DO the Math: Overspending + Failing to Realize Patents' Value = YOU Losing Money

DJ Healey article

Corporate Counsel
DJ Healey and Marc Stone
May 20, 2010

Companies often overspend on patent-related matters but frequently fail to realize the value of their patents. However, there are ways to spend less and make more from your patent assets.

Patents and applications must be viewed like other assets. You would not invest money in a new facility or project without a detailed business plan. Neither should you spend substantial money on anything to do with patents without the same kind of up-front, critical, cost-benefit analysis and careful planning you put into other investments.

An Asset-Based Approach

To get value from an asset you must first understand the asset. While a patent grants the owner exclusive rights to make, use or sell an invention, it does not give the patent owner the right to actually make, use or sell the invention.

Most patents are issued for very narrow incremental improvements over existing technology, and not for “ground breaking” technical leaps. Ownership of a patent on some features does not authorize the patentee to make a product without a license on other patented features in the product.

Some patents and applications are valuable in their own right, some for their future patent potential, some for specific product or feature coverage, and some only because they add an additional patent to the “thicket” of coverage in a portfolio.

Because most patents are narrow, generally, they are much more valuable as a collection or portfolio, than individually. There is potentially more value when they include applications that are still open to amendment, or new enough to have claims expanded in reissue.

Patents are often compared to real estate. They can have different value to different potential users.

A small downtown lot may have little value to a manufacturing company, but be very valuable to a retail outlet. Often multiple pieces of complementary property are more valuable than a single isolated lot. Timing is also important to maximize the return on any asset, like in a “hot” real estate market.

For example, a patent on a technology used to conserve memory in a video game might be extremely valuable when memory is expensive, but become irrelevant when the price of memory goes down or video game software becomes more efficient.

A patent that is not being exploited is like a piece of raw land — the owner is losing rent, sales revenue, or profits from the property if the owner is not doing something to leverage its value. An unenforced patent or a lapsed application is also like a real estate option that has been allowed to expire even though it may have value to someone who has a different use for the property.

Putting Your Patent Assets to Work

There are many uses for patents and patent applications in business, including:

• Deterring Competitors — A patent can deter competitors from implementing a product or service features using the protected invention. This can distinguish your product from competitors, enhancing the marketing or branding of your patented product even if the feature is very minor.
• Generating Revenue — Selling or licensing patents and related technology can generate revenue.
• Defensive Purposes — Your patents may deter your competitors from enforcing their patents against you for fear that you may respond by enforcing your patents against them.
• Build Value — Show potential investors, shareholders and partners the progress of your research and development, including milestones achieved. Patent applications and patents are assets a new company can create early in its life to build value.
• Increase Borrowing Potential — Patents and applications may be collateral that increase your borrowing ability.
• Protect Your Invention — Patents can be used to exclude others from using your invention or force them to pay for it if they do use it.

It’s Your Property: Use It or Lose It

As with a land option, unless the rights are exercised or sold in a timely manner, the patent has no value. If the patent rights granted have never been used, then the expense invested in the patent is lost. If a patent application is not timely filed, the rights it could have protected never exist. Even if a patent has little value to your company, it may be valuable to someone else.

Patent protection in key foreign markets is also important.

Countries with strong patent systems (Germany, the U.K., Italy, France, and Japan) can offer substantial immediate benefit. Patents in China, Brazil, and India may become increasingly valuable as their enforcement systems evolve over the up to 20-year life of a patent.

Foreign patent rights are often much cheaper to enforce because many foreign court systems do not permit for U.S. style “discovery,” nor do they permit for common law or equitable defenses to patent enforcement. Foreign patent systems also generally permit patent owners to obtain injunctions against infringers, while trial courts in the U.S. are limited in granting injunctions to those cases in which a non-monetary harm can be established by the patent owner (e.g., harm to a competitive business).

The International Trade Commission (ITC) is the only U.S. forum where injunctive-type relief is always available to exclude imports of infringing products for patentees who exploit their patents in the U.S. through a “domestic industry.”

Patent protection in Europe could become more valuable in the near term because EU countries have reached an agreement in principle to have a single patent enforcement system for EU countries. This would potentially eliminate the cost of separate national patents, and allow for one patent suit in one of the prospective “patent courts” to provide EU-wide enforcement. All EU countries already permit for pre-suit seizures by local customs of allegedly infringing goods, which is a powerful tool for patent enforcement.

Cut Costs, Produce More Revenue

If your business is not using all of your patent rights, you should consider selling or licensing any issued patents or additional applications that come from that original application, just as you would sell any other obsolete asset. Below is a list of ideas that can start a discussion. Even if you are using patents defensively, you can still unlock additional value from them, albeit that process is more complex.

Sometimes a company is not in a position to enforce a patent against others for business, financial or political reasons. For example, your company might be concerned about its own exposure to a counter-infringement lawsuit or other type of lawsuit against you in retaliation for trying to enforce your patent.

If so, another idea to explore is organizing a subsidiary or affiliate to own, jointly own, or be the exclusive licensee of the patent, which will then license or sub-license the rights to others. By putting the rights into another separate entity, you can insulate your existing, primary businesses from liabilities or obligations that may arise from the patent-related transactions of your separate affiliate.

However, since the affiliated entities will remain under your common control, you retain the ability to use the patents for deterrence against your primary business competitors. While a patentee cannot get an injunction based on harm to an affiliate, you can get a remedy similar to an injunction in the ITC or another country. Further, your new entity may be organized in a tax-advantaged jurisdiction or in a jurisdiction where new businesses qualify for government grants, tax abatements or subsidies.

Another idea is to donate the patents to an organization, such as a university, trade association, or standard-setting group, for the tax advantages your company can realize from the donation — as well as any goodwill or positive PR you can generate from supporting a worthy cause. If your company donates a patent for use in a standard, you become the technology leader for that standard.

Bottom line: use it or lose it.

Reprinted with permission from the May 20, 2010 edition of the Corporate Counsel© 2010 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited.

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