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IP Resource Center

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 client’s 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 costs.

CLAIM SCOPE

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 product.

"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.

ENFORCEMENT

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.

PATENT COSTS

Patenting is also a substantial investment. Costs vary substantially depending on the complexity of the technology, but it’s 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 business concept.

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. It’s 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 know about?

What problems have I solved, and how have I solved them?

SELECTING THE NEW FEATURES THAT MAY BE COMMERCIALLY VALUABLE

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. It’s 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 licensee’s 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. That’s only 0.5% to 2.5% of the street price.

FEATURE LONGEVITY

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. There’s 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 it’s 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 you’ve 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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