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Why Protect IP? An Economic Approach

Posted by Nicole Liotine | Dec 27, 2013 | 0 Comments

By Daniel P. Custodio –

In my introductory blog, I talked about who “you” are; you are the CEO of a young startup. Creating and selling new products and developing your market are your primary objectives. There is a whirlwind of activity going on to achieve those objectives, from research to product development to high volume production.

R&D is pursuing several promising avenues of discovery that could be turned into innovative new products (although probably consuming its budget faster than you'd like). Development of new products is also progressing nicely in the pipeline, and you need them to stay within budget. On the other side of the ledger, you have a product in high volume production that is the breadwinner for the company. (See Figure 1, A Product Development Pipeline.)

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Figure 1. A Product Development Pipeline

You divide nearly all your focus and priority between business operations and strategy (ignoring for the moment general administration and overhead). You are constantly vigilant on costs and throughput and the most impactful spends. “Cash is king,” as they say; so who has extra cash to spend on more intangibles?

Are intangible assets such as intellectual property (IP) rights (IPR) worth pursuing at this stage of your company? Is it good strategy to pursue IP protection at the early stages of product and business development?

Well… like most business decisions, the answer can be framed and assessed both qualitatively and quantitatively. What are the benefits, costs, risks? Is it possible to reduce a cost-benefits analysis to a comparison of net present values (NPV) of various options? In a multi-part series, I discuss these two topics.

Background and Context

As background, there are several types of IP protections and rights that may be relevant to your situation. After this initial series, future postings will explore different types of IP protections and rights in greater detail. But for context, I will express just a few concepts here.

IP may comprise ideas that are proprietary, confidential and valuable. Ideas that are proprietary, valuable and kept secret perhaps is protectable under trade secret law. Or an idea that is embodied in an invention perhaps is protectable under patent law as a utility patent. Or a creative idea that is expressed in some medium perhaps is protectable under copyright law. Or an indicia of sourcing, such as a logo or brand, which identifies your goods or services to consumers perhaps is protectable under trademark law. Or relatedly, an idea formed into ornamental packaging perhaps is protectable under patent law as a design patent. Between all these potential IP protections, there may be (and probably is) overlap between different forms of IP protections and rights. (See Figure 2, A Sample Matrix of IP Protections.)

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Figure 2. A Sample Matrix of IP Protections

Here, for simplicity, I will consider only utility patent protection in a product development scenario. My simplified scenario follows only these phases: R&D, prototyping, and production.

During the R&D phase, innovative or cost-saving ideas may be in evaluation and experimentation. Some of these ideas may ripen into new product features.

Later, during the development phase, the best ideas coming out of R&D may be further culled, refined and released. For example, new process technology may be released and implemented into production. Or product architecture and design may include new features from R&D.

As the product nears production-release, technical product specifications may be published as well as engineering trade articles and press releases. Likewise, prototypes may be offered to key customers or early adopters. Objectives for the new product introduction probably include achieving first-to-market leadership and other competitive advantages.

Without considering other forms of IP protections and rights at this time, utility patents may play a part in protecting these IP embodiments in your products or processes. In the following sections, I will give an idea of cost, potential benefits, and risk. I draw on publicly available sources for this information, such as the US Patent and Trademark Office (USPTO), or on estimates of attorneys' fees.

Costs

To avail oneself of patent protection, it is a requirement to file a complete patent application before any activity that may publicly disclose the invention (for example, by publication, public use or public sales). Depending on a company's strategy, it may seek patent protection domestically or abroad. The formal requirements to obtain a patent vary from jurisdiction to jurisdiction, and they must be validly met within each. (See Figure 3, A Sample Multi-Pronged Patent Filing Strategy.)

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Figure 3. A Sample Multi-Pronged Patent Filing Strategy

The cost of filing a patent includes both government agency costs paid to the USPTO, and fees to the patent agent or patent attorney who assists you. USPTO costs to file and maintain (through the third year) a non-provisional utility patent may typically range from $3,500+ depending on the complexity of the patent and its claims. (See Figure 4, An Estimate of USPTO Government Fees.)

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Figure 4. An Estimate of USPTO Government Fees

Patent attorney fees will depend on the range of services a client seeks and on the patent agent or attorney selected to do the work. A ballpark for fees may range up to thousands of dollars. (See Figure 5, An Illustration of Estimated Attorney Fees.)

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Figure 5. An Illustration of Estimated Attorney Fees

Benefits

Because products or their specifications may be provided to customers or the public during prototyping and new product introduction, competitors may be able to inspect or reverse-engineer them to learn about various product or technology features. If a patent validly covers the scope of those product or technology features, patent law provides certain rights to the patent-holder. Accordingly, certain limitations are imposed on the public regarding the product or technology features validly claimed in that patent.

A granted patent gives the patent-owner the right to exclude others from using, making, selling or offering for sale, or importing the matter claimed in the patent. Therefore, with an effective and valid patent covering its innovative features or technology, a company would be able to prevent competitors from lawfully copying the protected IP.

Assuming an effective and valid patent covers the innovative features or technology, typical benefits of an effective and valid patent include:

The right to mark “patent pending” while the application is pending, which can serve as notice to some degree;
Ownership rights in the IP recognized under patent law (and other applicable laws);
In licensing or other negotiations, potentially enhanced bargaining positions by the IP rights accorded under patent law;
Potentially enhanced valuations of the IP;
Uses in defending against allegations of copying another's IP;
The right to enforce the exclusionary rights against another who may be infringing the protected IP.
For example, the right to enforce the IP rights may be particularly strategic if a competitor is found to be using, making, selling or offering for sale or importing copies of the protected IP. An effective and valid patent would provide legal bases for a patent-owner to seek remedies, including reasonable royalties by an infringing competitor, money damages based on the patent-owner's lost profits, a court order to stop the competitor's activities. Depending on the situation, an award of lawyers' fees may also be warranted.

Risks

Of course, filing a patent application is no guarantee of successfully obtaining a granted patent by the USPTO. Moreover, a successfully granted patent by the USPTO is no guarantee that a court would uphold it as valid and effective in litigation.

So do the costs in pursuing a patent justify benefits that may never ripen, and which are only possibilities? Put another way, what is given up by not pursuing a patent and saving the cost of expenditures instead?

Without a prerequisite patent filing, the potential to obtain patent rights is simply nonexistent. A formal requirement is that a patent application must be filed before public disclosure of the invention occurs, which typically includes publication, public use, public sale, or another person filing a patent application on the same invention.

Without the possibility of having valid and effective patent protections, a company cedes a potential part of its IP defense strategy against allegations of infringing another's patent.

Without the possibility of having valid and effective patent rights, a company cedes a potential part of its IP enforcement strategy, and competitors potentially may be able to quickly (and legally) copy a new product, potentially saving R&D costs and learning-curve time.

Conclusion

At this stage in my discussion, the qualitative discussion above proposes various hard costs involved in pursuing patent protections. These costs may potentially result in benefits having both strategic and tactical benefits.

While perhaps qualitatively helpful, this discussion does not provide much insight or answer to an economically-phrased question. In my next post, I will propose a model of assumptions that attempts to quantitatively compare the hard costs vs potential outcomes, by assigning probabilities and reducing the results to net present values.

IMPORTANT NOTE: This blog posting is based on my opinions formed by past and present business and legal experience. DISCLAIMER: These blog postings are not meant to constitute legal advice. Results and outcomes depend on a variety of factors unique to each matter. Results and outcomes do not guarantee or predict a similar result in any future matter.

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