An individual or small corporation makes an innovative product or process for the first time. In a blind moment of exuberance, the inventor rushes to the nearest patent lawyer and announces, “We want to get a patent on our discovery.” A large segment of the nearly 45,000 registered patent lawyers and agents would gladly accommodate this request. But before one invests the fees and expenses of seeking patent protection, one should carefully consider developing a comprehensive and strategic intellectual property plan to ensure any money is well spent, including an evaluation of alternative forms of intellectual property protection. This is particularly true of startups or other new venture where the entity needs working capital for its very survival.
Patents can confer a significant competitive advantage, and some companies invest millions in building a patent portfolio. Apple, Google, Microsoft, IBM and Texas Instruments are all well-known companies who see their patent portfolios as the means to distinguish and protect their product lines from competitors, and who are readily willing to enforce their rights against encroachers. Anecdotally, IBM received 8088 US utility patent grants last year–a record for any company in any year. The big players use the patent armada as a significant source of licensing revenue. For example, IBM and Texas Instruments were among the first to break $1B in annual patent royalty revenues, while Microsoft and Ericsson have reported licensing revenue of more than $2B per year. Most individuals and smaller corporations cannot afford the expense to create the virtual armada of patent weaponry procured by these organizations.
Patent procurement costs can range from $4K to $10K just to have a patent lawyer draft an average size, minimally complex case and file the original application with the United States Patent and Trademark Office.[i] Adding complexity or seeking to protect the invention abroad can rapidly increase out-of-pocket expenses in procuring protection in the first instance. Despite recent efforts to reduce filing costs and maintenance fees for small entities and sole inventors (“micro-entities”) patent procurement costs for a moderately complex patent may well range from $10K to $30K when attorneys’ time, and draftsman’s’ fees are included. Before one invests these types of funds, one should carefully consider the benefits of patent protection as well as alternatives as it relates to an organization’s long term planning and goals.
It is well recognized that a patent may distinguish your business from your competition and provides the ability to block your competition from using your invention. But is that really true? The US patent may be used to challenge someone else’s efforts to make, use, sell or import the subject matter covered by the claims of the patent. A patent is a limited property right the government gives an inventor in exchange for an agreement to share details of the invention with the public. But the subject matter of the patent may be “used” in many other ways that are not preventable. For example, a competitor may use the patented subject matter for experimental purposes—seeking to develop their own advances—one of the Jeffersonian fundamentals underlying the US patent system. And since a US patent has no extraterritorial reach, a competitor is free to make use and sell an otherwise infringing product or method in entirely foreign markets. Finally, patents have a limited lifetime (twenty years from the date of filing), and anyone may copy the subject covered in an expired US patent with impunity.
Most important, a US patent has limited value if the owner has no intention of enforcing it. While patents have a limited lifetime, and many believe patents become more valuable as they approach the end of their life, the patent’s value as a competitive tool only exists in its enforcement. Enforcement costs of a US patent in Federal District Court through trial in the Midwest region start in the mid-six figure range according to the AIPLA survey noted above. Actual costs are highly dependent on the amount in controversy and on area of the nation the litigation is brought.
Even when a patent case is meritorious, the resultant litigation victories may seem somewhat Pyrrhic. In 1956 Devex Corporation sued GM and other manufacturers of US autos that employed a special process for making stamped metal parts, particularly the large bumpers and shapes of the mid-1950’s automobiles, which involved pretreating and coating the metal parts with soap and borax. Many of the US manufacturers, like Ford settled their dispute with Devex, took a license early in the dispute process and paid a royalty. GM was a holdout and fought the patentee for years on issues such as patent validity and the proper methods to calculate damages. At the end of the day, the parties invested more than 30 years in the Federal Courts with General Motors ultimately being held liable for damages, pre- and post- judgment interest totaling more than $26 million. By the time the Supreme Court resolved the post judgment interest issues in the case, Mr. Henricks the inventor of the patented process tendered 95% of the patent rights to lawyers handling the case.
There are, however, situations where patent protection may make sense, even for a small or medium-sized entity. Obtaining patent protection for a truly innovative product or process confers the right of exclusivity for the life of the patent. If the patented subject matter is commercialized effectively, the company ends up with a strong market position and the potential to recoup the costs of development and marketing. Having patent protection or having a product that is “patent pending” may also be a useful tool in negotiations with potential investors and licensees. To those groups, the exclusivity that accompanies patent protection is an advantageous signal of market strength. Furthermore, depending on the deal negotiated with licensees, it may be possible to have the licensee cover the costs of procuring patent protection.
A design patent may be a less expensive alternative to a utility patent but is limited to non-functional aspects and features of a product. Manufacturers of iconic products should seriously consider design patents as a simple expedient to extent their brand awareness. Design patents protect against infringing designs—designs that are substantially the same when viewed through the eyes of the ordinary observer. Design patents protect the entire product design covered by the patent, regardless of whether the claimed design functions as a source identifier. They offer a different scope of protection than trademarks, which prevent others from copying the source-identifying feature of the product. Design patents may be an effective tool in combatting knock-off and counterfeit products during the 15-year life of the design patent.
Assuming the inventor can cover the costs of procurement and enforcement, the inventor is in a position to use the patent as a competitive tool through enforcement and may utilize the patent as a source of revenue through licensing. As an alternative, an individual inventor should also seriously consider the merits of a defensive publication or the value of maintaining an invention as a trade secret. A defensive publication is the act of publishing a detailed description of a new invention without patenting it, thereby preventing others from later being able to patent the invention. A trade secret is virtually any information that has a value in that it provides a competitive advantage, and is intentionally kept confidential. Trade secrets are protected by nondisclosure agreements and employment law, each of which is designed to secure the information from disclosure. The value of a trade secret continues until it is made public or becomes publicly known, while a patent may only be enforced during its lifetime.
Before chasing patents in the blind exuberance of a new discovery, one should consult with an intellectual property attorney to evaluate all the options and develop a comprehensive strategic plan, to minimize overall costs and maximize the potential return that intellectual property affords.
[i] According to the bi-annual survey for the AIPLA for patent cases of minimal complexity (10 pages of specification and 10 claims) filed using a Midwest law firm.