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Risk Management 101

Risk Management 101


In a previous module we pointed out the number one reason for business and start up failure is inadequate capitalization.  However, that is certainly not the only risk you will face as an intellectual property holder. In fact, you could have access to significant funding, and still fall prey to any one of numerous other serious risks and threats.  Obtaining a meaningful patent, Doctrine of Equivalency violation, product warranty & liability and user safety concerns all represent potential fatal blows to your project, as well as losing everything you have invested, or more. Being aware of these risks and understanding how to manage them is mandatory for responsible project management and pursuit.


This category is specific to the risks associated with patenting, design and product based concerns. However, there are other risks identified and discussed in other course modules. Awareness of all the risks, understanding how to safely and successfully navigate through them is central to your success and survival & achieving and maintaining profitability. Exposure to any single risk could negate total preparation in every other risk category. Risk dynamics are both static and ever changing. The inventors path is one of proper and well planned sequence, but still sited in a three dimensional world.

Meaningful/Robust Patent

    The collective use of a patent is generally to provide protection of a company’s products and services, which may depend upon the claims of intellectual property.  An invention disclosed and described in the description of a patent may not be protectable if it is not included in the claims.  Therefore, unclaimed inventions and/or unclaimed features and/or benefits are considered to have been deliberately disclaimed and consequently dedicated to the public.  Thus, a patent applicant should specify in the claims all features and benefits of the invention, which are described in the description.  

    Claims should be as broad as possible, so as to cover as many relevant features of the invention as possible, including all relevant alternative variations.  The claims should not surpass the invention described in the description because the interpretation of the claims is the first step in determining whether the patent is invalid or infringed in most patent litigation.   One of the best ways to draft claims is to compose broad generic claims along with several specific claims to each preferred embodiment envisioned.

    The range of protection associated with a specific patent may be stretched beyond the verbatim wording of the claims under the doctrine of equivalents.  However, over the past decades extending well into the 2000’s, in the United States of America, the courts have increasingly become far less willing to allow patentees to obtain a scope of protection outside the literal scope of the claims expressed in the patent.  Therefore, for companies seeking robust patent protection, it is paramount to ensure that patents are conscripted in such a way that they will be robust – especially if they are confronted in court and/or if they are challenged in the market place and/or the court of public opinion.  It is incumbent that a business strategy must be kept in focus while crafting patent claims.

    Every passing year businesses dependent upon Intellectual Property come to realize more and more that in order to remain competitive there must be investment in R & D projects.  Whether R & D is conducted internally and/or with assistance of a third party, it is paramount to establish a technological edge so as to be able to produce ever better products with improved features which stay ahead of competitors. As a result, these companies make deliberate steps in an effort to ensure that appropriate inventions resulting from the investments of R & D are protected and leveraged.  One primary way of accomplishing this is by establishing over time a robust patent portfolio.  

    Building a robust patent portfolio is not a something ordered from eBay or even acquired because you instruct someone to provide it.  It requires, at the very least, first and foremost, a comprehensive understanding of the competitive environment, as well as a good understanding of the direction, course and trends in technical advancement in the industry as a whole.  Intellectual Property benchmarking of the activities of current key players in the same field or niche includes looking at future competitors in the same or a different industrial or business sector.

    Having a large number of patents in a technological niche does not necessarily mean that any of the patents are particularly robust, or even adequate.  They must be robust in relation to the business model and/or purpose of the business or industry.  It is worth noting that the value characteristics of a patent are dissimilar from the value of the original invention.  Therefore, the quality of an individual patent is directly related to the business to which it is intended to serve.  In more specific terms, the quality of a patent must be considered in terms of context of high quality drafting of a patent application.

    It is necessary for the description of the invention in a patent to be sufficient for a person skilled in that relevant field to practice or understand the invention solely by gaining an understanding of the description in the patent, without excessive experimentation.  It is very important that one or more claims in the patent application should be skillfully drafted so that the patent office allows the claims as drafted/submitted in the patent application. This is much easier said than done. It is nearly impossible for a beginner – and seldom achieved by experienced patent writing practitioners.  This goal is elusive and presents a daunting challenge.

    In order to achieve a robust patent, whoever is tasked with the responsibility of drafting a patent application, must do so with an adequate scope of the business focus for which the patent is meant to be used.  It is in the task of drafting patent claims that the real importance of drafting the claims can be fully appreciated – because the claims must be established with a clear focus on the exact business needs related to the patent.  The definitive purpose of business strategy is to ensure that a business makes appropriate profit to justify the risks being taken in making the investments of resources and time.

    In similar fashion, attention paid to the drafting of claims should serve and support the business strategy. A small number of well drafted patents may actually be useful by businesses to help them to make or safeguard their profits. There are numerous reasons as to why a patented invention, which is technically feasible, is not found to be commercially viable or profitable.  

    From the viewpoint of patent owners (who may or may not be named inventors on the patent), the claims are the very core of a patent. The description and disclosure portions of the patent are there to teach how to make and use the invention.  The claims portion of the patent delineates the latitude of legal protection.

    Most of the things taught, disclosed, and otherwise described in a patent may not actually be protected by the patent because only the intellectual property covered in the claims is protectable.  If the preparer of a patent has not appropriately drafted the claims, then any characteristics and/or fundamentals of the invention which are disclosed in the detailed description in the patent application, but are not included in the claims, effectively become a part of the prior art.  The timing of this transformation of information disclosed in the patent which is not claimed happens the patent application is published or when the patent is granted.  In other words, bluntly put, anyone would be permitted to use all that unprotected information contained in the patent – and do so without the patent owner’s permission.  In such events, the patent owner is virtually powerless to do anything about it.

    As a result, most patent representatives seek to draft the claims as broadly as possible covering all aspects of an invention as may be described in the detailed description, even including relevant equivalents and/or alternative versions.  However, competent patent examiners in a patent office will generally not allow broad claims to cover more than what the invention actually covers.  Examiners generally force a narrowing of the claims to reflect the actual invention as described in the detailed description.

    Patent claims are allowed to be broad or narrow in their latitude or extensiveness.  As a general rule, broad claims include fewer elements or restrictions than narrow claims do.  Broad claims are potentially very valuable because they can cover an expansive range of valuable products or conditions.  However, broad claims may be much more expensive and difficult to obtain and/or to enforce because by definition there may be a wide-ranging series of prior art that may be eligible for infringement scenarios.

    In contrast, narrow claims are generally very specific to one exacting element or product.  A narrow claim stipulates more details than a broader claim.  These kinds of patents are easier to obtain and enforce because there may be less prior art come to light capable of infringement scenarios.  If a patent claims the exact precise products and/or processes of a company, the patent may be less robust and therefore provide poor protection for the business because it may permit competitors to easily enter the companies’ market with insignificantly modified products and services.  It is better for the patents of a company to include a significantly large number of claims with a mix of broad and narrow claims – and thus have a more robust hedge of protection afforded by the intellectual property.

Doctrine of Equivalence

    The exclusive rights of a patent owner are founded upon the text of claims.  As such, the courts have refused to confine the infringement examination to the precise choice of words of claims.  Instead, the latitude of the protection may be extended beyond the literal wording of the claims under the doctrine of equivalents.

    The doctrine of equivalence is an accused infringement, which presents insubstantial differences from the claimed invention, which may be judged an equivalent and therefore an infringement.  The doctrine of equivalents arose to stop competitors who would introduce insignificant modifications into the claimed invention to avoid literal infringement. Therefore, virtually every patent infringement case potentially involves the doctrine of equivalents.

    The doctrine of equivalents is not applied to the invention as a whole, but rather to the individual elements recited in the claims.  This is done in an effort to determine whether flimsy, and/or minor differential differences exist between the claimed invention and accused intellectual property.  

    In recent years, some patent litigators seem to be taking advantage of the doctrine of equivalents as though the doctrine has taken on a life of its own.  Sharp increases on the number of cases are clogging the legal system, forcing settlements out of court, and draining profits from companies.  Small companies and individuals often have a difficult task at hand to fight legal cases based on infringement and/or the doctrine of equivalents due to the costs involved with litigation – regardless of which side of the case they are on.  As a result, it may be a frustrating reality that deep pockets tend to win the day.

    Nevertheless, well written and articulated claims of a robust patent make a hard target for infringement or the doctrine of equivalents to gain a valid claim against – therefore minimizing potential for litigation in the first place – and minimizing the cost of potential litigation.  Therefore, one of the best patent strategies might include spending extra effort and money up front on the patent and the claims in an effort to establish a robust portfolio of intellectual property.  

    Observation of litigation cost compared to initial patent preparation cost reveals a staggering difference.  Patent preparation and filing cost for a robust patent will cost in the range of a couple of tens of thousands of dollars to several tens of thousands of dollars for a US Utility Patent.  In contrast, litigation for infringement and/or doctrine of equivalents can easily cost millions of dollars.  The ratio is well over 50:1 which highlights and emphasizes the value of spending a little more on the patent on the front end.

Product Warranty

    We live in a world in which a product warranty and/or a service warranty are offered on almost everything.  We hear and see things like “money back guarantee” or “double your money back if not completely satisfied” or “if you are not happy with results then return the product with no questions asked for a full refund”.  These are just some common examples of warranty offers.

    A warranty is effectively a contractual promise from a seller to a buyer.  It is a supplementary or insurance provision to the sale of the product and/or service.  A warranty claim is an action for breach of contract may serious legal ramifications.  If someone breaches a warranty, the damage for which a seller is liable is the amount required to recompense the consumer for any losses incurred.

    As a company, it is a serious and potentially profit draining decision to offer a product warranty or not. On one hand, if you do offer a product warranty, you might be setting yourself up to be completely bankrupt with returned and spent product – for which you must refund payments.  The payment refunded were what was supposed to cover the manufacture, marketing, sale, and distribution of the product – and the profits left over from the revenue received.  Therefore if the product is used up and then returned for refund – the company will be left covering the expense of everything associated with the product, and not have any product left, and not have any profit either.  This is obviously a terrible scenario for a business – but yet a plausible scenario.

    On the other hand, if you do not offer a product warranty and your competitors do offer a warranty, and the product warranty is the primary difference between you and your competitor, then you once again may end up with a losing business strategy because of lack of sales.  Therefore, some usually a product warranty of some kind is usually a good business strategy.

    When considering whether or not to offer a warranty, it is appropriate to determine if your company or product has a poor image in the market place – if so, then a good warranty might provide customers with a higher level of confidence to buy the product.

    It may be appropriate to consider offering a certain level of warranty just to “keep with competitors” and/or because the market place has already determined that a warranty is a minimum expectation for the type of product you wish to market.

    If your product is a brand new first time brand in the market place, then a potential reason to consider offering a warranty with your product is to offset perceived consumer risk buying and/or trying a new unknown product.

    Offering a very specific and/or limited warranty for a product which might be easily used incorrectly and/or for a product which requires extensive maintenance, and/or for a product which has a time sensitive period of use, is a way to minimize and limit some of the potential liability in the event that the product fails to perform and/or function properly.

    If a product will be used in extreme climate and/or service conditions, then a specifically limited warranty might helpful to shield you from various potential warranty claims.

    Some warranty features are similar to a consumer product insurance agreement in that if something goes wrong, or if there is some kind of defect, or the product does not perform as advertised, then some kind of restitution is offered.  Usually most business would seek to offer “limited” warranty stating conditions of certain things covered while other things are specifically not covered.  It is common for a limited warranty to also include a time limit before the warranty offer expires.

    An “unlimited” is just that – not limitations on time frames, no limitations on reasons for return, no exceptions for anything – just bring the product back at any time and for any reason for full refund.  For obvious reasons this can be a profit draining event waiting to happen.  Great care and consideration should be given before offering this kind of warranty.

    Some warranty offers might be rather unlimited – but they require an original receipt or the original bar code on the original packaging.  Yet other warranty offerings require that you ship the entire product back in the original packaging with the original store receipt or the warranty is void.  These kinds of warranties look good up front but make a rather difficult series of check points for consumers to take advantage of because most consumers do not keep original store receipts -- much less original packaging.

    While some warranty offers are specifically structured so that it is seldom that consumers can take advantage of them, other warranty offers go to the extreme in the opposite direction by providing an “extended warranty” on top of someone else’s warranty.

    Warranty offers are not limited to products – services are also good candidates for appropriate warranty offers much in the same way warranties are offered for products.

    It should be obvious from the previous discussion that warranty offers can be a very complex and precisely worded document – therefore it may incumbent to seek the services of a professional skilled in the language and wording of warranty offers.

Product Liability

    In a brief summary of explanation, product liability is related to the laws and legal responsibility of a company who manufactures, sells, markets, and/or suppliers, retailer, and/or providers of a product or service to the public at large – any and all of whom may be held responsible for any injuries resulting from the use and/or exposure to the products.  One need not look very hard to find many legal advertisements seeking to represent potential clients who have been injured in the course of using one product or another.  It is common to hear of injury and liability claims being made in the medical field, pharmaceutical industry, automotive, and others.

    Often the awards for injury are so staggering and impossible to justify or reconcile, for most business, should they be faced with any part of such litigation and/or liability awards against them would be an instant bankruptcy and dissolution of the business.  Product liability laws are limited to the United States; they can have far reaching international scope and ramifications.  

    There are several major types of product liability, some of which are more applicable to certain kinds of products than others:

    • Marketing defects may result in liability because of a manufacturer’s failure to warn consumers of a defect which causes an injury – and it is found that the injury could have been prevented with proper warnings

    • Manufacturing defects may result in liability because of poor quality and/or inadequate workmanship – amplified if shown the manufacturer knew of the poor quality and did not follow through to prevent it from reaching consumers and/or did not rectify the manufacturing process to prevent the defects from occurring.

    • Design defects may result in liability because the product is inherently defective and/or dangerous to use in the normal course of application and function.

    In addition, liability may result if a manufacturer, distributor, or seller of a product breaches a warranty, particularly an expressed warranty or an implied warranty.  The language and “fine print” associated with products in an effort to minimize liability risk is sometimes absurd at the magnitude required for the fine print.  For example, some magazine advertisements for a drug might actually be only one page long – while the fine print and warnings are four to five pages long.  In a similar way, some advertisements on TV or radio might only be a few seconds long, and then there is a very fast talking truncated and virtually illegible portion of speech making all the of liability exclusion statements.

    Negligence is another version of liability claims for injury in which there is a duty owed to the consumer by the manufacturer which was breached.  In addition, the breach resulted in a consumer’s injury.  The injury to the consumer needs to be one in which they suffer actual quantifiable damages.  An often time, liability resulting from negligence involves the manufacturer violating laws or regulations of some kind, whether willingly or unwillingly.

    Another form of liability claims is referred to as strict liability.  This version of liability law does not focus on the manufacturer like negligence liability, but rather on the product itself.  In cases of strict liability, a manufacture, distributor, and/or seller of a product may be held liable for a defective product; even if there was no negligence found to have been involved with making the product.

    There are some statutory laws related to liability referred to as consumer protection; which many states have enacted.  Consumer protection statues include manufacturers being held liable for products which simply do not work and are otherwise unusable.  This scenario results in economic injury more than resulting in physical injury.  Consumer protection statutes invoke economic loss rules at time that strict liability is unavailable.

    It is generally understood that the more advance planning and effort expended toward product liability risk, the lower the potential product liability risk has a chance of being.  Emphasis during product design on ways to limit product liability would seem to be very important – and yet apparently not much time and/or effort is actually spent up front.  It is desirable to design a product with no practical alternative safer design option.  It is further desirable to design a product which can be manufactured without being subject or victim to poor manufacturing processes.  It is further desirable to include all appropriate warnings and user instructions so that consumer risks are effectively mitigated via an effective product design.

User Safety

    The safety of the consumers and users of your product should be a very high priority – even beyond your concerns for warranty and/or liability.  Unfortunately far too many products make their way into the market place and deliver unsafe user conditions and danger to consumers.  Beyond incidental injury, more serious dangers often lead to permanent disability or even death.  As a result, much more time and effort should be focused up front on how safe a product is – before it is introduced to the market place.  

    In response to a frequent lack of apparent pre-market efforts related to minimizing and/or assessing the safety concern arising from the use of a product, several federal and/or state regulations, statutes, and laws have been enacted in an effort to reduce the incidence of consumer safety incidents.

    ISO 10377:2013 is a relatively new standard titled: “Consumer Product Safety-Guidelines for Suppliers” providing guidelines for consumer product safety.  This standard provides suppliers, designers, retailers, and distributors with practical guidelines related to how to best to assess and manage the risk associated with the safe supply of consumer products.  

    Basically, ISO 10377 is aimed at relatively small - medium sized companies.  However, larger companies and/or larger firms still benefit from the risk assessment and management techniques for safer consumer products.   The ISO 10377 standard is divided into four main sections delineating (1) general principles, (2) safe design, (3) safe production and (4) retail safety.

    It is generally understood that products are safer when suppliers are directly involved in their development.  Direct involvement should include but not be limited to; the raw materials, components, sub-assembly preparation, design, manufacturing and distribution stage. Direct involvement should also include development of prototypes and proving that production readiness will promote reduction in the likelihood of defective products during a production run.  

    Hazard analysis is a tool which will have its best value and use before a product is introduced into the market place, so that changes can be made at their lowest potential cost – especially when compared to the cost of litigation, recalls, and liability claims.

    ISO 10377 properly administered will help ensure safer products prior to introduction to the market place.  Safer products translate into reduced liability.  Primarily, ISO 10377 focuses on product safety, and in so doing, it predictably also limits the supplier’s responsibility.  The upshot benefit is greater safety and reduced liability at the same time.  The bottom line: a product with less chance of harboring underlying defects that might inadvertently harm the user.


    Regardless of company structure and/or organization, ISO 10377 will affect all suppliers irrespective of their role in the supply chain and all types of products whatever the origin.  One primary feature of ISO 10377 relates to product traceability, mandating that products should be traceable and carry some kind of unique identifier which may include a label, tag, or some other suitable indicator, which is applied at the manufacturer.  The primary purpose of product traceability is for product recalls.  A recent breakdown of product recalls found that the main categories for recall could be reflected in the following percentages:

    • Toys = 31%
    • Motor Vehicles = 15%
    • Cosmetics = 6%
    • Lightening Equipment = 6%
    • Electrical Appliances = 12%
    • All Others = 30%

    With all the media attention focused upon recalls in the automotive sector of the economy, it may be surprising that automotive recalls represent a relatively small portion of the total recalls.  The significance of this statement is that chances are very good that the products most entrepreneurs introduce into the market place are likely in one of the categories with a frequent recall history.  If so, great care, focus, and effort should be applied to ensure that your product is differentiated from those with frequent recalls so that your product does not become another blip in the recall data.

    Depending upon which market sector your product will be introduced will determine if other very specific safety guidelines are required for compliance consideration.  For instance, if your product is a food product, there are many separate and supplemental regulations and statues to comply with which are unique to the food industry.  If your product is a child restraint device, or a toy, there are numerous regulations which must be considered.  This same pattern follows for many different product types which demand a proper search for regulatory statutes and other applicable laws applicable to your product.

    Bottom line for consumer safety is that proper effort should be provided and documented upfront during product development and prototyping.  Direct involvement in development and manufacture by the seller in combination with documented compliance efforts with statutes and regulations will not only help ensure consumer safety – but also help to reduce liability and warranty risks.

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