Patent Protection as Investment and Insurance
Every entrepreneur is faced with having to make difficult decisions regarding resource allocation. Some of these decisions are relatively simple, or at least seem so at the time. Typically, founders of a company want to minimize cash outflow during the early stages in order to conserve it for use later when it may be needed to support the company while it seeks additional funding. This makes sense, but efforts to reduce the outflow of cash can also leave a company without a key asset that it may benefit from at a later time.
This sometimes-overlooked asset is the value of the intellectual property created by the companys employees. It is an asset that requires a certain amount of advance planning and investment in order to obtain, and may be perceived as an unnecessary and undesirable burden. However, it is also an asset that can provide a return on investment equal to many times its cost, both in terms of saving money and providing business opportunities that would not otherwise be available to the company.
Because of the great potential value of a companys intellectual property, I believe that a company should invest in identifying and protecting its intellectual property, but should view the investment as a type of insurance policy. That is, treat the investment as a way of purchasing protection against a business problem that may arise in the future, or at least consider it as a source of leverage that will make handling the problem easier and less expensive than it would be otherwise.
Because extracting value from intellectual property is a dynamic process (i.e., the intellectual property can be developed in ways that respond to changes in the companys competitive position in the marketplace), it is unwise to base decisions that affect the resources devoted to intellectual property solely on the perceived value of the property when it is first being evaluated. In order to explain why this is so, it is helpful to discuss some of the many ways in which a filed patent application or an issued patent may be of value to a company.
A patent application represents a way of converting an innovation into a business asset. This asset has value to the business because it can be used in multiple ways to preserve or increase revenue. In order to take advantage of this asset, a company needs to be aware of what characterizes an innovation, and to install a process to identify and capture those innovations. The process can be informal, but it is important to communicate the value proposition(s) of the process to management and employees so that they will participate in good faith.
An interesting side effect of a patenting program is that it can serve to stimulate innovation and product development within a company. This occurs through the operation of a virtuous cycle of positive reinforcement between the patent program, innovation, and product development efforts. This cycle is described more fully by the author in a Law360 article entitled Innovation, Development and the In-House Patent Program.
The cycle arises because product development efforts, R&D, and focused forms of innovation brainstorming all generate solutions to problems. Some of the solutions may eventually be incorporated into products or services. At the same time, these solutions are evaluated, with some being converted into a business asset via the operation of the patent program. However, in addition to capturing the outputs of product development or R&D, the patent program acts to create and support a culture of innovation within a company. This raises the profile of innovations as an important component of the company and a contributor to its success.
The virtuous cycle is one example of how the presence of a functioning patent program can provide benefits to a company separate from those represented by the number or content of filed patent applications. It provides a justification for at least some investment in establishing a patent program and for filing a limited number of patent applications.
Another benefit of establishing a patent program that is distinct from the number or content of the actual patent applications is that it provides evidence to prospective investors that a company is actively identifying and protecting innovations. As such, it may contribute to obtaining investment or continued investment. This is because the patent portfolio provides a tool that can be used at a later date to increase the value of a company and/or to help resolve a dispute with another company (and thereby preserve value).
In this way a patent portfolio provides a way for a company to capture the output of an investment in R&D or product development, and to convert that output into a form in which it may be used in business negotiations to benefit the company. Some investors may therefore view the patent portfolio as part of an exit strategy should the business operations of the company fail to provide a desired return on investment.
These benefits of the patent portfolio arise because of the multiple strategic uses of a properly constructed patent portfolio. An issued patent (and in some cases, a pending application) may have significant value to another party. A properly designed patent portfolio is one that contains assets that have multiple value propositions, some of which benefit the company and some of which benefit other players in the market.
If a company has (or is likely to obtain) a patent that contains claims that arguably cover a competitors product or service, then the company now has a bargaining chip that can be used in negotiations with that competitor. This may enable the company to negotiate more desirable terms in an agreement, to propose a cross-license (with a reduction in cash payment) in a situation in which such a proposal would not otherwise be accepted, to propose a joint development agreement with another company (because it now has something additional to contribute that may be used to protect the combined effort), etc.
Although a properly constructed patent portfolio has multiple value propositions, many of these value propositions may be unknown or not even possible to anticipate at the time a patent application is filed. This is because the possible needs for, and uses of, intellectual property rights will typically vary as a company develops a presence in the marketplace and its goals or business model change.
Similarly, just as the companys goals or business model change, so too do those of competitors, with new potential competitors arising over time. Just as the business environment in which a company operates is a dynamic one, so too are the needs for and possible uses of a patent portfolio.
This presents a problem: obtaining a patent may take two to three years, during which time a company and its competition may change business models and strategies. It would appear to be difficult (if not impossible) to prepare in advance for what types of patent claims will be needed at the time they will be needed. In an absolute sense this may be true, since some of the relevant information is not known at the time that certain decisions are being made about how to describe an invention and what aspects to attempt to protect.
Fortunately there are techniques that may be used to craft patent applications that enable those applications to be tuned to become more valuable assets as further information about the operating environment and/or business model of a company or its competition becomes known. These techniques include describing an invention as a broadly worded solution to a technical problem and deconstructing a generic implementation of the invention into a set of functional elements.
The bottom line is that a company needs to install processes to identify and evaluate all potential innovations, with a goal of investing in protecting the key product or service features that differentiate it in the marketplace and that are expected to drive revenue or otherwise provide an advantage to the company.
Alan D. Minsk is a patent attorney and former in-house counsel for Unwired Planet and Intellectual Ventures. He is currently a partner with the law firm of Lane Powell in the firms Seattle office. His practice focuses on counseling clients with regard to intellectual property issues that arise during the course of their business operations.