Breakthroughs & Abandonment: Patent Abandon Rate is a Reliable Measure of Speculative Portfolios
|Written by Mark Nowotarski
Markets, Patents & Alliances, LLLC
On Twitter: patentbuzz
Posted: September 27, 2010 @ 10:15 pm
Everyone thinks they have a great idea when they file a patent application. Some applications, however, are more speculative that others. We propose that the rate at which patent applications are abandoned is a reliable measure of just how speculative a given portfolio of applications is. We also propose that breakthrough inventions are more likely to be found in portfolios with high abandonment rates than in less speculative portfolios with lower abandonment rates. We support these propositions with data from PAIR.
The abandon rate of a portfolio of applications can be quantified by “abandons per office action”. Abandons per office action is the ratio of the total number of abandons to total number of office actions in a given portfolio. “Abandons” means failure of an applicant to respond to an office action in the statutory time period allowed for response. It also includes express abandonments made at the applicant’s own initiative. “Office actions” includes all correspondence from the patent office to the applicant that has a deadline for response. Office actions with response deadlines include restriction requirements, rejections of claims and notices of allowance.
The data on abandons and office actions for a given portfolio of applications can be found in the USPTO’s Patent Application Information Retrieval system (PAIR). Data for each individual application in a portfolio is retrieved by entering the application’s serial number or publication number. The status of an application (e.g. patented, abandoned, etc.) is found on the “Application Data” tab. A listing of the office actions is found on the “Transaction History” tab. The office actions can then be counted. Office actions for still pending applications and issued patents are counted since each of these office actions could have been an abandonment.
The average abandons per action for US utility patent applications is 0.1. This means that one application is abandoned for every 10 office actions in an average portfolio. We examined a random sample of 400 applications filed over the past ten years to measure this ratio. Abandons per action has remained fairly constant over this time period.
Abandons per action can be interpreted as a level of speculation in applications. Applications that have high abandon rates are highly speculative. Most of the inventions described in these applications ultimately have little value and the applications are abandoned quickly. If a portfolio of speculative applications as a whole, however, has value, then that value is concentrated in a few “breakthrough” applications. For some investors, this is a very desirable characteristic and they may wish to seek out portfolios with high abandon ratios.
Applications with low abandons per action cover inventions that are more incremental in nature. Their future value is more predictable and stable. As time goes on, fewer drop out. If the portfolio as a whole has value, then the value is more evenly distributed among the individual applications and there are fewer breakthroughs. An even distribution of value can be a very desirable characteristic for other investors who are looking for more stable “returns on innovation”. Investors of this sort may wish to seek out portfolios with low abandon ratios.
Figure 1 shows how average abandons per actions vary for different industries. Insurance & Finance and Molecular Biology applications are abandoned at a relatively high rate. These are very speculative areas where most inventions don’t pan out, but the ones that do can be extremely valuable. Pharmaceutical companies, for example, file thousands of applications on initially promising compounds and then rigorously weed those out to a remaining handful that cover compounds that become approved drugs. Each one of these remaining compounds can be a billion dollar invention, but it takes an initially large portfolio of very speculative compounds to capture them.
Insurance and finance inventions are also highly speculative. Most of these inventions fail, but some have gone on impact entire economies. Witness the dot com revolution of the 1990s which was largely driven by patented financial business method inventions such as eBay, Priceline, and Amazon.
Computer memory and electrical connector inventions have lower than average abandons per action. Inventions in these fields over the past decade have been fairly incremental. It’s been a while, for example, since anyone has invented anything in these fields as fundamental as the transistor or microprocessor.
The level of speculation in a given portfolio of patent applications is a strong function of who is filing them. Figure 2 compares the abandons per action for different entities in the field of business methods (class 705). Data for three major companies is shown along with that of a successful individual inventor and a large group of independent inventors collectively referred to as “no assignee”.
The major companies include a computer/software company, an office machines company and a financial services company. Each of these companies has filed hundreds of business method applications. The successful inventor has also filed several hundred applications over the past decade. His portfolio is currently valued somewhere in the nine figures. Companies spun off from this portfolio have gone on to significantly impact our economy.
“No assignee” accounts for 30% of the applications in business methods. The data bar is shown striped as opposed to solid to indicate that it is a collection of entities. We don’t know of any billion dollar inventions in this group (yet), but some of these applications have gone on to be enforceable patents with +$80 million litigation judgments assessed against infringers.
The computer/software, office machines and financial services companies present a spectrum of increasing conservatism as reflected in their increasingly lower abandons per action ratios. The computer/software company and office machines company each have formal programs for reviewing their pending applications and abandoning them when their value doesn’t prove out. This even occasionally includes abandoning an application after a notice of allowance. The Financial Services company, on the other hand, has an abandon rate that is so low that it suggests that no review at all is done of ongoing application value. Once the decision is made to file, it appears as if its outside counsel is authorized to prosecute to an allowance no matter how long it takes. Several of this company’s applications have had 10 or more rejections and still outside counsel continues to prosecute. Companies with abandon rates this low might do well to develop policies and procedures to thin out their applications and focus on the inventions that have proven significant value.
Abandons per action is a powerful metric for assessing the speculative nature of a given portfolio of patent applications. High ratios correspond to highly speculative ideas. Low ratios correspond to more conservative ideas. Investors looking to find breakthrough ideas, might do well to examine portfolios with high abandons per action. Investors looking for more stable returns on innovation might do well to examine portfolios with low abandons per action. Entities with exceptionally low abandon rates should perhaps develop policies and procedures to more realistically assess the ongoing value of their innovations and thin out those that don’t fulfill their initial promise so that they can focus on those that do.
About the Author
Mark Nowotarski is the President of Markets, Patents & Alliances L.L.C. and is a registered U.S. patent agent specializing in business method patents. He currently serves clients in the financial services, medical devices, consumer products and manufacturing industries.
Mark is also co-editor of the Insurance IP Bulletin. The Insurance IP Bulletin is dedicated to providing useful information to innovators in the insurance industry regarding the protection of their inventions with patents and ways to effectively promote their innovations.
Mark is a former Associate Director of R&D for Praxair. There he was responsible for the development and successful worldwide introduction of new products into the health care, electronics, and manufacturing industries. He was a leader in the reengineering of Praxair's patent system, and was responsible for technology planning for their home health care division.
Mark is an inventor on 17 US patents. He was appointed Corporate Research Fellow for the commercial impact of his inventions (+$300 million in sales).
Mark has a Master's degree in Mechanical Engineering from Stanford and a Bachelor's degree with honors in Aerospace, Mechanical Sciences and Engineering Physics from Princeton. His academic awards include the Sigma Xi award for most outstanding Mechanical Engineering research at Princeton and the Union Carbide Award for Academic Excellence and Leadership in Mechanical Engineering, also at Princeton.