by Joseph Crowley
Coke or Pepsi? D.C. or Marvel? It’s safe to say you probably prefer one of each category or dislike both options. But why? After all, Coke and Pepsi are both Colas. D.C. and Marvel both make comic books. The answer is obvious. You prefer Coke or Pepsi because of the flavor recipe and pick D.C. or Marvel because of the specific characters and stories.
In the Cola example, each company’s recipe is not public information. In the comic book example, each company holds intellectual property rights over its characters and settings. These companies’ business models necessitate the protection of their intellectual property from use by other companies. This business model is the norm in most industries. If you create or invent something, you should copyright, patent, or trademark it to control the sales of that product. But what if your company ignored this standard? What if your company deliberately avoided intellectual property rights by putting the recipe on the internet for everyone to see?
In the 2010s, a technology manufacturer headquartered in Loveland, Colorado, tested this idea. Aleph Objects produced a 3D printer line called the “Lulzbot.” What made this product interesting was the “open ethos” behind its production. Not only was the product developed using open-source technology – technology produced and published without securing intellectual property rights – but the device itself was “open.” The recipe of the hardware components used to build the physical printer was available online through Aleph’s website. The software used by the printer was fully open-source as well. Nothing in the device’s makeup was proprietary. Individuals were free to build their own Lulzbot without paying the company anything.
Can this business model be effective? If the company doesn’t protect its product from being replicated by other manufacturers, can it still make a profit? Let’s explore the pros and cons of this model.
Pros
Cheaper Startup Expenses
If you’re starting a company to sell a product you designed/invented, any decent lawyer will encourage you to get a patent on your design. You produced something unique, making it competitive in the marketplace. However, the expenses necessary to secure a patent can be intimidating for a company that is just starting out. Costs vary depending on the industry, but securing a patent will likely cost a business thousands of dollars. This price tag includes fees assessed by the USPTO and expenses on patent attorneys. You may spend even more money if your first application gets rejected and you need to try again. If you choose not to patent your product, you obviously save this money.
Harness Customers to Improve the Product
Employing an open model can reduce research and development expenses. If you produce open-source software and hardware, your customer base can contribute to the development of your company. As customers tweak the product with minor improvements and revisions, you can implement these changes in your production model. Under this scheme, you aren’t solely dependent on your R&D engineers (which, as a startup, may just be yourself) for good ideas. A limitless team of people can make suggestions, all for free.
No Need to Defend Your Intellectual Property
Even if you secure intellectual property rights to your product, you still need to defend these rights from would-be duplicators. Failing to do so will hurt your business, causing your market share to decrease and possibly losing your patent altogether. If you never secured the patent in the first place, this problem doesn’t exist. You don’t need to spend money on lawyers to protect your intellectual property.
Cons
Idea Theft
If you are not securing intellectual property rights over your product, your competitors can replicate it. If you place your cards on the table, your opponents will know what they’re up against. They can take advantage of your good ideas, but you will not see any improvements they make. It’s easy to see how your business can fall behind the competition in this situation.
Industry Dependent
Let’s face it, in most industries, this model can’t work. You won’t beat Coke by making your own Cola and publishing the recipe online. If you’re trying to beat D.C. and Marvel, letting them use your characters in their stories will not help. This business model may be effective in the technology industry, but perhaps nowhere else. Open-source software is already an industry standard, and open hardware has been done before, as seen with the Aleph Objects example.
Making Money
If you publish the schematics for your product online, how can you expect to sell any units? Why would consumers buy from your company when they can make your product themselves? For this business model to be successful, you must take advantage of economies of scale. Your production costs must be low so you can still price-compete with individuals who would buy the parts and build your product themselves. These margins are going to be tight. You can’t markup your product’s price when building one is easy and cheap. This model may require higher startup costs to make production efficient enough for prices to stay low.
The Takeaway
It is impossible to recommend an “open ethos” model to all business owners. The model is too industry and circumstance specific. Lawyers usually recommend that business owners secure intellectual property for a reason. However, for some entrepreneurs (particularly those with very progressive views regarding the philosophy of ownership), the “open ethos” model may work. Playing while showing your hand is a bold strategy in any card game, but you can still win if your cards are good enough.
This post has been reproduced and updated with the author’s permission. It was originally authored on January 31, 2023 and can be found here.
Joe Crowley, at the time of this post, is a third-year law student at Penn State Dickinson Law. He is originally from Fort Collins, Colorado. He received his undergraduate degree from Colorado State University. He is interested in all aspects of business and tax law. In his free time, he likes to watch movies, read, and play chess.
Sources:
https://opensource.com/business/15/11/open-ethos-powers-lulzbots-success
https://www.uspto.gov/trademarks/basics/trademark-patent-copyright
The rate of Americans with multiple jobs has risen since 2010. Today, 16 million Americans – around 10% of the U.S. workforce – work more than one job. Many healthcare, food service, retail, and administrative employees work more than one job and still make less than $20,000. Inflation, weak wages, and lack of pay transparency all contribute to the need for people to work multiple jobs. Many people in the U.S. workforce do not have the luxury to “shop around” for a better-paying position because the hiring process puts a financial strain on their already dwindling savings. However, lack of pay transparency means that even those who can research new positions can be caught off guard when their new pay range finally gets disclosed.
State or local pay transparency laws are currently in effect in ten states: California, Connecticut, Maryland, Nevada, New Jersey, New York, Ohio, Pennsylvania, Rhode Island, and Washington. Pay range disclosure requirements vary, but each law prohibits complete pay secrecy.
Pay transparency does not (and should not) end after the hiring process. Regardless of whether or not an employee is aware of their pay range before joining the company, Section 7 of the National Labor Relations Act gives employees the right to communicate with their fellow employees about their wages. The National Labor Relations Board recently confirmed that an agreement between an employer and an employee “is unlawful if its terms have a reasonable tendency to interfere with, restrain, or coerce employees in the exercise of their Section 7 rights.” Section 7 rights are important because employees can discover inequities and pay gaps by communicating with each other about their wages. Companies can avoid employee dissatisfaction and resentment by consistently providing pay transparency throughout both hiring and employment.
Most start-up pharmaceutical, biotechnology, and medical device companies are formed with the intent to eventually be bought out by larger, well-established companies such as Abbott, Sigma Aldrich, or Bayer. However, the option of being bought out only comes to fruition once a start-up has established scientific proof that leads to medical or pharmaceutical advancement. In the course of novel scientific innovation, start-ups and inventors are often quick to get a patent. But, when being bought out, one might find themselves confused about the status of their application or the ownership of the patent. This blog post aims to explain (1) the ownership and assignment of a patent when it is first filed, and (2) how assignment rights can be transferred when a company is bought out.
Utility applications and patents are the most common type of filings and are what people often think of when hearing “patent.” Scientific developments will always be utility applications that end in utility patents. However, these filings come in many types including provisional, nonprovisional, divisional, substitute, continuation, and continuation-in-part applications. While the precise differences between these applications and their functions are irrelevant to this post, it is important to note that a nonprovisional application is always a parent application. The remaining types of applications, except provisional applications, stem from the originally filed parent application and are therefore known as child applications. Provisional applications themselves are not a type of application that leads to a patent, but rather, they act to “hold your place in line” at the United States Patent and Trademark Office (“USPTO”).
While not required, it is always best to record an assignment at the USPTO. Recording the assignment provides public notice of the assignment and prevents your company from losing rights if a later transfer occurs to a third party as they will be aware of the original assignment. While that may sound complicated, it simply means that recording the assignment prevents any later transfers to a third party because the first party to record and publicly claim ownership in good faith is given priority in ownership.
If the start-up only holds partial ownership in an application or patent, the transfer does not provide the assignee with complete ownership but is rather defined as an “assignment of patent rights.” In other words, you can only assign the percentage of rights held by your start-up. This situation is often seen in joint ventures between two companies or where multiple inventors exist and fail to unanimously agree to assign the application or patent. To illustrate this, if four inventors each own a 25% interest in the application or patent, with two refusing to assign to the start-up, the start-up can only obtain 50% ownership, and may only further assign that 50% right to another. The main issue in this scenario is that all owners must act together if the application undergoes prosecution before the USPTO. This can create difficult scenarios where application owners have differing opinions on how to proceed with prosecution, thus slowing down the entire process and ultimately leading to more issues.
Although solar energy has recently become one of the cheapest forms of generating electricity, the upfront capital cost of solar installation remains high. Large companies like Google, Walmart, Apple, and Amazon have made major investments in solar energy, reaping the benefits of reducing energy costs, promoting a cleaner environment, and taking advantage of climate-friendly policies. Meanwhile, start-up companies and small businesses have shied away from solar installations, causing them to lose out on these benefits. Despite the decreasing prices of solar technology, commercial solar installation costs remain high for small and mid-sized businesses, ranging from $43,000 for a 25-kilowatt (kW) system up to $175,000 for a 100-kW system. However, financing options like Solar Power Purchase Agreements (PPA) provide a vehicle for businesses that lack the capital to invest in solar energy.
While utilizing solar energy is the right move from an environmental and socioeconomic perspective, the upfront costs of investing in solar technology remain costly and the savings may not be recouped until four years after installation. Before entering a solar PPA, small business owners and start-up companies should consider many factors. One factor to consider is the price of electricity specified in the terms of the contract. Although solar PPAs provide predictable rates of electricity pricing, many solar PPAs contain a fixed escalator clause, typically raising the price the customer pays between 2-5% annually. While this rate is often lower than the projected utility price increases, customers risk overpaying for solar energy as retail electricity prices may decline or increase more slowly than the escalator plan. Further, negotiating favorable solar PPAs may be complex and potentially have a higher transaction cost than buying the solar system outright. Nevertheless, solar PPAs provide predictable, predetermined rates allowing businesses to budget accurately.