“It’s not very helpful to talk about quality,” said former Chief Judge Michel. We agree. Quality has too many meanings for too many people. We all want quality patents, but we do not agree on what quality means. A better objective for patent strategy and patent management is the pursuit of valuable patents. “But wait!” you say, “Isn’t ‘valuable’ just as confusing as ‘quality’?” In short, “no,” if you identify the value you care about.
For at least some companies, the sources of value can be identified and defined. We have identified five primary value streams that high-technology companies obtain from their patents (Figure 1). There are additional value streams, but we will focus on these because they tend to be the highest value and most common. We are using the term high-technology to refer to companies in the information and communication technology space. To determine if a patent is valuable, we add the value attributable to each value stream. To determine whether a patent is worth pursuing, we can estimate the expected value against the expected costs. To determine whether a patent program has been successful, we compare the value of the company’s patent portfolio to the company’s goals for the value streams. Ultimately, metrics, budgets, and program targets can be set by focusing on the value streams of most importance to the company’s strategy. A follow-up article will provide details on modeling the return-on-investment.
Figure 1 presents the value streams on a spectrum from primarily defensive uses of patents to primarily offensive uses of patents. For each value stream, an expected value can be obtained. Whether the expected value is calculated on a per asset basis or a portfolio basis, the important part is that a dollar amount can be assigned to that value stream.
Patents can be used for counter-assertion to defend against patent assertions from other companies. High-technology companies face patent assertions from operating companies in their ecosystem as well as large corporate asserters. To mitigate this patent risk, a company can identify the biggest threats in their ecosystem and build a patent portfolio with patents that those anticipated asserters’ products infringe (you can read more about this here). If an asserter asks your company to take a patent license, you can use your patents to counter-assert. Typically, counter-assertion will help you reduce license fees, or sometimes avoid a patent litigation.
Thus, your patents have value due to their capacity to reduce future license royalties and decrease costs. To fully realize this value, it is important to analyze your patent risk and devise a defensive counter-assertion strategy. You can read more about how LinkedIn built a counter-assertion patent portfolio here.
Value stream 2: General deterrence
Another defensive use of patents is general deterrence. General deterrence takes place when a large patent portfolio deters other companies from asserting patents against the holder of that portfolio. This strategy is often analogized to Mutually Assured Destruction. A general deterrence strategy creates value by reducing the number of assertions from other operating companies. Fewer assertions mean lower legal costs and a lowered likelihood of having to pay for licenses in the future.
Patents create general deterrence when a portfolio is large enough, which means that it is the portfolio as a whole, rather than an individual patent, provides value. The value of a single patent is the incremental value of that patent’s contribution to the overall size of the portfolio.
Value stream 3: Recognition/distinction
Patents are an external validation of a company’s inventiveness by Patent Offices. Patents afford recognition to both the company and the inventors. Many of the world’s largest high-technology companies market their patent issuances and filings as signifiers of their innovation leadership. This external recognition thus supports marketing and branding strategies. The recognition can also serve internal purposes, helping companies to identify, compensate, and retain their top inventors. For a more in-depth discussion of the broader motivations for obtaining patents for recognition see Rantanen, Jason and Jack, Sarah E., Patents as Credentials (August 4, 2017).
Value stream 4: Deter copying
Exclusivity is the textbook rationale for a patent system: if you invest in inventing novel technology, a patent gives you a chance at market exclusivity. Note: this is a chance, not a guarantee. In high-technology, the exclusion value is often limited: (1) there are often many ways to design around a patent, and (2) the product life cycles are short, so effective exclusions are difficult to maintain. That said, the deterrence value is still relevant concerning a direct copy (e.g., from a former employee or a direct competitor).
Notably, a few high-profile cases illustrate the value of deterring copying: most recently, Apple was awarded $120M in their slide-to-unlock patent lawsuit vs. Samsung, and, earlier, Amazon’s 1999 one-click buying patent lawsuit vs. Barnes and Noble. Both of these patents were successfully used against companies providing features that look like they were directly copied.
Note, outside of high-technology, market exclusion by stopping infringing products is typically the highest source of value from your patents. It is so rare in high-tech, we usually will note it as a source of value, but do not model it.
Value stream 5: Licensing
Regarding the offensive-defensive strategy spectrum, licensing sits at the end of the offense side. Licensing is asserting your patents to make money from other companies. The value is the expected value of future licensing revenue minus the costs of the licensing program. Many large companies, such as IBM, Microsoft, Qualcomm, and British Telecom, run extensive patent-licensing programs.
The above framework is helpful for considering the primary value streams high-technology companies obtain from their patent portfolios. Additional considerations:
- Value is contextual. The ’123 patent held by a company with a defensive strategy can provide value through counter-assertion. If that same patent were held by a corporate asserter, the patent might provide value primarily through licensing revenues.
- One patent can provide multiple value streams. The ‘456 patent held by a company with a defensive strategy may, for the most part, serve as general deterrence; however, when a specific corporate asserter shows up, that patent provides counter-assertion value.
- One portfolio provides multiple value streams. For a company like IBM, the patent portfolio might be used both to support licensing and to provide external recognition.
- Strategy implementation is required. If your company invests in a large number of patents for recognition but fails to publicize those efforts and link those efforts to its innovations, the value diminishes. Similarly, if the ‘456 patent is ready to license, but the company lacks a licensing team and associated capabilities, that value cannot be realized.
Focusing on patent value is more helpful than focusing on patent quality. Patent value allows you to connect metrics, budgets and expected return-on-investments. In this article, we have discussed five value streams that high-technology companies obtain from their patents. Companies can model these values across their portfolio generating an expected return on investment (ROI) for their patent efforts. This modeling allows the patent team to answer tough questions from executives such as “why are we spending so much on patents?” or “what is our return on our patent portfolio?”