Your Patents Probably Don’t Matter. Or Do They? How to Know the Difference.

By Jackie Hutter

Let’s cut through the noise and get real about patents: they rarely matter to business value, but when they do matter, they typically matter A LOT. Sadly, there are few people out there–even those appearing as patent experts–who can distinguish between these two vastly different scenarios. This means that most patents, and those innovators who seek them, are subjected to the same tired meme: patents are necessary to “protect” an innovative idea. For those willing to dive into the business end of the patent game, clear distinctions exist between patents that drive corporate value creation and those that drive their owners to distraction or worse. Gaining understanding of these issues can go far to enabling innovators to not only obtain patents that matter, but patents that matter a lot.

First, here’s a truism that I have learned after many years as an IP attorney: the only person who needs a patent is a patent attorney. I will note that I did not realize this until I left a highly lucrative position as an owner in a successful IP law firm, a position in which I had 6 attorneys reporting to me and relying on me and my fellow partners to feed them enough business to pay their (and our) absurdly high hourly rates. I am not knocking the ethics and professionalism of my patent attorney peers. To the contrary, the vast majority are certainly highly ethical and have the best interests of their clients in mind when they provide their patent recommendations. Those asking a patent attorney whether they should obtain a patent for their inventions would nonetheless be well-served to view their attorney’s advice from the framework of the “fox guarding the hen house.” Put another way, all patents matter for patent attorneys because patents are their business.

Now that that’s out of the way, let’s look more closely at when patents matter (or don’t matter much) for those seeking to bring innovative ideas to the marketplace.

For large and/or established companies, irrespective of whether they are prolific filers, patents normally don’t matter very much. These companies possess existing business models, revenue streams, customers etc. that will likely still be in place whether or not they file for patent protection in a particular instance.  For example, a while back I was engaged by a large publicly-traded company to help them assess the strength and weaknesses of their existing patent strategy, as well as to provide them with guidance on how to remake their patenting efforts to allow them to become more “strategic.” This company held hundreds of patents, and spent more than $10 million a year on patenting, including having a number of patent attorneys employed in-house. Notwithstanding these extensive patenting efforts, a review of the company’s portfolio revealed that only about 5 patents were meaningful to the company’s bottom line.

Readers will note that I said “meaningful” in relationship to this small subset of patents in the company’s large portfolio. This qualifier relates to the fact that these 5 or so patents were associated with a true innovative technology differentiation, and this innovation drove customers to purchase products from my client, as opposed to those of its competitors. The patents covering this innovation certainly mattered, but readers may be surprised to find that they didn’t necessarily matter a lot.

To this end, the client, a large global manufacturer, was not then known to its customers as an “innovator,” even though some of its products were indeed innovative, as were the products associated with those few meaningful patents in its portfolio. Put simply, this company possessed a multitude of “complementary assets” that enabled it to garner customers, including its specialized manufacturing processes, global supply chain, multi-national footprint and long-standing reputation for quality, among others. Accordingly, with or without holding these 5 or so “meaningful” patents, this company’s customers would still choose it over competitors in this product space. While my client’s innovative product undoubtedly created value in the market and this value was desirable to competitors, others would be unlikely to be able to sell a duplicated product because much attendant value would be missing from a substitute offering. This means that it is likely that none of my client’s patents were necessary to allowing the company to achieve its overall business objective of gaining customers for this innovative product offering. In short, the company’s few “meaningful” patents were a “nice to have,” but the company would remain successful without them.

For other large and/or established companies, patents may indeed mean a lot. I have written before about the P&G’s and Kuerig/Green Mountain’s patent strategies. For each of these companies, patents meant the difference between capturing the value generated by their respective innovations. For P&G, the comprehensive and skillful patent strategy executed for the Swiffer(r) product has meant that the company has effectively been able to own the entire market created by the innovative mopping system since the product was introduced in the late 1990’s. This successful patent strategy continues to allow the premium pricing that the company obtains for its patented disposable mopping pads and cleaning solution. For Kuerig, the company’s failure to properly protect its improvements to its coffee pods when it created a improved innovation in the mid-2000’s means that the company is quickly losing market share to non-infringing substitute pods.

The unifying feature between the P&G and Kuerig examples is that in both cases the innovative product created by each of these companies was easy to copy such that competitive substitutes provided customers with the same value. Moreover, as shown by Kuerig, customers would readily substitute one product for another if the same functionality was available, especially if offered at a lower price. This means that patents meant a lot when it came to protecting each company’s innovation investment because without satisfactorily-broad patent protection, others could (and likely would) copy the product features sought by customers. In other words, for each of these companies, the competitive environment signaled that patents not only mattered, but that they mattered a lot. Only P&G was able to read this signal in advance, however.

For smaller and/or less established companies, the same type of analysis applies: if customers value the company’s product, competitors will likely seek to copy the product features desired by the customer unless there is a reason that they cannot legally do so. Readers might then assume that patents are more likely to mean a lot for smaller and/or less established companies, to which I respond “not necessarily.” A patent will matter a lot for these companies if, and only if, they are able to obtain patents that cover the reason why their customers buy the product from them in the first place.

And herein lies the rub: most patents cover only the specific product that a customer buys, not the value the customer sees in that product. As a result, competitors will be free to provide the same value to the customer without fear of patent infringement. Moreover, smaller and/or less established companies will not have the resources–that is, the “complementary assets” discussed previously–typically necessary to create a strong and vibrant customer set in a short time. For example, these companies likely do not have the manufacturing capability, distribution channels, reputation etc. required to serve all potential customers out of the gate. This means that smart competitors, which are often larger and most established companies with complementary assets, can pounce on the now-validated customer base and capture the market using its established resources, thus leaving the first to market innovator with nothing but a worthless patent.

The solution for the smaller and/or less established company with innovations to be brought into the marketplace is to “make it cheaper to go through you than around you.” In other words, the first-to-market innovator must strive to obtain patent protection that effectively prevents competitors from solving the same customer need. Companies that wish to serve that need will then either have to buy (or license) the right from the smaller and/or less established company or it will have to make the investment to innovate around the patent holder.

As an example of this premise, I previously worked with a start up in the “big data” space. This company developed a way to better manage data so that machine durability could be enhanced. Notably, the company’s product was a unique and high value analytical insight that resulted in improved software for use in the machine, however, when examined closely, we could see that the company’s product actually made the machine better–that is, more functional. The company did not make the machines; rather, it sold its software to the machine maker, and the market was very excited about the improvements provided by my client’s methodology. Here, the “customer value” was the improved machine operation. Indeed, customers did not care one bit about how my client’s software operated; they only cared that it worked. As a result, the established machine maker could sell its improved machine at a higher cost. The machine maker would further be motivated to increase profits by cutting my client out of the picture, if possible. This was now possible because my client’s product gave them a road map to do so.

To prevent this from occurring, we designed a patent strategy directed not toward my client’s software product (which by itself was patentable), but to the improved machine (which was itself patentable due to its improved functionality). Put another way, we defined the invention in terms of the value it provided to the customer, from which my client’s methodology was but one way to enable the functional improvement in the machine. When the patent issues, my client’s customers (that is, the machine makers) will not be able to sell a machine with the functional improvements claimed in the patent without also infringing my client’s patent. This means that our patent strategy has created the desired business outcome of making my client the gatekeeper for improved machines, either by way of licensing or by making this small, but growing company a strong target for acquisition.  In other words, for this start up, the patent will matter a lot.

There are any number of variations on when patents don’t matter and when they matter a lot. Certainly, the possible scenarios are as virtually unlimited as the number of desired business outcomes that exist for innovative companies. The key insight for those wondering whether and to what extent a patent makes sense in a particular instance is to ensure that the patent is not seen as a means to an undefined endpoint. Instead, innovators must first define their desired endpoint and then undertake a multi-faceted analysis of whether a patent with properly designed claim scope will enhance the probability of that endpoint occurring. Then, and only then, can it be ensured that any patents your company obtains not only matter, they matter A LOT.

[This post originally appeared on LinkedIn Pulse.]