The importance of patents

Having a directed patent strategy can reduce company costs and increase value

A patent provides its owner with the right to exclude others from exploiting the patented technology, including, for example, making, using, or selling the patented invention. This “exclusive right” enables the patent owner to recoup development costs and obtain a return of investment in the development of the patented technology. Effective patent protection stimulates research and is a key requirement for raising venture capital. It is also crucial to overall economic growth. A company that decides to file patent applications should adopt a strategic approach that obtains value from patents while minimising costs associated with obtaining the patents.

Value from patents Patents provide a wide range of value to their owners, some of which may be more applicable to one business or another. First, patents provide freedom of movement in the company’s field. For many companies, this freedom of movement can be very valuable, especially in a crowded field with many competitors or in a field dominated by one player. Filing patent applications early helps limit the risk that someone else has obtained (or will obtain) a patent on the same idea. This early mover position provides the company with greater assurance that it will not have to license technology from a patent holder. Indeed, the sooner patents are applied for, the better the chance that someone else will not be first.

Second, patents provide licencing opportunities with companies inside and sometimes even outside a company’s field. An active patent program can generate revenue from the licencing of patents which cover technology or business processes that are not practiced by the company. Patents allow individual inventors and small businesses the option of obtaining licenses or selling rights to others who may be in a better technical and/or financial position to bring the ideas to market. Rambus, Qualcomm, and other technology companies are among those that no longer manufacture products but rather focus on technology innovation and licencing.  Some companies licence the intellectual property on technology used by the company to competitors, forcing the company to constantly innovate and re-invent itself. Other companies regularly patent technology which they never commercially practice, but instead sell to others that do.

Thirdly, patents provide increased overall corporate value. Corporate valuation relies greatly on a company’s intellectual assets, such as, patents. Today, the capital assets of Fortune 500 companies account for only 15% of the company’s value, whereas intellectual assets account for 85% of the company’s value. Fourthly, patents provide for the generation of prior art to protect the company from patent infringement suits. An active patent program provides a reservoir of prior art which prevents others from receiving patents which may exclude a company from practicing important technology and processes.

Patent application process To obtain a patent, a patent application has to be filed, describing the invention in technical terms detailed enough to enable a person of skill in the particular field to understand the invention well enough that he or she could “practice” the invention. The application has to meet certain legal requirements. The Patent Office of the country in which the patent application is filed “examines” the invention described in the patent application for novelty and inventiveness.  The examination may take two or more years.

A patent in a country can be granted based on a patent application filed directly in that country. For example, a U.S. patent can be granted based on a patent application filed with the U.S. Patent and Trademark Office, and a German patent can be granted based on a patent application filed with the German Patent Office. A patent can also be granted based on a patent application filed first in one foreign country and then within 12 months filed in a second country with a claim of “priority” to the filing in the first foreign country. For example, a German patent can be based off of a German patent application filed 12 months after a U.S. patent application to which it claims priority.

The Patent Cooperation Treaty (PCT) offers a simplified patent application procedure for over 100 countries worldwide. It enables inventors to file a single international application designating many countries, instead of having to file separately for national or regional patents. In the “international” phase, an international search and preliminary examination are performed. In the “national” or “regional” phase, the patent granting procedure is then carried out by the relevant national or regional patent offices. Most frequently, the PCT application is filed 12 months from the filing of a patent application filed directly in the patent office one of the member countries, such as the U.S. or U.K.

To identify and realise the full potential of value from patents, companies should define a strategy for assessing and protecting their intellectual assets. Part of this strategy includes the development of a patent program by which new technology is identified, assessed, and included in patent applications. Further, the strategy should identify ways to maximise the value of patents while reducing costs associated with them. The value-cost assessment is particularly important with international patenting.

Strategic considerations for international patent filing Figure. 1 depicts a relative comparison of costs and economic importance for obtaining patents in various countries. This diagram is a general comparison. Economic importance in certain countries may be different based on the type of technology. For example, a pharmaceutical for treatment of malaria may have far greater economic importance in Brazil than an electric circuit for controlling machine tool equipment. Furthermore, as discussed below, there are ways to reduce the costs associated with different countries based on specific patent laws and fees for the particular country. An up-to-date knowledge of the patent rules and regulations in several countries is very valuable to reducing costs of patenting.

As depicted in Figure 1, costs for obtaining patents in Japan are much greater relative to costs for obtaining patents in Canada. The value, though, in relative economic terms of having a patent in Japan is greater than having a patent in Canada.

Figure 1: Importance vs. patent costs for various countries

An important consideration in the strategic approach to filing international patent applications is consideration for different rules and fee structures of different patent systems. For example, some countries allow multiple inventions to be included in one patent application, while others require that one patent application be used for each invention. The U.S., for example, requires that separate inventions be filed in separate patent applications. Depending on the country, it may be possible to combine patent applications that are filed separately in some countries and avoid filing costs of multiple applications in some countries.

Different countries also charge varying fees for the patent application filing depending on the number of claims included in the patent application. Claims are the legal section that define the scope of the patented invention. Some countries base the patent application fees based on the number of pages of the patent application while others base fees on the number of claims in the patent application. It is relatively common practice for companies to file identical patent applications in multiple countries. However, doing so increases the costs of the filings. With patent applications in Japan, for example, there are dramatic cost savings by reducing the number of patent claims. A company that files a patent application in the U.S. with 20 claims can achieve great savings by reducing the number of those claims. For instance, we often limit the number of claims in Japanese applications to three or less. The remaining claims from the original U.S. patent application are incorporated into the text of the Japanese patent application. If needed, these removed claims can be used to further limit the claims if the patent is challenged. The cost savings over the life of the Japanese patent is approximately $20,000 per patent in annuities alone, with further cost savings during prosecution (the proceedings through which the application is examined by the patent office).

CREATE Act One recently-adopted law in the U.S. illustrates the importance of having an understanding of different country’s patent laws. The Cooperative Research and Technology Enhancement (CREATE) Act affects what qualifies as prior art in the U.S. Patent Office. Prior art is used to prevent patents from being granted or invalidate the patents after they are granted. Before the CREATE Act, if a university and a company developed technology as part of a joint research agreement, work done before the joint research by one of the two could be used as prior art to the work done jointly. The CREATE Act aims to disqualify certain activities by parties that later become participants in a joint research agreement. Despite the change in the law, though, the CREATE Act has several limitations that must be addressed in the joint research agreement as well as the patent application. Furthermore, the CREATE Act treats prior art very differently than how prior art is handled according to the patent laws in Europe and Japan.

Conclusion Patents can provide individuals and companies with great value and increased return on the investment made in developing a new technology. Patenting should be done with an intelligent strategy that aligns business interests for implementing the technology with a wide range of options in how, where, and when patents are sought. As an example, with attention paid to international considerations and the rules in specific countries, it is possible for a company to achieve significant savings and improve the rights obtained using patents.

By Paul S. Hunter, patent attorney Foley & Lardner LLP