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Business Impact

What You Need to Know About Patents and Their Value

Amidst rapid technological change, patents have suddenly become the hot ticket in town.

The number of patents issued in the United States rose to 187,000 in 2003, up 22 percent from 1999. For inventors who grasped the system or who were fortunate, the rewards have been ample. Licensing fees from patented inventions now earn $150 billion globally each year, a figure that is expected to climb nearly 30 percent over the next several years.

At the same time, patent infringement litigation has been filling headlines daily. The number of patent infringement lawsuits filed annually in the United States. grew 64 percent in the period 1991-2000.

Moreover, during a 12-month period ending in September 2003, U.S. patent owners filed 2,788 patent infringement lawsuits, a 13 percent increase over the same period five years earlier and more than double the 1,178 patent suits filed in calendar year 1991.

But many inventors have not enforced their patents despite having legitimate claims of infringement. In some cases, they have been overwhelmed and intimidated by costs involved.

Much of the time, these disappointments could have been avoided if inventors had been armed with the knowledge and understanding of what patents are (and what they are not) and how to determine their value. Such knowledge can make the difference between success and failure for an aspiring inventor.

Possibly the biggest misconception concerns what a patent is and what rights it provides to its owner. Many think a patent gives the inventor the right to produce or market the patented invention. In fact, nothing can be further from the truth.
A Patent’s Value

By statute, a patent is the right to exclude others from making, using, selling, offering for sale, or importing the patented invention. In other words, a patent is an exclusionary right and affords no positive rights whatsoever. Basically, a patent is nothing but a license to sue for infringement.

A patent is a state-sanctioned monopoly that is limited in three ways. It is only in force for twenty years from the filing date, it is only valid in the country that granted it, and it is limited to what is specified in the patent’s claims.

Before applying for a patent, an inventor should ask questions regarding its potential value. Is it worth filing for a patent in the first place? Is it better to protect the technology by patenting it, or by keeping it as a trade secret? Should you continue to pay maintenance fees for a patent you are not using?

To answer any of these questions intelligently, you need to assess the value of the patent. The value of a patent should not be confused with the value of the patented product. The two are distinct and live separate lives.

In other words, a product without a patent has value; so does a patent without a product.

Coca-Cola, for example, is a product without a patent. The formula for Coke is protected by trade secret laws alone, and it is one of the most valuable trade secrets in the world. Another example is Bayer Aspirin. It was once protected by a patent, which since has long expired. The product lives on, however, without the patent protection it once had.

An example of a patent without a product – a so-called “paper” patent – is a patent on an intermittent windshield wiper. The inventor, Dr. Kearns, never sold the product himself. However, he got $10.2 million from Ford, after suing the automaker, and successfully enforced his patent against most other car manufacturers.

A more recent example is a patent on “Java” technology which became Kodak’s as a result of a merger. Kodak, which had never commercialized the technology, recently accepted a $92 million settlement of its infringement lawsuit against Sun Microsystems.

The value of a patent is the difference between the value of the product with a patent and without it.

If the patent is licensed, then its value is the net present value of future royalties received from licensing, plus incremental profits earned from the market monopoly secured by the patent.

Of course, if the patent is not enforced, it is not worth very much at all.

How to Use a Patent

A patent can be used in two principal ways. If you are making or selling a patented product, the primary use of the patent is to protect market share by keeping competitors at bay. If you are a researcher, your only hope to generate any revenues may be by licensing the patent.

There are two types of licenses: a carrot license and a stick license. The carrot license is a voluntary license wherein the prospective licensee, often a manufacturer or marketer, is not using the patented technology and is under no compulsion to license the patent from you.

Patents protecting cutting-edge technologies developed in academia usually lend themselves to carrot licensing. Stick licensing occurs when the prospective licensee is already producing and marketing your invention, thereby committing patent infringement.

The motto of stick licensing is “License my patent or else…” (Read: I will see you in court!). Most infringers will make the cynical, but not unfounded, calculation that they will probably not be sued – usually they are right, as most patent owners fail to enforce their patents. Thus, stick licensing will work only if the threat of litigation is credible.

No threat appears to exist in the case of carrot licensing. Or does it?

Let’s say you present your newest invention to a prospective licensee and convince them of the overwhelming advantages of your technology. What stops the other party from thanking you for educating them on the merits of your invention and then going ahead and marketing it without a license from you?

A confidentiality agreement, which most manufacturers refuse to sign in the first place, even if executed, will hardly stop a company from using your technology. That’s because the confidentiality agreement cannot protect publicly available information.

A patent is a public document, in which the invention is fully disclosed, enabling anybody with adequate manufacturing and marketing capabilities to produce and distribute it. The only thing that stops a prospective licensee from taking advantage of your invention is the threat of a patent infringement lawsuit.

Thus, every carrot license is actually a stick license in disguise. Although such words as infringement or litigation are never mentioned in carrot license negotiations, they are in the back of everyone’s mind. And, once again, unless the unspoken threat of potential future litigation is credible, why would anybody take a license?

You can count on the prospective licensee to ask their patent attorneys how easy it would be to circumvent or “design around” your patent. Only a well-written patent coupled with the ability and the resolve to enforce it may compel a prospective licensee to consider licensing it.
Deciding How to Enforce Your Patent

Every inventor filing a patent application needs to pause and ask a question: Do we have the wherewithal to enforce the patent if it is infringed?

Many organizations, particularly academic and research institutions, are litigation-averse. This, obviously, undermines the value of their patent portfolios. If the message gets around that a particular organization is reluctant to enforce its patents, why would anybody license that organization’s patents when the patented invention could be infringed without serious threat of legal consequence?

However, it is not enough to have a proper attitude toward patent enforcement. This attitude needs to be backed up by a healthy bank account. With the median cost of patent infringement litigation in the U.S. exceeding $2 million, patent litigation is the sport of the rich. Unless you are employed by a well-financed organization that stands ready to bankroll the litigation, you may not be in a position to carry out your threat – whether explicit or implied.

Fortunately for small companies and individual inventors, there are alternative methods of financing patent infringement litigation. One is to find a law firm that will represent you on a contingency basis.

This means that instead of billing you by the hour, the law firm will get a share in the monetary recovery, which may be an award of damages to the winner of a suit or licensing fees negotiated in a settlement. A typical contingency fee may be between one third and one half of the recovery.

Most law firms will not, however, pay out of pocket expenses for you. These are the responsibility of the patent owner and may amount to hundreds of thousands of dollars. Most intellectual property law firms are reluctant to carry out patent litigation on a contingency basis, let alone when the client cannot even pay their own expenses.

Yet another route is working with a patent enforcement organization. Such an organization, which is typically not a law firm, will do an initial due diligence, prepare the case before hiring patent litigation counsel, and will finance and manage the enforcement – including legal fees and disbursements. An enforcement firm will also do all licensing work.

Although such organizations tend to be slightly more expensive than most law firms, generally sharing the recovery with the inventor 50/50, they will, unlike the law firms, pay all out-of-pocket expenses in addition to the attorneys’ fees.

Enforcement is what gives a patent its value. In order to enforce a patent, you need to have the resolve and a lot of money to exercise your right, or partner with an outside patent enforcement organizations or a contingency law firm, to implement effective strategies to protect your rights against infringers.  Then, just maybe, you can make millions from your patent.

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