Invention vs know-how for defense startups: pros & cons

Article is published in the The Legal Industry Reviews: Ukraine

Authors:

Bogdan Malniev, Partner, Tax&Law practice, EY Ukraine

Denys Kolesnychenko, Manager, Tax&Law practice, EY Ukraine 

Formalizing defense startups' technologies and products as IP or through alternative methods enhances investment appeal by safeguarding against unauthorized use and replication, unlocking commercialization opportunities, and boosting the startup's value.

Defense startups' diverse offerings, including UAVs, specific technologies within products, unique manufacturing methods across sectors like robotics, demining, intelligence & communications, AI and cybersecurity, qualify as IP and can be formalized through inventions, utility models, industrial designs, trademarks, know-how, and software. For protection purposes, the most fitting approaches are either registering the IP as an invention or protecting it as a know-how without public disclosure.

Registerable IP. Inventions and utility models share patentability requirements like novelty and industrial applicability, with the additional inventive step for inventions only. Practically, inventions are complex, innovative solutions, while utility models are improvements to existing technologies or devices with simpler innovations and shorter protection terms. Industrial designs cover the external looks of a product or its part, requiring only novelty and a unique character to differentiate from other designs.

Ukrainian law recognizes specific "secret inventions", which incorporate state-classified information. They offer advantages for local defense startups by keeping registration details out of public IP registers, thus shielding the invention's details from competitors and national security from enemies. However, this option can deter foreign investors because of the legal restriction against registering such inventions internationally, including under the Patent Cooperation Treaty (PCT) procedure.

Know-how. Know-how, as defined by law, is non-public and materially valuable technical, organizational, or commercial information crucial for product manufacturing, technological processes, or service provision. It often refers to unique production technologies, such as innovative methods or process enhancements. Since know-how is not registerable, startups protect it by establishing a trade secret regime through management directives, employees informing, cybersecurity protocols, and incorporating NDA clauses with substantial disclosure penalties into agreements with developers and relevant parties.

Pros & cons. Registering as IP provides ownership recognition, protection against unauthorized use, and a time-limited "monopoly", enabling commercialization (through production, capital contribution, assignment, licensing, or as loan collateral) and investment attraction based on proven product competitiveness. However, it necessitates public disclosure (entering the public domain of technology), is subject to time and territorial restrictions, and incurs registration and maintenance costs.

Conversely, protecting know-how maintains the confidentiality of formulas and processes indefinitely and without geographical limits, and can be more cost-effective if long-term profits don't justify patent expenses or if the technology is difficult for competitors to reverse-engineer. Yet, it demands rigorous internal confidentiality measures, such as NDAs and vigilant monitoring of potential breaches or leaks, with no absolute safeguard against information leaks.

The "first-come-first-served" IP principle dictates that rights are usually granted to the one firstly filed for registration. Generally, a know-how owner cannot prevent others from using identical technical or commercial information if it was independently bona fide developed through their own R&D, provided there's no infringement of the know-how owner's rights. Defending know-how against patent infringement claims requires demonstrating that the patent was filed in violation of rights, such as through breach of contract or espionage.

Deciding whether to protect technologies or products as registrable IP or as know-how is a strategic decision for startups and investors alike, which must be determined considering the startup's capabilities, its products, the geographic scope of its market strategy, and the preferences of its investors.