State of Innovation

Patents and Innovation Economics

Reasons for Obtaining a Patent

Note that this post is based on free audio CD, titled How to Make Your Patents a WMD- Weapon of Market Domination.  If you want a free copy of the audio CD click here

Now that you have an idea of what rights a patent (see Rights Obtained with a Patent) will provide you, I will discuss the major economic reason for obtaining a patent.  You should not be interested in non-economic awards, ego-boosters or that-a-boy reasons for obtaining a patent.  But if you are, you might as well quit listening this program now.  The single most important reason for obtaining a patent is to obtain a market advantage that generates dollars.  The fact that a patent provides you a property interest in an area of technology should give you some marketing advantage.  For instance, the patent might prevent your competitors from offering a certain feature and this feature means you sell more of your products or services or a patent might lower your manufacturing costs or raise your competitors and now your margin is higher or you sell more products because you can sell for less.

Obtaining a market advantage is the main reason for obtaining a patent.  This is the advantage that allows you to create a Weapon of Market Domination.  If you compare the cost of obtaining a patent to your marketing and sales cost you will spend over the life of a patent, you will see that a patent is a great bargain.  A patent lasts from 20 years from the date of filing. The average cost to obtain a US patent ranges from $10,000 to $30,000.  Even in a fairly small market, the marketing and sales costs over the first 10 will dwarf the patent costs.  Note that the patent costs can come early in your commercialization process.  As a result, later in the program, we will explain some strategies for delaying these costs and reducing your risk in investing in patents. 

A second reason for obtaining a patent is definsive leverage.  In the event you are sued by a competitor, if you have a patent portfolio, you may be able to convince your competitor they infringed one of your patents, or they would like to have a license to one of your patents.  If this is the situation, then the case can usually be resolved by cross-licensing patents for a lot less money than having to litigate the issue.  If you do not have any patents, then the only way for your competitor to obtain an economic return, is to move forward with the lawsuit.  If you compare your cost of obtaining patents to obtaining patent infringement insurance, you will see that patents are comparability a bargain and provide more benefits than insurance.  However, you should be clear that having a patent portfolio will not replace insurance. 

A third reason for obtaining patents is to increase your company’s valuation.  Investors want you to be able to prove that you have a protectable market and patents can help you prove this.  This is a very common reason for start up companies to obtain patents.  Failure to obtain patents for your start up company can cost you millions of dollars of valuation. 

A fourth reason for your technology company to have patents is in case a key employee leaves your company.  If an employee moves to a competitor and has access to key technologies and suddenly your competitor starts using this technology, you are normally limited to a trade secret case to stop your competitor from using your technology.  In a trade secret case, you have to prove that technology was a trade secret, the employee had access to the trade secret, the employee took the trade secret with them, and your competitor used the employees knowledge to develop this technology.  However, if you have a patent on the technology, all you have to prove is that your competitor is using the technology.  That’s it.  While obtaining patents is as not as cheap as obtaining a trade secret, it is significantly more secure than a trade secret. 

Patents have a number of other advantages.  One of the lowest priority reasons for obtaining a patent is to generate licensing revenue.  However, you can see from the IMB case (see the article The Value of Patents: Case Studies) that patents can generate significant royalty income.  Wouldn’t you like to have royalty income arriving quarter after quarter?  In addition, this is a common goal of independent inventors.  My advice to independent inventors is to remember that even if your goal is to license the patent, the licensor is interested in obtaining a market advantage.  You should evaluate any potential patents’ ability to provide you a market advantage, its defensive value if you’re sued by a competitor, whether the patent will increase your companies market valuation, and whether the patent will provide you with royalties.

June 3, 2009 - Posted by | Uncategorized

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