WHEN TO PATENT: A
FRAMEWORK FOR STRATEGIC BUSINESS DECISIONS
By Evan Smith
There are many ways to blunder in protecting technology.
Many entrepreneurs lose rights by postponing an investigation of patent potential until it
is too late. Another common mistake is spending scarce funds on a patent that provides
little business advantage.
It's not easy to predict a patent's impact on your bottom
line. The average entrepreneur lacks experience in patent matters, and may not understand
exactly what the rights will do for the company. The average patent attorney lacks
experience in entrepreneurship, and may not understand his clients competitive
environment or strategic plan. As a result, entrepreneurs sometimes seek patents when
their money would be better spent on marketing or product development.
The entrepreneur needs a sensible analytical framework for
deciding when and how to invest in patents. To make good patenting decisions, follow this
five step process: (1) understand how utility patents work; (2) understand the categories
of features that are potentially patentable; (3) list the new features of a system or
process; (4) analyze the features for commercial value; and (5) discuss the business
strategy and the selected features with a patent attorney.
HOW DO UTILITY PATENTS WORK?
As preparation for analyzing patenting potential, it's
important to understand the basics of claim scope, enforcement, and patent
The owner of a utility patent can prevent others from
selling a product with specific features, or performing the steps of a specific process.
The body of the patent, or specification, often describes many features, but the things
described there are not necessarily protected. It is the claims (appearing at the
end of the patent) that define the scope of protection. Your patent claims describe
"what you can stop somebody from doing".
In general, to analyze patent coverage, look at a competing
product or service and read your patent claim line by line. If the competitor meets every
requirement in the claim, there is infringement. If the competitor leaves out just one
feature included in the claim, there is generally no infringement.
When your patent attorney writes claims, there are two
competing objectives: broad coverage, and avoiding the "prior art."
The coverage is broad if competitors have difficulty
avoiding the patent claims. The patent coverage is narrow (and easy to "design
around") if the claims include features that competitors can easily omit from their
"Prior art" means the materials and information a
Patent Examiner can use to reject the claims. Prior art includes prior patents, other
products, and publications that pre-date the invention. If the claims "cover"
prior developments by others or things that are obvious variations of those prior
developments, they will be rejected during the examination process.
Patents may be enforced to prevent competitors from
including the covered features or performing the covered steps, but only after they have
been issued by the Patent Office. A pending patent provides no protection. Patents are
also not self-enforcing. Marking products and advertising literature with a patent number
or with "patent pending" may discourage competitors. However, if a competitor
proceeds anyway, and does not respond to threatening letters, the patent rights must be
enforced in a lawsuit. Patent lawsuits may cost hundreds of thousands of dollars, putting
them beyond the reach of most early-stage entrepreneurial companies.
Patenting is also a substantial investment. Costs vary
substantially depending on the complexity of the technology, but its certainly not
unheard of to spend $10,000 to $15,000 over a three year period to patent complex software
or electronic systems. Most of the work occurs during initial preparation of the
application, so these costs are front-end loaded.
CATEGORIES OF PATENTABLE FEATURES
It's also important to understand which broad categories of
features may be patentable.
Patentable features may include (1) operating methods or
processes; (2) physical structures; and (3) product features. A particular sequence of
process steps may be patentable even if the individual steps are all old; putting them
together in a specific order may produce a different result. Similarly, an old feature or
structure may be patentable if it is used in a new context.
Historically, software was considered unpatentable, and it
was difficult to protect computer-based inventions. Today, there is no question that
software can be patented. Thus, entrepreneurs should treat software like any other product
when considering patent issues. Software may have "selling features" visible to
the end user that are worthy of protection, or a new type of software may perform a
sequence of steps that has never been performed in exactly the same way.
In internet-based businesses where a product or service is
delivered using unique custom software, patent coverage may be particularly important. If
the method of doing business is unique, the software that implements it may also be
unique, and a patent on the software could make it impractical for others to copy the
LISTING THE NEW FEATURES OF A SYSTEM OR PROCESS
Now that you have a basic understanding of the patent
process, the next step is identifying what may be new. Its important to realize that
the standard for obtaining a patent is relatively low; patents are granted for incremental
advances, not just brilliant new concepts. Make a list of every feature and process that
(as far as you know) is different in some way, even if it's very similar to what was done
before. You can start your list by answering the following questions:
What have I done that is different from the prior art I
What problems have I solved, and how have I solved them?
SELECTING THE NEW FEATURES THAT MAY BE COMMERCIALLY
The next step is to determine which of the new features or
processes might be worth patenting. Patent law is a business tool for increasing market
share and profitability. If a patent won't achieve those objectives, spend the money on
product development and marketing instead. To determine the commercial value of patenting
a feature or process, consider: (1) consumer valuation analysis, (2) feature longevity,
and (3) other forms of commercial value.
CONSUMER VALUATION ANALYSIS
Which features on your list will consumers value? Consumers
choose between competing products and services based on many factors, but features and
operation are usually important considerations.
Patents provide a significant strategic advantage if they
protect a consumer-preferred feature. If feature X is patented, the patent owner can
prevent competitors from offering the same product. If consumers strongly prefer feature
X, the exclusive provider of X will gain market share. If consumers want X badly enough to
pay more for it, the patent holder will also realize higher profit margins.
To determine whether a patent on X makes sense in consumer
valuation terms, answer these questions: (1) how much more money do you predict the
company will make if it has exclusive rights in X, compared to a free market condition,
and (2) if you could put $10,000 to $15,000 in a somewhat risky investment over the next
two years and receive in return the amount in (1), would you do it? If so, it makes sense
to investigate the possibility of patenting X.
Entrepreneurs should answer these questions on at least a
qualitative level. Its also possible to create a spreadsheet model to quantify
potential patenting returns. Start with traditional market research techniques like
collecting demographic and market data. Surveys and focus groups may also be useful in
predicting consumer preferences, but consult your attorney before disclosing your idea.
Based on this data and supportable assumptions, predict the market size, the degree of
consumer preference for X, and the incremental value of X to the consumer. Do the math,
and then determine the net present value of increased profit margins and market share that
might result from exclusive rights in X.
This consumer valuation approach can also be used to
predict royalties if the technology is licensed to other companies. Depending on the
industry, a typical licensor can expect to capture 10% to 50% of the licensees incremental
net profit resulting from use of the patented technology. The licensee gets the
remaining 50% to 90% of the incremental profit, as compensation for taking the
engineering, manufacturing and marketing risks. Note that these royalty rates translate
into a much lower percentage of the total sales price of the item.
For example, if a modem without a patented feature
wholesales for $100, and a modem with the feature is expected to wholesale for $120, have
a street price of $200 and cost $10 more to manufacture, a manufacturer might offer to pay
a royalty of $1 to $5 per unit out of his $10 incremental net profit. Thats only
0.5% to 2.5% of the street price.
Another way to limit your list of potential patenting
investments is to discard features with limited shelf life. Because of backlogs in the
Patent Office, it typically takes two to three years to obtain a patent. In the busy
software field, the Patent Office may not even begin examining an application for 12-18
months after filing. Theres hope for improvement, but entrepreneurs have to deal
with the current reality. Under these conditions, why consider patents for features that
will be obsolete before the patent issues? Concentrate on basic features and operating
methods that will be around for several years.
OTHER FORMS OF COMMERCIAL VALUE
There are at least two reasons to apply for a patent even
if a feature has limited consumer appeal or longevity. First, advertising a product as
"patent pending" or "so unique its patented" can be a useful
marketing technique. Second, having a patent or a series of patents is a credential that
lends an aura of expertise in fields like engineering and medicine. For example, people
may prefer to see a doctor who has developed and patented new medical instruments. If your
objectives do not include enforcing the patent against competitors, make sure your
attorney understands your strategy.
DISCUSSING THE BUSINESS STRATEGY AND THE SELECTED
FEATURES WITH A QUALIFIED ATTORNEY
As you can see, a patent application is a major investment
that should be undertaken only when it is likely to provide a substantial return. After
youve done your homework by analyzing your technology for possibly important
features, show your entire analysis to a registered patent attorney.
Your attorney may recommend conducting a patent search. The
search will focus on the features with potential commercial significance, and will collect
some of the most relevant prior art. Armed with search results, the attorney can predict
the available patent claim scope, and help you refine your analysis of the competitive
advantages resulting from the available claims.
The final decision should be made by weighing the cost of
patenting against anticipated profits (given the predicted claim scope).
Copyright © 1997 Greenberg
Traurig - All rights reserved. Used with permission.
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Resource Center Ground Rules.