The Real Value of Patents

By Jeremy M. Ben-David, at JMB Davis Ben-David.

“Do you know how much money we spent on patents last year?”

This is a common opener to a panic attack, shortly before all the money that has been invested, is shown to be a waste, as the CEO or Chief Legal Counsel, having no idea why their company was filing patents in the first place, decides to abandon all of their patent applications and to cease maintenance payments on their granted patents.Whether your business is in engineering, hi-tech or healthcare, and whether you are a startup, a mature company, tech transfer or any type of business, patents are objectively important. Your patents are financial assets, no less than real estate or any tangible asset. But if the rationale for patenting is a superficial ‘because we need to protect ourselves’, then the next person to pull the plug on his company’s intellectual property assets, may be you.

So is obtaining a patent simply another thing that ‘you do’ when developing a company or a project? Is it like setting up a website, choosing a logo or going to the annual conference, without which no one knows your company exists? Is it a box that needs to be checked for the benefit of the investors or shareholders? Obviously not. But my experience shows that many companies and investors have no real understanding of what patents are and how they can be used. So let’s take a closer look.

What is a Patent?

A patent is often referred to as a ‘bundle of rights.’ I have heard it said that if a patent covers an invention, and an invention is something that one can make, then surely if a company owns the right to a patent, it should have the right to make its invention. As professionals, we all know that this is not correct, but many are confused by this.

At a recent conference in Singapore, I heard the in-house IP counsels of US corporations that own tens of thousands of patents refer to the protection provided by their patents. I knew what they meant, but it still rankled me to hear them talk about patents providing protection. This is because when the same words are used by the owner of a small company (and most companies are small in comparison to the corporations represented at that conference) it often shows a lack of understanding as to what a patent actually does.

Because a patent’s function is often misunderstood, it’s small wonder that after a couple of years, and several tens of thousands of dollars spent on filing a handful of patent applications and building a patent portfolio, one of the first things to be cut during an owner’s annual budget review is the patent budget. Or at least a good portion of it.

As we all know, in the first instance, patents enable an owner to do nothing at all in the implementation of the invention. A patent owner can, however, enforce his patent against infringers. A patent can be used as a way to generate income by granting a license to a third party to operate in a manner which would otherwise – in the absence of the license – be considered infringement. Patent rights can, of course, be sold outright, although a wise seller will in many cases want to ensure that he has a license to use the patent that he has just sold.

So How Do Patents Provide ‘Protection’?

There are two answers to this. The first answer is to state emphatically that they don’t provide protection. At least, not if the protection means that the patent owner is ‘protected’ in the sense that he is free to practice the patented invention.

The second answer is more complex and is the result of the enforceability rights that are provided by a patent. This can be easily understood by the following example which could be viewed as a simplified and superficial explanation of the ongoing patent war between Apple® and Samsung®, as well as hundreds of patent battles which are less well known.

So here’s the story: “Super Patents Inc.” owns a patent for certain advanced widget technology. In fact, they own a number of patents which cover different aspects of the technology. They manufacture and sell ‘super’ widgets which are far more advanced than conventional widget products.

Old Widgets Ltd. have a number of older, more basic widget patents, and used to be on the cutting edge of widget technology. They now limit themselves to the manufacture and sale of a single lucrative ‘old widget. But they have now realized that certain aspects of the super widgets made and sold by their competitor Super Patents Inc. appear to infringe their own (i.e. Old Widgets Ltd.’s) patents. Surely this is a chance for Old Widgets Ltd. to see a return on their investment in patents, and to obtain a royalty stream from Super Patents Inc.

Old Widgets Ltd. warns Super Patents Inc. that by manufacturing and selling the super widgets, Super Patents Inc. is infringing Old Widgets Ltd.’s patents and that they are required to stop, otherwise they will be sued. However, being reasonable, they are also prepared to license their patents to Super Patents Inc. for appropriate royalty fees.

Super Patents Inc., who are more concerned with making and selling things than with making money out of lawsuits, are initially resigned to the fact that they will either have to stop making their super widgets, which will mean the loss of a major revenue stream, or to come to a licensing agreement with Old Widgets Ltd. However, this too, will impact the cost of making and selling the super widgets, and bring into question the economic viability of the super widgets.

Rather than wallowing in its misfortune, Super Patents Inc. conduct a review of their patents and discover that they are being infringed by old widgets being manufactured and sold by Old Widgets Ltd. Super Patents Inc. then goes on the offensive, and warns Old Widgets Ltd. that by manufacturing and selling the old widgets, they are infringing Super Patent Owner Inc.’s patents and must stop.

The Bottom Line on Protection

One way of settling these counter claims would be to go to court. A far more practical and usual way, however, assuming that these companies are not Apple® and Samsung® would be for the two competitors to license each other’s patents, without money changing hands. This can be considered a barter agreement which enables each side to continue operations as before. It is this sort of use which can be considered to be protection which, indeed, is provided solely by virtue of both sides having patents.

Don’t Take Chances

Of course, at the outset, neither company knew how its patents might come in handy.  Old Widgets Ltd. was the first to realize that its patents could be useful, even though their initial intention was to use them offensively and to directly generate a revenue stream based on them. Ultimately however, after Super Patents Inc. got lucky and realized how it could use its patents, Old Widgets Ltd. found a defensive use for its patents, ultimately enabling them to avoid an expensive law suit or licensing agreement.

In the above scenario, a lot was left to chance. I strongly recommend that you decide to understand what patents are, what they can do for your business in the long term, and why it may be worthwhile investing in them. This could turn out to be one of your smartest business decisions.

[This post originally appeared at JMB Davis Ben-David.]

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