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Focus on the Value of Patents

John M. Fuscoe, Attorney, Wyrick Robbins Yates and Ponton LLP

One primary advantage of a patent is that it can provide the owner with a valuable competitive advantage. Many patents, however, are buried in file cabinets and never provide their owners with a return on the amount invested in the patents. Why does this happen and how can one avoid investing money in an asset that does not add value to a company? A preliminary cost-benefit analysis can help patent owners make better decisions.

One important point: a patent is a business asset and an expensive one at that. In addition, a U.S. patent provides patent protection only in the United States. International protection is available on a country by country basis and can dramatically increase the total cost of patent ownership. A patent only provides a benefit to the owner to the extent that it has value or can create value. To avoid overestimating the value of a patent, understand how a patent can create value and also the potential factors that might limit a patent’s value.

Four primary patent uses are described below along with the factors that affect their potential value.

Barrier to Entry

The most obvious use of a patent is to provide a barrier to entry to the applicable market. A patent provides the owner with the right to exclude others from, among other things, making, using, or selling the inventions claimed in the patent. Excluding others from a market, however, is not easy. To exclude others, potential infringers must be identified and notified that they are infringing a patent. This is typically done by an attorney and through cease and desist letters.

Notifying potential infringers can be difficult, time consuming, and expensive. For example, many companies are secretive about their processes. Thus, most often it is not possible to be 100 percent certain that a process patent is being infringed. Infringers may overlook any demands to stop alleged infringing because they know that it will cost a patent owner many thousands of dollars to initiate litigation and go through the discovery process.

Finally, if a market is lucrative, many competitors try to design around a patent. Established companies often have large R&D departments that are very good at creating products similar but not identical to patented products and yet offer almost the same benefits to the consumer. Why pay a license fee (see below) or stay out of the market altogether if it is possible to create a similar product that can compete without infringing a patent?

Licensing

Many patent owners believe if they build a better mousetrap, potential licensees will beat a path to their door to pay lucrative license fees. While this might happen, patent licenses (and sales) rarely occur without a lot of effort by the patent owner to identify and negotiate a deal with a licensee. Often an offer to license a patent is extended only if a potential licensee has no less expensive alternative. If the potential license fees are high and designing around the patent is not an option, a competitor might try to invalidate the patent by the use of prior art or some other means.

Also, most patent licenses pay royalties to the patent owner as a percentage of the revenue obtained by the licensee, to the extent that such revenue is attributable to the patent. So even if a license deal is negotiated, royalties will be paid only if a market exists for the patented product and will be paid only to the extent of the patent’s contribution to the revenue generated by the licensee’s product.

Cross-Licensing

For a relatively small number of patent owners, a patent is used in a defensive manner in the event of potential litigation. This occurs in mature industries where many patents exist, such as the semi-conductor industry. There are hundreds and perhaps thousands of patents that involve the manufacture, use, packaging, and sale of semi-conductors. A participant in this industry is likely to discover that it infringes on a competitor’s patent. If the participant has patents of its own, it might be able to avoid infringement litigation by negotiating a cross-license.

Raising Money

Many start-up companies obtain patents in the hope that potential investors will place a higher value on a company with a robust intellectual property portfolio. In certain situations, this may be true. For example, it is vital for most biotech companies to have intellectual property assets that provide a significant competitive advantage. In other industries, however, it is not uncommon for potential investors to place lesser value on patents, especially if the patents do not protect leading edge technology or the patent has been in existence for several years without being used to generate a revenue stream or as a barrier to competition.

In conclusion, it is always best to look before you leap. Many patents are valuable assets and more than justify the time and money spent in obtaining the patent. A careful and objective analysis of a potential patent’s value prior to filing a patent application will help avoid investing in a worthless asset.

At a minimum, your analysis should include the following steps:

  • Examine the competitive landscape. Understand your competitors and their ability to design around a patent or develop substitute products and services. Investigate licensing options.
  • Understand what potential revenue streams are available or not available in the event that a patent license transaction can be negotiated. If you are starting a company, talk to potential investors, and find out what value they place on patents.

Finally, if possible, identify other similarly situated companies, and determine whether they are willing to share their strategies and experiences in building or not building a patent portfolio. With some advance planning, you should be able to focus your time and money on patents that offer the greatest possible return.

© 2006 John Fuscoe. All rights reserved.

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