Over two previous articles — Building Patent Success in the New Innovation Ecosystem and Sound Patent Portfolio Management — I’ve explored not only the new realities of the patent world, but the steps that innovation intensive companies should take to succeed in that world. Today, in this final installment, I explore two more important pillars for building a patent operation that will facilitate innovation into the future: building the right team and smart patent deal-making.
Step III: Build The Right Team
It should go without saying that a good team is a necessary ingredient toward building a successful patent operation. Unfortunately, many companies think they can check the “IP team box” once an in-house IP lawyer has been hired, and/or outside prosecution or litigation counsel has been retained. While those are often necessary ingredients for executing on the patent front, they are by no means the only ingredients. More is required, particularly in today’s patent market, which not only requires an understanding of patent prosecution, but a keen understanding of the business, strategic and financial aspects of patents.
The Patent Strategist
The patent strategist is the rare breed of animal that not only understands patent prosecution and litigation, but also appreciates the strategies necessary to implement a successful patent operation, and the issues that arise at the intersection of patent law, business and finance. For instance, how should a portfolio be developed and managed? Is the political climate favorable or unfavorable to the company’s patent position? What monetization avenues should be pursued and with respect to which third parties? What are the risks and benefits of a particular monetization approach? What patent specific deal terms are favorable or unfavorable? This is the purview of the patent strategist. And by understanding the collective whole of the patent market, the strategist not only offers a wealth of knowledge to complement an existing in-house team, but can also be in-sourced to provide needed patent acumen and expertise.
The Patent Financier
Success breeds copying, and as many innovative companies quickly come to realize once faced with a copycat technology, putting an end to copying typically requires patent litigation. Unfortunately, they don’t call patent litigation the “sport of kings” for nothing, as recent statistics put the costs of such litigation north of $5 million.
Compounding the complexities of litigation expense is also the fact that innovators have by and large lost a once necessary lifeline: reputable law firms willing to handle cases on a contingency basis. Why? Because recent reforms have made the management committees of many law firms unwilling to handle cases on a contingency basis. At a minimum, many firms now require the patent owner to cover the “hard costs” of a litigation. But these costs, which include expert, court and travel expenses, themselves often total in the millions and are simply out of reach for many patent holders. And if a law firm demands at least some portion of hourly fees to handle a case, the bill can quickly climb higher.
Enter the patent litigation financier — the specialized finance professional who understands the complexities of patent litigation and will fund the astronomical costs of patent litigation in return for a share of any damages or settlement award. For many innovation-intensive companies, the financier is no longer a luxury. It is a necessity. But there are good and bad litigation finance deals. For instance, does the funder get multiples of invested capital before the patent holder sees money? Do the funder and patent owner share proceeds? For a patent owner, knowing the difference between a good deal and a bad deal could be the difference between seeing millions or no dollars at all.
The Patent Review Panel
In Part I, we discussed the significant value of a strategically developed patent portfolio. To get to that point, however, important inventions must be identified and the right decisions must be made about which inventions should find their way into a patent application. Indeed, having the smartest of engineers can be a lost opportunity if there is not an efficient process in place to discover their inventions. This is particularly so where — and god bless ‘em —many engineers tend not to believe that any of their innovations are patentable in the first place! And once an inventor compensation program is put in place, the number of candidate inventions for patenting is sure to increase even more.
A patent review panel is thus critically important. It is not enough for an organization to educate employees about patents and to distribute invention disclosure forms. There needs to be a multi-member panel in place to a) know what innovation is happening, b) know which groups are doing the innovation, c) capture the innovation and d) make intelligent decisions about which innovations are worth the cost of pursuing in a patent. The advantages of such a panel cannot be overstated. And such panels are also an effective way to prevent a portfolio from becoming improperly skewed by Founder bias, a problem highlighted in Part I. Don’t wait. If you haven’t already, put this process in place today.
Step IV: Sound Patent Deal-Making
In the end, all of the best practices in building a successful patent operation will be for naught if, when it is time to sit down at the negotiating table, good patent deals don’t get done. Largely, and particularly for licensing, deals struck today are simply a reflection of the leverage one party holds over another. If, for instance, you are a small technology company and the behemoth you’ve spent two years pursuing in court is now willing to talk settlement, it is hard to reject what’s offered or the form in which it is offered. After all, settlements are no longer easy to come by!
At the same time, it is important for patent owners to at least be aware of the fact that deals done today can have great ramifications on the deals that are possible tomorrow. For instance, many settlements in the patent space — particularly in the technology space — involve a one-time, lump sum payment. This is certainly to no fault of the patent holder, which in many cases must take what is offered and in the form it is offered. At the same time, however, in foregoing entitlement to a longer term, running royalty, the patent owner gives up the right to revenue streams that could provide tremendous strategic optionality down the road. For instance, the opportunity to monetize some, or all, of that future royalty stream, in return for substantial capital today, will be lost.
Patent owners must also understand that the licensing agreements they enter into today will affect the value of outcomes tomorrow. We often see this in the form of a patent owner who has been successful in licensing a portfolio to a plethora of bigger companies for relatively small licensing payments. Then, when the same patent owner seeks to pursue a very large damages award against the behemoth of the industry, those “comp” licenses serve to depress the royalty rate that the Court is willing to award at trial against the behemoth. Again, all patent owners know what it best for them, including whether certain deals make financial sense. But whichever action they pursue, it is critically important to simply be aware of the implications inherent in a particular course of action.
To reiterate, if you’ve done your homework and built what promises to be a successful and sustained patent operation, be smart and don’t forget to think long-term. The rewards will prove tremendous.