The Legal Side of Open Innovation

There is one area in which open innovation differs significantly from in-house innovation: the legal element. The consequences of ignoring the legal side of open innovation can be catastrophically expensive, warns Jeffrey Baumgartner.

I have a confession to make: I do not entirely get “open innovation.” On one hand, it has been going on for ages. Corporate research scientists I know tell me they have long worked with outside companies, experts and universities in order to develop projects. Indeed, probably the main reason scientists attend international conferences is not to listen to lectures about topics they can read in journals anyway. Rather, it is to network, find out what others are doing and develop new ideas on how to solve problems.

On the other hand, many of the new so called open innovation experts seem not to have looked at the wealth of research and experience gained in corporate innovation initiatives focused more on closed – or what I like to call “in-house” innovation. That is, innovation which is performed by employees of the company.

Moreover, a popular open innovation process known as crowdsourcing is often managed by software that uses outdated suggestion scheme methodology and lacks a structured back-end that would streamline and manage the evaluation of submitted ideas. Reward schemes, motivation and other issues which I – or any of my more competent competitors – could describe in detail are also missing from most these software solutions and the initiatives for which they are used.

Yet, there is one area in which open innovation differs significantly from in-house innovation: the legal element. Surprisingly, this is a subject seldom discussed among open innovation experts. That’s not good. The consequences of ignoring the legal side of open innovation can be catastrophically expensive. Let’s look at an example.

Whose intellectual property?

Let’s imagine a scenario in which Melissa submits to Acme Ice Cream’s customer suggestion web site with an idea about how to make an ice cream wrapper that will keep individual ice cream snacks (such as ice cream cones, ice lollies, etc) cold for days, even outside the freezer. Clearly her idea would have all kinds of terrific applications.

Melissa gets a form-letter e-mail from Acme thanking her for her suggestion, but hears nothing more. Then, six months later, she is stunned to read that Acme is launching a new range of ice cream snacks in their patented “Keep-Kool” wrappers which seem remarkably similar to Melissa’s idea.

The new Keep-Kool product range is a hit and Acme earns gazillions of dollars and its stock prices soar. Melissa, meanwhile, is steaming. She has earned nothing. Not even a thank you. Finally she decides to sue Acme for her share of those gazillions of dollars.

It seems like Acme has taken advantage of Melissa in the heartless way evil corporations seem so often to do, doesn’t it?

But in fact, Melissa made serious mistakes and no legal expert would be likely to take on her case.

Look at it from the corporation’s perspective

Melissa had to have been inspired somewhere for her idea. Let’s assume it was an article in a news magazine citing a recent paper in a scientific journal describing a new material with near perfect insulation capabilities. Being an ice-cream lover,Melissa was inspired by this article and so came up with her idea. Fortunately, she studied chemistry in University and was able to draw up some viable specifications for her idea, including some sketches. She submitted all of this to Acme.

Meanwhile, back at Acme Ice Cream, you can be sure that at least one of their food scientists read the original paper in the scientific journal, saw the opportunity and began work on a similar idea to Melissa’s. Moreover, Melissa was probably not the only member of the public who had a similar idea about using this material as an ice cream wrapper.

Indeed, the case of numerous people having nearly identical ideas at the same time is far more commonplace than most of us realise. Ask anyone who has ever managed an open suggestion scheme (that is one in which any idea can be submitted) and they will confirm that one of the biggest problems they have is duplicate ideas.

That’s not surprising. Ideas are inspired by what we read, watch, look at and hear. An item on a television news programme watched by millions of people is likely to inspire many of those people in a similar way. As a result, thousands of viewers have a similar idea which each believes to be very creative and original.

Thus, from Acme’s perspective, Melissa was just one of dozens of people who suggested the same thing. Moreover, all of these suggestions were submitted long after Acme’s research department had started developing Keep-Kool wrappers. Moreover, Acme, with a team of highly paid legal experts on their payroll, promptly applied for patents on Keep-Kool  wrappers, thus protecting their intellectual property.

Lastly, there is the fine print Melissa did not read. We will get to that in a moment.

Contract law

Of course the employees within Acme will not dispute the ownership of the idea or the Gazillions of dollars in earnings. This is because every employee of Acme and every contractor hired by the firm will have signed with the company a legally binding contract stipulating ownership of all intellectual property (IP) they develop while employed or contracted by Acme. And this contract will almost certainly stipulate very clearly that the ownership of all patents, trademarks and copyright and other IP belongs to Acme.

So, if Melissa had protected her idea, for instance through a provisional patent in the USA or an i-Depot envelop in Benelux or a similar process in her legal jurisdiction (usually country when it comes to IP law), she might have a case against Acme. Particularly if it could be demonstrated that she applied for protection before Acme did.

On the other hand, if Melissa had submitted her idea in one of the open suggestion schemes that several companies are using, she will almost certainly have signed away ALL intellectual property associated with her idea together with the text describing the idea and any illustrations she might have uploaded. She will have signed away her rights when she registered to use the suggestion site and agreed to the terms and conditions.  Like most people, she probably just clicked the box stating she agreed to the terms and conditions, without actually reading them.

Be careful with your most potentially innovative ideas

In fact, if you have an idea which is a potential breakthrough innovation for a company, I would suggest that you do not even think about submitting it in an open suggestion scheme. By so doing, you will sign away all of your rights to the idea, royalties and recognition associated with the idea. Moreover, most public open suggestion schemes are so over run with trivial incremental suggestions that people managing them do not even look at all of the ideas! They know that the breakthrough ideas will not be submitted there.

Let us assume that Melissa and Acme are in the USA. Melissa’s best course of action would be to check for relevant existing patents and applications – she can get started with Google’s nifty patent search tool. If none exist she can apply for a provisional patent that will give her protection for one year, after which time she will need to apply for a full patent. A provisional patent will cost just US$100.

With this protection, she can propose her idea to Acme safe in the knowledge that if Acme does exploit the idea she should benefit financially. And if Acme does not give her royalties, she will have a much sounder legal case against the company. And, assuming Acme does exploit the idea, their lawyers can take care of the costly and time consuming process of applying for a full patent AFTER a contract has been signed with Melissa guaranteeing her royalties and/or other benefits.

Lesser known idea submission sites

While crowd-sourcing open innovation initiatives are attracting all the press, in spite of their lack of any demonstrable value beyond capturing incremental improvements in an inefficient manner, many large companies also have forms on their web sites for submitting real innovative ideas. These forms will explicitly ask the idea submitter for details on the IP protection the idea. Often these forms will not even allow submission if no patent or other IP protection information has been entered on the form. This is to protect the firm against IP based law suits.

If the firm does not have such a form, Melissa can contact the company directly with her idea. Because it has been protected, not only can she feel safe discussing it openly with people in Acme, but Acme will take her much more seriously as well.

Danger to small companies

Medium and large companies have legal staff or legal experts on retainer or both. They know they have to be careful with IP and so ensure that public suggestion schemes include terms and conditions which assign all IP to the firm. They also know to ignore unsolicited ideas, without IP protection, submitted through other channels. This further protects them from accusations of idea theft.

Smaller companies run by enthusiastic entrepreneurs, on the other hand, are less likely to be aware of the issues of IP and as a result are in danger of running into potential IP disputes when they run open innovation initiatives. And if they hire an open innovation consultant or service provider who is equally unaware of the legal side of IP, they are putting their entire firms at risk!

If you are planning an open innovation initiative of any kind, be sure you or the person managing it is aware of the legal ramifications of what you are doing. And,if in any doubt, contact a legal expert.

By Jeffrey Baumgartner

About the author

Jeffrey Baumgartner is the author of the book, The Way of the Innovation Master; the author/editor of Report 103, a popular newsletter on creativity and innovation in business. He is currently developing and running workshops around the world on Anticonventional Thinking, a new approach to achieving goals through creativity.

Main image: Ideas pen nib from