In Defense of Patents: Retaining value and relevance of patents in periods of rapid innovation

By Kevin McLintock
September 7, 2016

Patent definitionInnovation, whether in the technical or biological fields, occurs at a pace today that likely exceeds any period in history. This is due in part to the modern tools available that promote innovation. Equipment that was once available only to universities or billion dollar corporations, now sits on the desks of small startup companies and hobbyists. Consider: only a few years ago it cost tens of thousands of dollars and took months of work to produce a medical prosthetic limb. Today, researchers are using consumer grade 3D printers to create replacement jaw-bones in a matter of weeks. In an environment of such rapid innovation, it is no wonder that some question whether patents are still valuable or relevant given the slow, bureaucratic and expensive process require to obtain them.

This negative assessment rings somewhat true when patents are viewed as pawns in a patent arms race, or thought of as assets that take years to issue and then sit on a shelf only for use in lawsuits. Such patent strategies generally focus on harvesting all available inventions up-front in the hope that the resulting patents will develop some form of value in the future. In reality, only a small minority of very large companies can truly afford to engage in this “file and forget” approach. Further, as observed in the smartphone patent wars, huge patent portfolios developed in this way typically yield only a small number of enforceable patents, and the associated patent litigation rarely produces a clear winner. But many smaller companies and independent inventors also follow this same front-loaded approach, spending limited dollars to file as many patent applications as they can, in as many countries as they can afford, in the hope that the resulting patent(s) will have value in the future. When viewed through such a lens, and considering that a number of today’s inventions will be obsolete within three to five years, it seems reasonable to question the value of patents.

The value of patents in our modern age, however, does not turn on poor, outdated strategies that are only mildly effective for the largest and richest patent applicants. The true value of a patent has always depended on what that patent ultimately achieves for the owner. Therefore, to assess the modern value of patents, one must determine the specific benefits desired from a patent, and whether those benefits can be effectively realized within a relevant timeframe using the available options.

Many associate the value of a patent with possessing enforceable rights. In most countries, a utility patent generally takes three to four years from filing to issuance. In a fast moving technology field, this timeframe may exceed the useful life of the invention. Does this then negate the value of filing the patent? It may, if the intended benefit of the patent is solely tied to litigation or licensing. However, patents and patent applications obviously have a number of tangible and intangible benefits beyond enforcement.

One benefit that filing a patent application may bring is enhanced marketing. Published patent applications often get picked up by trade publications and can be interpreted as an indication that a company is pioneering a new technology, or entering an unanticipated new field (whether correct or not).

Other benefits of a patent at any stage of prosecution include support for funding efforts, establishing first-mover claims, strengthening freedom to operate positions, or illustrating a robust IP position underpinning a business. Most venture capitalists and angel Investors continue to evaluate IP portfolios and use them as impartial metrics in valuation and investment decisions. Other, less tangible potential benefits should be considered as well, such as creating perceived barriers to entry, which can limit competition or negatively influence the funding of competitors. If the intended benefit of a patent relates to one of these categories, it is irrelevant how long it takes for a typical utility patent to issue. A patent or patent application can easily be curated to meet these or other goals.

If having enforceable patent rights in less than three to four years is a priority, there are a number of options available to achieve this. In the US, accelerated patent prosecution is available via the Track 1 system. For roughly double the upfront cost, many applicants receive issued utility patents via Track 1 within one year of filing. Other patent options should also be considered when enforceable rights are desired in as little as one year. Design patents are an attractive means for protecting physical devices, and typically issue one to two years from filing. In recent US litigation, the scope of design patents has been interpreted relatively broadly, and the penalty for infringement can be an entire disgorgement of the infringer’s profits. This is potentially much higher than the typical reasonable royalty associated with infringing a utility patent. Looking outside of the US, countries such as China, Japan, South Korea, and Germany offer utility model patents (also sometimes known as “registrations”), which generally issue within a year. While not considered as robust as regular utility patents, utility model patents can be very effective when used against copycat type inventions. The popularity of utility model patents in China has skyrocketed, due to their low cost, quick issuance, and perceived value. In fact, the number of annual utility model patent applications in China now exceeds that of regular utility (Invention) patent applications. By considering accelerated prosecution options, diversifying the types of patents in a portfolio, and looking at foreign options, enforceable patent rights are certainly attainable within a practical timeframe for even fast moving technical fields.

Monetization is also a reasonable strategy for extracting value from patents. If contemplated during the IP generation stage, decisions can be made to maximize potential returns. This may include blanketing a technology field, as employed by some computer memory and haptic feedback companies, or targeted filings on critical innovations within a field. Opportunistic monetization may also be considered after a patent is filed. This may include royalty bearing licensing, cross-licensing to reduce outgoing royalty payments, or divestment. While divestment can be attractive, patents are routinely over-valued when making divestment decisions, and many potential pitfalls are not given sufficient consideration. A common misconception is that patents can be divested quickly. In reality, the process of analyzing a portfolio, working with a broker, marketing, vetting potential buyers, and closing a deal can take a very long time. Timeframes of six months to a year are not uncommon to divest patents, assuming that there is interest in the market.

Further complicating monetization efforts are the presence of non-practicing entity (NPE) buyers. Often, when a patent or portfolio struggles to find a buyer, it is an NPE that enters to purchase patents at the lowest end of the value range. Sellers should decide early in the process whether they will consider selling to NPE’s, as it could significantly impact the marketing process and the potential valuation. Although NPE’s frequently purchase patents that are otherwise not successful in the market, they can also participate in bidding and driving up the price of more attractive portfolios. Many operating companies are increasingly scrutinized when patents that they divest end up in the hands of NPE’s. This may occur via a direct sale, but also often occurs from secondary or tertiary sales when the original owner is no longer involved. For companies concerned about patents being acquired by NPE’s, there are emerging groups like the License on Transfer (LOT) Network providing some protection in this area. When members of the LOT Network sell or transfer their patents, other members of the group automatically receive immunity from NPE lawsuits for the life of those patents. Thus the risk of being seen as a bad actor is reduced, and a benefit is achieved by receiving immunity to NPE lawsuits from patents originating from any other member companies. Patent pools also offer another avenue for extracting value from a patent. Membership generally requires the contribution of at least one or more relevant patents, so you must already own a relevant patent in order to participate. The benefits can be in the form of a royalty free license to other patents in the pool, and potential royalties from licensing to companies who are not members of the pool.

The scope of a patent clearly affects the value it can provide, and directly impacts whether it can support a particular goal. It would be challenging for a narrow patent, focused on a specific implementation, to provide long term value. These types of patents are very susceptible to becoming irrelevant as technology evolves and new innovations are developed. These narrow patents can, however, serve a purpose in securing funding, for marketing, or enforcement if quickly issued, but the window for providing value is relatively short. Conversely, a broader patent, covering an invention that is a platform for future innovations, will have a longer valuable life cycle. Patents having a broader scope have the potential to continue to be relevant even if the implementations based on them quickly evolve. As such, the scope of a patent and the underlying invention will play a critical role in its value. Simply being within a field experiencing rapid innovation does not exempt a patent from having short or long term value. Again, the intended use, type of patent, and pace of prosecution will influence whether the scope of a patent is sufficient to meet its needs.

Changes to national patent laws can also significantly impact the value of a patent. Fortunately, changes to the governing rules and laws set by individual countries around the globe tend to occur at a glacial pace. Judicial decisions, however, can have a rapid and highly negative impact on the value of a patent. Of course, this also depends on the reliance on judicial precedent in a country (e.g., high in the US, low in China). In the US, truly significant judicial decisions within a field tend to only happen every three to five years. The result is often a significant level of uncertainty for twelve to eighteen months, followed by a number of subsequent decisions that walk-back or clarify many of the most impactful changes. While significant changes in patent law are unlikely, the impact of such changes could have a highly negative impact on the value of a patent. Fortunately, the likelihood of such changes is relatively low and can be potentially mitigated if a member of a patent family is still active. Stand-alone patents, or those that are part of a small portfolio with closely related claims are at the highest risk of being negatively impacted. Whereas a patent that is part of a large portfolio, with diversified filings and active family members, should be able to mitigate most changes in patent law and retain much of its long term value.

Patents continue to provide value and remain relevant even in today’s fast innovation milieu. In short, the rate of innovation within a particular field does not determine whether value can be derived from a patent. Modern patent practice can provide issued patents, with enforceable rights, in relevant countries, within a timeframe relevant to nearly any business goal. Further, other significant benefits may be realized from a patent before it issues, potentially providing additional value much earlier in its lifecycle. The benefits realized from a patent may be tangible or intangible, short or long term, fixed or dynamic, independent or closely tied to one another. The key to extracting value is in determining these desired benefits as early as possible, and adopting a patent strategy to meet those goals.

The Author

Kevin McLintock

Kevin McLintock is the Director of World Wide Intellectual Property Strategy for Logitech. His 17 year career at companies from successful startups to the Fortune 500 is focused on patent prosecution, IP transactions, and strategic portfolio development.

Warning & Disclaimer: The pages, articles and comments on IPWatchdog.com do not constitute legal advice, nor do they create any attorney-client relationship. The articles published express the personal opinion and views of the author and should not be attributed to the author’s employer, clients or the sponsors of IPWatchdog.com. Read more.

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