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Your Company’s Patents:
Evaluating their Strategic Value

by Randy J. Pritzker and Daniel G. Rudoy

 
   
 
   

Patents can be—and often are—enormously valuable. A company may use a patent, for example, to generate profit indirectly, by helping to establish the position of a product in the marketplace. Or a patent may help generate profit directly, by selling/licensing/enforcing the patent against an infringer to collect damages. Patents can be an integral part of any business that holds them, and for that reason it’s crucial that everyone in a firm, including the CEO, understand their strategic value.

What precisely is a patent? A patent is a grant from the U.S. government that gives its owner the right to exclude all others from making, using, selling, or offering for sale what is covered by the patent in the U.S. for the term of the patent. Patents not only protect ideas and concepts relating to products, processes, business models, or designs, but also afford a limited monopoly that is not only legal but also encouraged under U.S. law.

Factors Contributing to Strategic Value of a Patent

Evaluating the strategic value of a patent starts with the scope and breadth of the patent’s claims (which define, in technical terms, the scope of protection conferred by a patent). In general, the broader the claims, the more valuable the patent. Similarly, the larger the difference between the scope of what is covered by the patent and the prior art (all publicly known subject matter relating to the invention), the more valuable the patent.  To this end, identifying relevant prior art (e.g., through searching), can be very helpful. Another consideration is whether it is possible for a competitor to circumvent the exclusionary right granted by a patent by "designing around" the patent. This can be difficult to do if the claims are strong and broad.

The language of the patent claims should also be examined to ascertain the difficulty of verifying that someone else is infringing the covered technology if, for example, it is but one small piece of a larger product or invention. Who are the potential infringers of the claims? A patent written in such a way that a company's customers are potential infringers may have less value than a patent written in such a way that a customer's competitors are potential infringers. For example, if you own a patent covering a medical device, you may wish to sue a competitor making/selling an infringing device rather than suing the doctors who use the infringing device, as they may very well be your customers, too. Opinions by counsel may help to resolve some of these issues.

The prosecution and litigation histories of a patent provide further insight into its value. Is the patent part of a broader intellectual property portfolio, and are there any related patents or pending applications? It is important to know whether the patent has ever been licensed or sold. If so, under what terms? Any information about related patents, such as the terms under which they have been sold or licensed, may be useful to consider as well. Has the patent ever been litigated? If so, what was the outcome?

Other Factors Contributing to Strategic Value of a Patent

The strategic value of the patent to a company naturally depends on the commercial value of products, services, and their features covered by the patent. In turn, the value of such products in the marketplace depends on players in the marketplace (e.g., competitors), current product sales, and the predicted future sales potential. A patent that covers a high-demand and profitable product has greater strategic value than a patent covering a product that neither sells well nor is projected to sell well in the future. In addition, a patent should offer protection in the locations where the markets of a company's products are.

A patent's potential as a defensive tool in warding off potential threats should also be evaluated. As a defensive tool, a patent may help a company to establish a position for a product in a new market. For instance, patents can provide barriers to entry to a company's competitors, particularly in cases where the company can patent its business model or an important feature or features of its main product or service. Such a barrier may provide the company with a competitive advantage in the marketplace. Alternatively, a company may simply threaten competitors with the patent when needed or use it as leverage in a negotiation for business deals. Indeed, patents are often kept as company assets that others may respect, fear, design-around, and value.

Offensive Potential

Used as offensive tools, patents may be used to generate revenue directly through licensing, sales, and/or enforcement. These options should be considered in light of: (1) the company's goals and competition, (2) the position of the patent-covered products in the marketplace, and (3) the strength of the patent itself and its position within what might be a larger patent portfolio.

Licensing some patents can yield a steady revenue stream without necessarily relinquishing patent rights. A patent on a mundane product unrelated to a company's main product line may provide a revenue stream without interfering with the company’s business, and it may be done on either an exclusive or non-exclusive basis to a number of entities. Qualcomm, for example, has made over $1.3 billion (plus continuing royalties) from licensing intellectual property. IBM is another company that has had a very successful licensing strategy, earning over $10 billion in IP licensing royalties over the years.

Depending on license terms, however, some licenses may not generate revenue for some time, until after sales of the product or products begin, whereas sale of a patent often will provide cash up front. Patents could be sold to any company viewing them as strategically helpful, including the many patent-holding companies in business today.

Enforcing patents may generate revenue by getting a potential licensee or infringer to pay up. In recent years, many license agreements were reached only after the patent owner initiated litigation, or at least threatened to litigate. In the absence of a licensing agreement, there is a great potential for revenue through awards of damages. One series of three cases in February 2010, between Johnson and Johnson and Boston Scientific, ended in a final total settlement of $1.7 billion.
     
Finally, a patent has great strategic value as an asset. On the one hand, a patent can be used to increase shareholder value by helping to produce sales, draw business partners, and attract financing. As an additional example, a patent may be used to generate revenue through marketing. A company can tout its patent protection by appropriately marking its products and by noting its protection in its promotional literature. As an example, a company can label its products as "patent pending" once a patent application has been filed, even though the resulting patent will not issue for some time.

Conclusion

Scope and coverage, product marketplace value, and defensive and offensive potential are just some of the issues to consider when evaluating the strategic value of a patent. Note that all these factors should be considered in light of the patent’s term (20 years from filing for a utility patent, and 14 years from issuance for a design patent). After all, many things can change over these periods of time, including a company's core technologies and products, customers, and competitors. In today's fluid and competitive marketplace, we can be sure of at least one thing – a well-developed and strategically-positioned patent portfolio will serve a company well.


       
   
 
       
   

The Authors

Randy Pritzker Daniel Rudoy

Randy J. Pritzker is a shareholder and Daniel G. Rudoy, Ph.D., is a technology specialist in the Electrical & Computer Technologies Group at the intellectual property law firm of Wolf, Greenfield, the largest IP-only firm based in New England.

They can be reached at rpritzker@wolfgreenfield.com and drudoy@wolfgreenfield.com respectively.

 
       
   
 
       
   
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Copyright 2011 by Randy J. Pritzker and Daniel G. Rudoy. All rights reserved.

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