State of Innovation

Patents and Innovation Economics

How Do You Determine if it Makes Economic Sense to File a Patent?

Just because you can obtain a patent for your invention does not mean that you should file for a patent.  So how do you determine whether it makes business sense to file a patent application on your invention?  The goal of filing a patent application is to create a barrier to entry.  There are many ways to create a barrier to entry in business.  For instance, a company’s customer list can give you an advantage over potential competitors since they will not know who the key people are in the industry.  Another barrier to entry might be your location if you are a retail store.  A gas station on at a busy intersection with easy access has an advantage over competitors that cannot be at the same busy location.  Trademarks may also provide a barrier to entry.

In order to understand the value of a patent to your business it is helpful to make an analogy to physical barriers to entry.  You probably lock the door to your house, but you know that someone can break the window and still get into your house.  So why do you lock the doors to your house?  Probably because you know that it will slow down any burglars and make it more difficult to enter your house.  As a result, you increase the chance that any burglars will either give up or move on to someone else’s house.  Note that you can always spend more money on the locks to your house, but at some point it doesn’t make economic sense.  If you spend $1 million on a safe for a $10K diamond, it doesn’t make sense.  The same thing is true for patents.  You are not trying to create a perfect barrier to entry, you are trying to increase your competitors cost and slow them down if they decide to compete with you.  For many of my clients the main goal is to make it painful enough for someone to compete with them that the potential competitor would rather buy out my client.

Thus the question is not whether you can afford to enforce a patent, or whether having a patent will eliminate all you competitors, but whether filing for a patent application or obtaining a patent will increase your competitor’s cost and slow down their entry into your market.  If you spend $10K to obtain a patent and it increases your competitor’s cost $100K and slows them down, then it probably makes sense to file a patent application.

The size of your market must also be taken into account.  The bigger your market the smaller the barrier needs to be.  For instance, a company with $5 billion a year in sales in a well defined market should file patents on almost any invention in their market space.  Vice versa the smaller the market the bigger the barrier to entry needs to be.  I have had clients walk into my office where I am pretty sure we can create an almost perfect barrier to entry, but the market is only $80k a year.  This is essentially buying a job and it makes no sense to file a patent for that size of market no matter how strong the barrier to entry.

Remember the goal of patent is to create a barrier to entry.  Just like physical barriers to entry, you should not expect a perfect barrier to entry.  For most startups, you want a strong enough barrier to entry that your competitor will buy you out rather than compete with you.

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April 11, 2012 - Posted by | -How to, Patents | ,

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