell-size. That process is a different one from the Transcytos, but they are hoping to achieve similar goals in a sense that they're hoping to get different types of materials into the cell which will then become active in a cell.
PETER FASSE: Correct.
SAL DAHER: Transcytos has shown some very promising results and the entrepreneur is Otto Prohaska, someone that I like very much, and is a very determined, a very thorough person, and very pleasant as well.
PETER FASSE: He's also originally from Austria and so he probably has the same mentality as I do with my German background. That's why we hit it off and why I ultimately decided to invest.
SAL DAHER: Very detail-oriented, very minute, on getting the thing to work and so on. I think he'll ultimately succeed. SQZ Biotech, that's also doing, and I hope to have the CEO on at some point also, is also doing well. They have a partnership with Roche. These are public facts. As I said before, their technology is where they push the cell through a small grid and then the outer layer of the cell becomes compromised temporarily, it allows in different types of materials, and then the cell heals up and begins to have its new function, develop a new function, which is a fascinating thing.
PETER FASSE: It's done in labs hundreds of millions of times a year across the globe, so there's a real market for this.
SAL DAHER: Yes.
Most Patents Are Not Commercially Viable, But Fish & Richardson Has a Special Package for Highly Promising Startups – Fish Steps
PETER FASSE: I think that's just one of the important aspects that for the investor to really determine whether this startup has something that is commercially viable. There are lots of wonderful ideas out there, but they're perhaps difficult to put into a commercial embodiment that is going to take off.
SAL DAHER: I remember you telling me that your firm had the idea of investing in the patents that they have and that the experience was not so good.
PETER FASSE: Right. We looked into that, but ultimately decided as a firm that that was not really the business that we wanted to be into. We allow the partners, the principals of the firm, to invest individually, but the firm does not invest in companies, aside from one special program that we do have for very new startups, that we have a special package of patent application that we do for startups. We are pretty selective and do that for about 20 or so new clients per year.
SAL DAHER: I didn't know about that.
PETER FASSE: It's called our Fish Steps-
SAL DAHER: Fish Steps.
PETER FASSE: -program, but otherwise there are examples of law firms that have invested heavily in their clients and many of those firms don't exist anymore. That's the reason that Fish & Richardson decided not to go down that path.
SAL DAHER: The reality is that most patents are never commercialized. I mean the overwhelming majority of patents are never commercialized.
PETER FASSE: That's correct.
Unsolicited Client Testimonial for Peter Fasse!
SAL DAHER: It reminds me when I was investigating this possible investment, I'm a Walnut member, someone presented at Walnut a very impressive entrepreneur. She had been a professor at a university and had developed some technology there, which she had then commercialized. She had left the university and was commercializing this technology that she's gotten a lot of money from Federal government and so forth. It was funny because I was in a due diligence meeting with her and she was saying, "I really wished that I could use a patent attorney that the university used before, but now I can't because I'm conflicted out and I really liked this guy who was there," and so forth. I said, "Which firm is this?" She said, "Fish & Richardson." I said, "Who did you work with at Fish & Richardson?" "Peter Fasse." I said, "Oh geez," because my brother-in-law and so forth. "Oh, yes, he's an excellent patent attorney," but to have a highly-respected scientist say, "Geez, I wished I could be working with Peter Fasse," was really eye-opening for me. I got quite a chuckle out of that one.
PETER FASSE: Things like that are always nice to hear, but it is a small community.
SAL DAHER: It is, yes.
PETER FASSE: There are not that many patent attorneys out there. I guess total registered number of patent attorneys is on the order of 70,000 across the US, but many of them are retired by now. I think there are only on the order of maybe 40,000 patent attorneys practicing in the US at any given time, so it's not a huge community.
SAL DAHER: Sometimes patent attorneys tell you good stories. I heard a good story from a patent attorney a few weeks back. He's the father of a very, very brilliant and successful young man who was an undergraduate at MIT. While there, he created a company which he sold and then shortly after leaving MIT, he founded another company which he also sold to Dropbox. His son, of course he has a certain number of years he has to spend with the company that bought and he was coming to the end of that, and so he was looking for different projects and so forth.
He told his dad, "Dad, I've got a summer job." This is a guy who's now independently wealthy, he sold two technology companies. He's done quite well, but he's taken a summer job. "I've got a summer job and I've got to meet with the CEO tomorrow," and so forth. His father, I said, "Who's the CEO?" He said, "Elon Musk." It's funny, a guy who's a founder, a successful founder, sold two companies, and he's taking a summer job. It would make sense that it would be with someone like Elon Musk.
Is there still in the patent world a tremendous shortage of patent attorneys? I know there was at least 10 years ago, 8 or 10 years ago.
PETER FASSE: We certainly are looking for new people on and off in different particular areas of technology. In general, you might say that there is a shortage. A few years back when we had the recession, even patent work was impacted where generally historically companies would continue to fund their patent work and so patent firms were immune to recessions, but the last recession impacted even Fish & Richardson and we actually had to let people go. That was not a great situation, but certainly since then we've really ramped up the hiring again.
Why Investing Through a Vehicle Rather than Directly Can Make Sense
SAL DAHER: Right, so you invest directly in these companies always or do you invest through groups and so forth? Because one of topics we talk about here are different angel groups and so forth. People have different ways of approaching it, for example, I'm a member of Walnut Ventures and so forth, but you're investing directly as a solo, but also you participate in some vehicles, investment groups.
PETER FASSE: Sure. Some of those have been through Fish & Richardson and some of them have been through groups that you've assembled. I actually like that idea where you have a group of people who are pooling their resources and then looking at a number of different companies over a certain time period. You get more opportunities to see a wider range of companies. Through my work, I would probably focus almost exclusively on medical device and biotech companies, but through the group that you put together, I had a chance to invest in some other companies that were really quite interesting but outside of my sphere of clientele.
SAL DAHER: We hope, also, when it's in your sphere of knowledge and so forth, that you pitch in and help us with the due diligence, which you've done very gracefully.
PETER FASSE: I will always look at the patents given my background and bias. Sometimes, as you said, if it's a really software driven company, the patent landscape may not be that important, the patent portfolio may not be that important because these companies do develop and change their software so quickly over time. Perhaps, the patent diligence is less relevant in those cases, but I always like to see what kind of a patent portfolio they have.
Trade Secrets – Formula for Coca Cola
SAL DAHER: Right. Now what would you say to a firm that says, "I'm not going to go and get patents. I'm just going to keep this as a trade secret and then keep evolving ahead of the industry, so that they can't really catch up"?
PETER FASSE: I think it depends largely on what the product or the service is that this company is going to provide. If they are a software company where they're using software internally, then that might be a very good way to go. If they're actually selling software packages, then I would say that trade secret is impossible.
SAL DAHER: It's very easy for people to reverse engineer them.
PETER FASSE: Once you have put your product out there, it's not a secret anymore. The whole theory of trade secret protection is that you're preventing the public from gaining access to your secret, your invention.
SAL DAHER: But for example, you're a chemical manufacturer, you might be able to maintain the process secret because you're selling the product and not the process, making people aware of the process.
PETER FASSE: Correct. Even some products are protected by trade secret. There are some very famous trade secrets, like the formula for Coke, Coca-Cola for example, and for Bacardi rum. These are trade secrets that have endured for many, many decades. That's one of the benefits of trade secrets is that their protection last indefinitely until the secret is no longer a secret, whereas a patent has a 20-year lifetime from the original filing date. On the other hand, a trade secret is perhaps harder to police and you have to have very clear written guidelines for the company that are given to the employees when they start. You have to have very strict types of exit interviews with your employees when they leave, to make sure that they understand the importance of these trade secrets because once it gets out, the trade secret is lost. Similarly, if someone independently invents the same or similar thing, your trade secret doesn't protect you, whereas a patent would. They have different ranges and scopes of protection and different ways of obtaining that.
A trade secret might be cheaper to obtain originally. In a lot of startups that I deal with that they are based on, as we talked about, university technology or hospital technology, in there the founders, the scientists, the inventors, they have to publish. Once you publish, you can't have a trade secret anymore, so there's this balance that you have to follow between patents and trade secrets. I think many companies use both.
SAL DAHER: We think of the reason for having a patent is to have a barrier to competitors entering into your market. Frequently, particularly in a case of software firms or companies that are various types of consumer-oriented fields and so forth, it makes sense for the company to acquire momentum, to be growing very fast, particularly in areas where there's a network effect, meaning that the more clients that are using the product, the more valuable the product becomes. It's like Facebook, for example, Facebook has a network effect. The more people that are on Facebook, the more valuable Facebook is for the users. In those cases, just the growth and momentum discourages competitors from trying to get into it, it Bigfoots the competitors.
PETER FASSE: Right. That can happen whether or not you're using a patent or a trade secret, but the problem with the trade secret is how do you explain to the public what your invention is, what your innovation is. Similarly, how do you tell investors? You have to deal with confidentiality agreements. If something is leaked out, then your trade secret is done. Generally, I encourage clients to consider the patent route.
SAL DAHER: Talking about the Coca-Cola trade secret, my hunch is with the advance that we have in analysis, the chemical analysis and so forth, people can know exactly what's in that formula. The only advantage that Coke has is the fact that it has a very strong brand and huge distribution and so forth, so you have no chance. If you discover the real secret of Coca-Cola, you have no chance to be a competitor because you can't replicate that enormous powerhouse.
Trademarks – Frequently Overlooked
PETER FASSE: Absolutely. You raise another topic in intellectual property, which is trademarks and service marks. We haven't touched on that yet, but that can also be, as you said, for Coca-Cola for example, but a very important and very valuable asset of a company. Startups don't always consider looking at the best potential trademark or looking at marks that are very strong marks as opposed to just like an acronym or a series of words that everyone in the industry also would want to be using. They also don't necessarily check first to see whether other people are using a similar mark, that there might be confusion out there.
SAL DAHER: You might think that, "What's a slogan? What's the big deal. Everybody's got a slogan," but a slogan if it's developed into the trademark, it's extremely valuable to the company and other people cannot use that slogan.
PETER FASSE: Exactly right. A strong mark is something like Xerox that has absolutely nothing to do with the product, but once that develops the brand recognition, those are the strongest kinds of marks.
SAL DAHER: Right, very interesting, very interesting. I interviewed Kathryn Roy in Episode Nine, who's a member of Walnut, and she's a specialist in marketing and she was talking about branding. It's astonishing that, she told me that IBM, which is $100 billion company, really thinks it can only afford to have five brands. That's how hard to establish a brand is, how hard to maintain. That's quite remarkable.
Trouble with Chinese Partners – Capital Controls & Theft of Intellectual Property
Tell me some more about some of the other startups you've had experience with. You had a startup, for example, that had a problem with their Chinese partners.
PETER FASSE: Yeah, that's a situation where the company is doing well, they have already developed and obtained European market approval for a little test cartridge for a particular blood marker. It's actually a client of the firm's and one of the clients that I’ve also personally invested in. They developed a deal with a commercial partner in China for manufacturing these cartridges but also for investing in the company. They ran into a problem because the Chinese company was all of a sudden not delivering on their promises to infuse cash into the company at the time when they said that they would have. Ultimately, that's been resolved, but all of last year was a real cash flow problem for our client. They had problems in paying us and other of their team of people that are helping them. The Chinese company was saying that it was the Chinese government that was preventing them from actually distributing cash outside of China.
SAL DAHER: I can believe it. I can believe it. The Chinese government is clamping down, capital controls. I mean living in the United States; we take for granted that you can wire money to anybody in the world that you want. If you're living here and you want to send money to somebody in Italy, you just wire money to them. Vice versa, if you're in Italy, you can wire money here. The reality is that, including countries like Italy and also South America where I lived a good part of my life and I've worked, the norm was that countries impose control on the flow of capitals across borders. It's an insane idea. It's very wrong. If you know anything about economics, you understand that capital controls are just a disastrous thing. People try to justify it, but they're really wrong.
However, there are governments who think they know better than the markets and prominent among those is the Chinese government. They tell their citizens that they cannot take out more than X amount and so forth. There's a situation in China right now where some of the financial institutions are not in the best situation and so there is a natural tendency to capital flight. I've seen this because I use to work in this space for decades. What's happening now is I’ve seen several cases of particularly biotech startups that have serious Chinese investors who understand the technology, who are interested in making an investment, and who are prevented from going forward because of restrictions by the government. The government doesn't differentiate between someone making a valuable investment overseas and someone just taking money, ill-gotten gains, and sneaking it out of the country. It's hard to distinguish when you impose these strict rules.
Another consideration for entrepreneurs is to think about the problem of capital controls when you're thinking about your funding sources. If you're getting funding from the US, it's not a consideration, but if you're getting funding from a place like China, or Russia as well, a country that's had a history of capital controls.
PETER FASSE: There are other issues with countries like China where clearly a lot of manufacturing is done. The same client was working with a Chinese company that was manufacturing a different one from this investor, but a smaller company that was manufacturing these cartridges. All of a sudden, we noticed in one of our US cases that there was this Chinese patent that was being cited against us and it was identical to the technology we were trying to patent for our client. It turns out that this company that was a collaborator with our client had actually gone off on their own and filed their own patent application as if they had invented these cartridges to get their own patents. It's again another word of warning, you really have to be careful as to the collaborators you select in these countries where they just have a different mindset from the typical US company. They think nothing of just taking your idea and doing whatever they want with it on their own. Ultimately, we were able to convince that Chinese company that this was not their technology and that they assigned the rights to that Chinese application to our client, so it ended up well, but it was again a significant cost to our client to deal with that problem.
SAL DAHER: Peter, I’m very grateful that you could come and spend an hour with us and talk about these very interesting topics and to provide a really important advice for young entrepreneurs. Thanks a lot.
PETER FASSE: My pleasure and I enjoy speaking about these topics. It's near and dear to my heart, has been for 30 years.
SAL DAHER: Thanks a lot. Listeners, I'm very grateful that you joined us today for this very interesting podcast on the topic of intellectual property and patents. I invite you to please sign up at our website angelinvestboston.com. There's a sign-up button that you can press and it will allow you to give your name, first, and last, and email address, so that you can be made aware of the future of events that we might have, including live in-person events and also upcoming online events that might be live and so forth, that we might be having. It's always helpful to find out about things that are going on via that list. We respect your privacy, so free to sign up. This is Sal Daher, this is Angel Invest Boston and we are very happy that you are with us here. Thank you.
I'm glad that you were able to join us. Our engineer is James Willetts. Our theme was composed by John McKusick. Our graphic design is by Maywood Art. This is the Angel Invest Boston. I'm Sal Daher.