Patent Math: Making Sure Your Strategies Add Up

DJ Healey article

by DJ Healey and Marc Stone
China IP Magazine

Patents and applications must be viewed as assets.  You would not invest money in a new facility or project without a detailed business plan.

An asset-based approach

To get value from an asset you must first understand the asset. A patent is a grant by a government of exclusive rights to make, use or sell an invention. An invention is not necessarily a “ground-breaking” or “landmark” product or technical leap. Most patents are issued for very narrow incremental improvements over existing technology. On a stand-alone or individual basis, most patents are of limited value. In fact, some patents have been criticized as down right silly, such as U.S. patent 6,368,227 Method of Swinging on a Swing.

A patent does not give a patent’s owner the right to actually make, use or sell anything – including the invention. A patent owner’s invention might be an improvement on someone else’s prior invention. Ownership of a patent on some features does not authorize the patentee to make a product without a license on other patented features also in the product as made.

Some patents and applications are valuable in their own right, some for their potential for additional patents to issue in the future, some for specific product or feature coverage, and some only for the fact that 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. When building a group of patents to defend against some other company that might be looking for royalties from your company, remember that patents on improvements that you have made to another company’s original invention will bar even the original inventor from using the improvements without a contract or license from the owner of the patents on the improvements. In many ways, patents on improvements are as important as patents in the original device or software.

Patents are often compared to real estate or an option for real estate. As with real property, patents can have different value to different potential users. Owning the land needed to get to the road is sort of like having a patent on an improvement to the original device or software – it can become just as important for both parties to cooperate. 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 valuable when memory is expensive, but becomes irrelevant when the price of memory goes down or video game software becomes more efficient.

Regardless of scope or timing, a patent that is not being exploited is like a piece of raw land – the owner is losing rent, sales revenue, or profits from operations from the property, if the owner is not doing something to leverage its value. Another analogy is an unenforced patent or a lapsed application is like an option on real estate 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 event if the feature is very minor.
• Generating revenue: Selling or licensing patents and related technology can generate revenue. (And of course one way to get valuable patents is to buy them).
• Defensive purposes: Your patents may deter your competitors from enforcing their patents against you in feat that you may respond by seeking enforcement of 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. (In the U.S., some companies have secured large bank loans using only their patents as collateral).
• Protect your invention: Patents can be used to exclude others from using your invention or forcing them to pay for it. (This protects your inventions, your brand, an gives you negotiation leverage.)

It’s your property: use it or lose it

Patent prosection in key foreign markets is also important. Right now, countries with strong patent systems (Germany, U.K., Italy, France, and Japan) can offer substantial immediate benefit. However, since a patent typically lasts up to 20 years from the date of filing of the original application, patents in China, Brazil, and India may become increasingly valuable as their enforcement systems evolve over the life of a patent. Indeed, 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 as developed by the U.S. courts. Finally, foreign patent systems still generally permit all patent owners to obtain injunctions against infringers, while in the U.S. system, trial courts now are limited in granting injunctions to where a non-monetary harm can be established by the patent owner (e.g., harm to a competitive business). (The International Trade Commission, which is a federal agency, remains a forum in the U.S. where injunctive-type relief is available to exclude imports of infringing products for patent owners who exploit their patents in the U.S. through a “domestic industry,” but it is an expensive process).

Patent Prosecution in the 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. In additional, all EU countries already permit for pre-suit seizures by local customs of allegedly infringing goods, which is a powerful tool for patent enforcement.

For example, Samsung in the late 1980s and early 1900s purchased patents from U.S. companies to use in negotiations and lawsuits until it could build up its own group of patents. However, today, Germany is also a large distribution center for most products, and the Netherlands is the largest port of entry for goods into Europe. Purchasing U.S., German, or Netherlands patents is a good way to start to build a group of patents to use in self-defense: Many patent brokers will help you identify these patents. In addition, European patents are often less expensive than U.S. patents. Finally, if a U.S. patent is purchased that allows for additional claims to be sought, this adds value.

Cut costs, produce more revenue

Just as you might buy patents to build a group of patents, if you exit a business, or if your business is not using all of the rights of your patents, for any reason, 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.

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 relataliation 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 fro the patent-related transactions of your separate affiliate. However, since the affiliated entities will remain under your common control, you retain the ability still to use the patents for deterrence against the competitors of your primary business. While a patentee cannot get an injunction based on harm to an affiliate, you can get a remedy similar to an injunction in the International Trade Commission 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, which as a university, trade association, 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 can donate a patent to a standard-setting group for use in a standard, you become the technology leader for that standard.

Bottom line: use it or lose it.

Reprinted with permission of China IP Magazine