Getting a return on investment on your patent portfolio
According to the US Patent Office, there are more than 3 million patents in force today in the United States. However, it is estimated that fewer than 3 percent of these have been licensed or commercialized, which means that ultimately they are not making any money for the inventor.
It seems inconceivable that any business would hand over large amounts of cash (the lifetime cost of a patent filed into the major jurisdictions around the world is approximately $1M) for an asset that has less than a 3% chance of generating a return (you are better off at the Roulette table with those odds!). Regardless of this, many companies are still investing significant amounts to patent ideas that they will likely never benefit from.
This does not mean patents are “bad”. Patents can be incredibly valuable. Unfortunately, they can also be waste a lot of time and money.
Are you actually using your patents?
According to Forrester Research, “U.S. firms annually waste $1 trillion in underused intellectual property assets by failing to extract the full value of that property through partnerships.”
Our work with company’s around the globe supports this research. It is remarkable how often we come across companies who spend substantial amounts on patents but have never stopped to check what their return on this spend really is.
When faced with this situation we ask the patent owner three simple questions:
- Have you licensed these patents to anyone?
- Have you litigated (enforced) these patents against anyone?
- Do you have an active programme to sell these patents to a third party and are they interested in buying?
Over the long term if the answer to these three questions is “no,” then there is absolutely no point in having that patent. Zip. Nil. Nada. Why?
The answer lies in the nature of patents: a patent is a sword not a shield – you need to actively use it to generate value.
Monetizing your patents
You can extract value from a patent in three fundamental ways:
- Licensing agreements: By convincing a third party to pay you to use your patented technology. This could be a one-off fee, an on-going royalty, a premium on the product relative to competitor products or even a commitment to buy the product.
- Defending your patent through litigation: If asking politely doesn’t cause them to cough up money or do what you want, you either walk away or sue and recover sufficient damages or other advantages (injunctions, suit dismissals etc) to offset what are likely to be substantial litigation costs. In New Zealand, you’d be looking at about $250k plus for a high court trial, Australia $500k plus, and in the US litigation is likely to start around $2 million. Large bets on long odds indeed.
- Sale: Recent years have seen the emergence of patent markets so you can try to sell your patent. The value of your patent is essentially a function of (1) and (2). That is, if it is not capable of generating income or being a useful weapon in a patent litigation suit , then its effective value is likely to be very low or zero.
I should note at this point that some proponents of patents argue that patents can have a deterrent effect and that merely by having them they dissuade competition from entering a market. First, this is extremely hard to prove: it’s akin to saying “the reason I don’t get burgled is because I have a burglar alarm” – it could be but it could also be that there are no burglars in your neighborhood. Second, it *can* be true that patents act as a deterrent but it is the exception, not the rule. Generally, if a company is earning super margins from a product then the defences it has in place that enable it to earn those super margins will come under intense competitive pressure. If that defence involves patents that in the long run, the company will typically need to sue with that patent to defend those margins or face copy cats.
What’s the point?
In the long run, if you’re not doing one or more of the above (ie. if you’re not wielding the sword or selling it someone who can) there is no point in having a patent at all. Put simply: patents sitting on the shelf have little to zero value regardless of what you paid for them or what you’ve been told they are worth. It also pays to note that patents are perishable: they have a finite life and every week their potential value ebbs away. Just like a sword, eventually they rust away.
An example of this can be seen by looking at the sale of one of the largest portfolios in patent history. In this situation, a new General Counsel was appointed at a major US corporation. The business had hundreds of patents that it had never enforced, but it was paying millions of dollars in fees for the upkeep of these patents. The first thing the new General Council did was implement an aggressive licensing campaign on these assets, followed by suing anyone who did not co-operate. Long story short: he turned a department costing millions into one generating millions – he was prepared to wield the sword.
On the flip-side, we worked with a manufacturing-based client who had developed a “unique” construction method. The attorney working for the client encouraged a strategy that included filing a patent and further R&D/market development. The manufacturing company later approached EverEdge for an independent view and we conducted an audit of the company’s intangible assets and analysis of its competitors. As we worked through this process, it became obvious that “patent” did little to protect the invention and that the invention was not especially unique and had already been copied offshore.
The result of this was that the manufacturing company sunk $930,000 on patents, roughly 2X as much on R&D and committed to a major market entry. The investment in R&D and patents cost the client $4.5M investment for $0 return. The lesson from this? Understand if your patents are actually worth the paper they are written on and make sure that you are actively leveraging them – or else letting go of them and concentrating on the other tools you have in your arsenal to build and protect your competitive edge.
The key take out from this is that if you have patents that you’re not actively licensing, litigating or sell them, then you’re unlikely to be maximizing your potential return on investment. Understanding how patents fit into your overall business strategy and how these can be leveraged to create a stronger intangible asset position can pay significant dividends both in the short and long-term.