Wealth of Ideas Newsletter

Wanted: Partners in Our – and Our Clients' – Success!

Wealth of Ideas Newsletter, July 2010

Over the last two decades, General Patent Corporation has had an informal network of people, businesses and other organizations that have referred business to us. Patent practitioners, inventors, IP litigators, licensing executives, business owners, technology transfer managers and others who know what we do have referred patent owners to General Patent.

We decided to formalize these arrangements via our new Affiliate Program. Anyone who might come across potential new clients for General Patent can sign on and earn significant income if the referral turns into new business for General Patent. You probably already know more potential clients than you think!

Perhaps you know someone, or know someone who knows someone, who could benefit from General Patent’s comprehensive patent enforcement capabilities. This includes any patent owner who believes his (or her or its) patent has been infringed and appears to have a viable claim.

How Our Affiliate Program Works

Let’s say you know or come across a patent owner who believes his patent has been infringed. If you refer that patent owner to us – and it is not someone with whom we have had prior contact – there are several points at which you can earn income for your efforts:

  1. If the patent owner signs a Letter of Intent (LOI) with us, we immediately pay you a bonus.
  2. If the patent owner decides to have General Patent manage a patent enforcement campaign on his behalf, you earn a second bonus.
  3. You then also share in all revenue (awards, settlements, licenses, etc.) generated from the patent enforcement campaign, and this can be a significant amount of money since patent infringement settlements can run into the millions of dollars!

Who Should Become a GPC Affiliate?

Anyone whose contacts include likely owners of IP – inventors, business owners and executives, and tech transfer managers, for example – as well as people who are likely to know or come in contact with owners of IP are all appropriate candidates to become a General Patent Affiliate. This includes, but is not limited to:

  • Patent Agents and Patent Attorneys
  • Commercial and IP Litigators
  • Licensing Executives
  • Business Development Executives
  • Tech Transfer Managers
  • Inventors, Scientists, Engineers and Researchers
  • Consultants in All Disciplines
  • CPAs and Financial Planners
  • Venture Capitalists and Other Fund Managers
  • Retirees from Any of These Categories

Who Are Prospective Clients for GPC?

Any person, business or other organization that owns a patent – and believes that patent has been infringed – is a prospective client. While patent assertion is our primary business, we can also assist patent owners who want to sell or license their patents as well as businesses that need IP consulting and advisory services.

Getting Started

If you think you might know of some good prospects, but aren’t sure about how to promote GPC’s capabilities to them, we can help. Our Affiliate Marketing Guide leads you through all aspects of the process, including:

  • Finding prospects – and identifying the right person to speak with at a company or institution
  • Identifying the prospect’s needs
  • Expanding your current prospect network
  • Introducing General Patent to prospects in your network
  • If you have a website, how to use it to promote General Patent
  • If you are a business, law firm or consultant, how to integrate GPC into the package of services you offer

We are not talking about cold calling. We show you how to grow concentrically from your current network of contacts, and how to do so in a professional, collegial and friendly manner. We do not expect you to try to “sell” something a person does not want. The process is to match people and businesses with a specific need with the company best equipped to assist them.

GPC Affiliates also enjoy a comprehensive support package. For example, you can send us your e-mail contact list, and we will use our e-mail broadcast system to send fully customized e-mails on your behalf.

No Upfront Investment!

Just as General Patent requires no upfront investment from our patent enforcement clients, becoming a General Patent Affiliate involves no upfront investment on your part. And the amount of time and effort you devote to Affiliate activities is completely up to you.

You’ve probably built a significant network of contacts over the years. It’s now time to reap the rewards! Even a single referral can pay off handsomely.

To sign up for our Affiliate Program or learn more, call Rich Ehrlickman or Alec Schibanoff at our corporate offices in New York. The number is 845-368-4000. Rich is at Ext. 113 and Alec is at Ext. 116.

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The Bilski Case: It Could Have Been Worse!

Wealth of Ideas Newsletter, June 2010

At the eleventh hour – and after almost eight months of deliberations – the U.S. Supreme Court delivered its anxiously-awaited decision in the case of Bilski v. Kappos.

The country’s highest court affirmed the lower court’s decision – namely, that Bilski’s invention was not patentable. However, the Supreme Court stopped short of ending the practice of granting patents on business methods and software, which many observers feared might be the outcome.

The high court found it impossible to categorically exclude methods of doing business from patentable subject matter, which would clearly contradict the Congressional intent:

“Under §273(b)(1), if a patent-holder claims infringement based on ‘a method in [a] patent,’ the alleged infringer can assert a defense of prior use. By allowing this defense, the statute itself acknowledges that there may be business method patents. Section 273 thus clarifies the understanding that a business method is simply one kind of ‘method’ that is, at least in some circumstances, eligible for patenting under §101.”

In saying so, the Supreme Court left the door ajar for the future of business method patents.

Although the high court agreed with the Court of Appeals for the Federal Circuit (CAFC) insofar as the unpatentability of the Bilski invention, it disagreed with the Federal Circuit’s application of the machine or transformation test.

“The Federal Circuit incorrectly concluded that this Court has endorsed the machine-or-transformation test as the exclusive test. Recent authorities show that the test was never intended to be exhaustive or exclusive,” wrote Justice Anthony Kennedy. Sounds like a slap on the wrist: Ouch!

The Supreme Court’s decision in Bilski “did not provide much clarity of what is patentable,” observed Alexander Poltorak, General Patent Corporation’s CEO and chairman and also the founder and president of American Innovators for Patent Reform (AIPR). “The ‘machine or transformation’ test promulgated by the Federal Circuit was found by the Supreme Court to be too rigid, but it did not provide any alternative test to shed light on this question. Under this decision, methods of doing business, as well as software, get to live another day.” And that’s good news for innovators and those who support and finance innovation and bring new products and services to market.

The Court heard the case in early November 2009, and spent the next several months deliberating it while patent attorneys worried and bloggers speculated about the outcome.

“It is ironic that the patentability of business methods should even be in question,” observes Dr. Poltorak, “since business method patents have been issued by the Patent Office for over 200 years.” In fact, the first business method patent was granted on March 19, 1799 to Jacob Perkins of Massachusetts for an invention for “detecting counterfeit notes.”

With that in mind, Dr. Poltorak continues, “The ‘machine-or-transformation’ test promulgated by the Court of Appeals for the Federal Circuit (CAFC) shows a lack of appreciation of the evolution of the mechanical technologies of the Industrial Age to the software-driven innovations of the knowledge-based economy of the 21st century.”

The Supreme Court’s decision on Bilski points to an interesting tension between the U.S. Supreme Court and the CAFC, which is the highest patent court in the nation and the court that strives to achieve clarity in patent law by promulgating what are known as “bright line” rules – such as the rule that a permanent injunction followed automatically upon finding of infringement (MercExchange LLC v. eBay Inc.), or the rule that “Teaching, Suggestion or Motivation” (TSM) was the dispositive test for obviousness (Teleflex, Inc. v. KSR International). The latest machine-or-transformation test was the exclusive test for patentability (In re Bilski).

“These ‘bright line’ rules make the Supreme Court squint!” says Dr. Poltorak. “In eBay, the Supreme Court found that a permanent injunction does not necessarily follow a finding of infringement. In KSR, the high court stated that although useful, the TSM test is not a dispositive test of obviousness. And in its latest exercise of Zen consciousness, in the Bilski ruling, the Supreme Court once again slapped the CAFC on the wrist. So much for clarity in patent law!”

But there is a bright side for American inventors, businesses and patent owners. “In choosing such expansive terms, Congress plainly contemplated that the patent laws would be given wide scope,” wrote Justice Kennedy, in order to ensure that "ingenuity should receive a liberal encouragement." This is the first encouragement of innovation we’ve seen from the Supreme Court in more than a decade, and it sure brightened our day.

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Can You Strengthen Your Patent through Reexamination?

Wealth of Ideas Newsletter, May 2010

Remember the landmark ruling last August in the landmark i4i v. Microsoft case? An Eastern District of Texas jury slapped the software giant with a $290 million damages award and an injunction on sales of the version of Microsoft Word 2007 that contained the infringing feature.

Microsoft appealed the verdict before the Court of Appeals for the Federal Circuit, but the CAFC sided with the lower court – although it did extend the deadline on the Word injunction from 60 days to five months after the August 11 order.

Now Microsoft just received more bad news: The results of the patent reexamination they requested on the i4i patent − filed before the jury verdict was issued − are finally available, and all the patent’s claims were confirmed valid! As i4i’s lawyer for the reexamination put it, Microsoft’s bid to invalidate the patent “failed in a dramatic way.”

To better understand the significance of this development, this month we’ll take a look at what the patent reexamination process involves – and how it can be used by both patent owners and accused infringers to either strengthen or invalidate a patent.

Patent Reexaminations: Inter or Ex Partes

First of all, what is a reexamination? Simply put, it’s a process whereby a third party or the inventor can request a review of a patent by a patent examiner to make sure the patent’s claims are still allowable in light of newly-cited prior art (“prior art” is any information that was available to the public at the time the patent application was filed and which might be relevant to whether the invention is novel, non-obvious and, thus, patentable). Whether the entity filing for the reexam is an alleged infringer or the inventor/patent owner, the request for reexamination must be accompanied by prior art that “raises a substantial new question of patentability.”

Reexaminations can be inter partes or ex partes. In inter partes reexamination, the entity who filed the request for reexamination (the petitioner) is allowed to participate in the reexam proceedings; in an ex parte reexamination, all correspondence is between the patent owner and the patent examiner.

Inter partes reexaminations take longer and afford the petitioner a chance to be involved in the process, so they would seem to be the natural choice for a defendant in a patent suit who wishes to make the problem patent “go away.” However, inter partes reexams cost more than ex partes. And there is another important point to consider: After initiating an inter partes reexamination, the petitioner will be barred from introducing at a subsequent trial any defense that was raised – or even could have been raised – in the reexamination process.

Patent Reexams: Risks and Rewards

Defendants in patent lawsuits often initiate reexaminations of the patent(s) that they are accused of infringing. There are two reasons for that: First, the reexam can put the trial “on hold” for months or even years. It takes about three months to find out if the request for reexamination is even granted, and from that point, the reexam certificate with the decision of the examiner takes an average of 37.5 months to issue in an inter partes reexamination.

The second reason alleged infringers initiate reexaminations, of course, is the possibility of invalidating the patents they are accused of infringing. A 2008 report issued by Foley & Lardner LLP found that in the sample of reexaminations they surveyed, around 60% of all inter partes reexaminations resulted in all of the patent’s claims being rejected. Only 12% of the patents in inter partes reexams survived with all of their claims intact, and 28% changed their claims in some way to remain valid.

Clearly, patent reexamination is a risky business – and the statistics are on the side of the infringer! If the patent is invalidated through reexamination, the lawsuit is over, and the defendant doesn’t even have to incur much in the way of legal fees.

So why would a patent owner wish to subject their patents to this kind of risk? First of all, if you don’t file for reexamination, whoever you file a patent infringement lawsuit against probably will. Second, a patent that has been through reexamination and survived is stronger and more difficult to invalidate.

As with most intellectual property matters, whether or not to petition for a reexamination of your own patent (or someone else’s!) is something to carefully consider – and only proceed on the advice of, and with the assistance of, a competent patent enforcement professional.

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More Added Value: GPC Suite of Services, Part II

Wealth of Ideas Newsletter, April 2010

Last month, we told you about how General Patent Corporation examines each infringement claim to determine its merit, and chooses and manages the right law firm for each case.

This month, we continue our discussion of the General Patent “Suite of Services” with a comprehensive look at the many expenses GPC underwrites, our expertise in licensing negotiations, and how we even maintain the patent and monitor royalty payments once the deal is done.

9. GPC Underwrites All Litigation Expenses: Among all civil litigation, patent infringement is among the most expensive, second only to anti-trust litigation. Known in legal parlance as “disbursements,” litigation expenses are the out-of-pocket costs involved in prosecuting a lawsuit. The many expenses GPC covers in the course of a patent enforcement campaign include:

a. Filing Fees: While these are not a major cost, they can run into the thousands of dollars, especially if there are multiple defendants (as there often are).

b. Travel Costs: These can be substantial, especially if fact-witnesses are scattered all over the country or, worse yet, all over the world – which is often the case with multi-national infringers.

c. Depositions: Witnesses need to be deposed. That is, they are questioned by the attorneys litigating the case prior to actually testifying in court. This is part of the process known as “discovery.” These depositions must be recorded by a court stenographer and transcribed to produce a written document. We sometimes also videotape depositions of important witnesses, which can be quite expensive.

d. Expert Witnesses: Patent infringement litigation always requires testimony from experts. In fact, patent infringement litigation is often called a “battle of the experts.” Every patent case requires technical experts who testify on the questions of infringement, plus damages experts who testify on the issues of damages and reasonable royalties. Some cases require additional experts, such as licensing experts who testify about licensing practices, and patent experts who respond to questions about Patent Office procedures and inequitable conduct.

The choice of experts and their testimony is crucial to successful litigation. This is no place to cut corners and look for bargains! GPC has worked with some of the very best experts in these areas, and we spare no expense in securing the services of the most capable and talented expert witnesses.

e. Trial Demonstratives: Many cases settle before they reach trial, but we never count on this happening. Well before the trial is scheduled, we prepare for it. This involves preparing technical tutorials that are needed when the technology is complicated. Trial demonstratives can include audio-visuals such as PowerPoint presentations, videos, charts, graphs and diagrams. In addition, scale models, prototypes, props and displays will be used to illustrate the infringement theories and drive home important points for the jury.

No expense is spared to create and prepare trial demonstratives that will help convince a jury to deliver a favorable verdict for the patent owner!

f. Jury Consultants: When a lot of money is at stake, nothing is left to chance. It has become increasingly common in recent years for litigators to rely on jury consultants to help them select jurors who will be sympathetic to their client and their client’s claims. Jury consultants are usually psychologists who help attorneys select winning arguments and the language that will most effectively deliver these arguments.

g. Mock Jury Trials: Mock jury trials are essentially dress rehearsals. The jury consultant goes to the city in which the trial will take place and hires “jurors” from the same pool of people from which the actual jury will be selected. These hired “jurors” represent not only the mentality of the actual jurors who will hear the case, but they also share the socio-economic strata, education, ethnicity and demographics of the jury that will hear the case.

The attorneys split into plaintiff and defense teams, and the two teams try the case before the hired jurors. Several mock juries are recruited, and the trial is repeated several times with different juries using different arguments and approaches. Jury deliberation is video-recorded and scrutinized to see what issues the jurors focus on, what arguments work with the jurors, and what arguments do not.

While this is a very useful process, it is also very expensive. That is why they are most often used only by well-heeled corporate litigants with millions at stake.

h. Reexaminations and Continuations: If the patent goes into reexamination, or we decide to file for a continuation or continuation-in-part, General Patent pays for a patent attorney to prosecute reexaminations or continuations of the patent before the Patent Office.

10. Settlement Negotiations: While General Patent and the attorneys we engage to litigate each lawsuit are prepared to go to trial, many lawsuits never make it to trial. Instead, the parties decide to settle before going to trial in what is known as an “out-of-court settlement.” Both the attorney litigating the case and GPC’s legal and licensing professionals are involved in these negotiations.

General Patent’s three decades of experience in negotiating settlements of hundred of patent infringement cases is unmatched. Negotiating license agreements and settlements of lawsuits is like a game of chess – one has to have a strategy and every move has to anticipate the courter-move of the opponent. We take pains developing a negotiating strategy in which every move and counter-move is prepared in advance.

General Patent professionals are skilled in alternative dispute resolution (ADR) techniques, so GPC clients are represented by some of the most skilled negotiators in the industry.

11. Licensing Negotiations: We refer to General Patent as a “patent licensing and enforcement” firm because we do not always have to go to court to secure compensation for our clients. It is not uncommon for us to file patent infringement lawsuits against two or three infringers. Once we win or settle with one or two lawsuit defendants, we may be able to negotiate licenses with other infringers without having to file lawsuits against each and every one of them.

GPC handles all license negotiations, and over the years we’ve negotiated hundreds of patent license agreements. For just one client, Acticon Technologies, we negotiated over 150 separate licenses!

12. Monitor Royalty Payments: Once we have licensed a patent for a client, General Patent continuously monitors the licensees to make sure each licensee pays all monies due the patent owner in a timely matter. Since some licensing agreements are based on dollar or unit sales of the product that uses the patent, GPC maintains the right to audit the licensee’s books to make sure that you, as the patent owner, are paid every penny you are owed under all license agreements.

13. Maintain the Patent: General Patent also makes sure that its clients’ patents are properly maintained. That includes making sure that all patents are docketed in our system, and all maintenance fees are paid so the patent remains in force over its full term.

All of these services are provided at no up-front charge to you, the patent owner, but as part of the overall patent licensing and enforcement campaign that General Patent Corporation manages and finances on behalf of the patent owner on a 100% contingency basis.

We hope this two-part series has shown you just how comprehensive GPC’s services truly are. From determining infringement to finding and negotiating with additional infringers, from retaining a law firm to maintaining the patent, GPC does it all. We invite your questions about our services – and if you have a patent or patents that you believe are infringed, we will gladly review your case at no cost or obligation on your part. Contact us at info@generalpatent.com to get started.

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Added Value: The GPC Suite of Services

Wealth of Ideas Newsletter, March 2010

This month and next, we offer a two-part series about the unique and comprehensive package of services that not only enforces your patent, it may also strengthen it in the process – and all at no upfront cost to the patent owner!

Since General Patent is not a law firm, we engage a law firm to litigate each patent infringement lawsuit we undertake on behalf of a patent owner. However, successful patent enforcement is more than simply engaging a law firm and filing a lawsuit.

Patent enforcement is a complex and comprehensive effort that approaches the objective from several angles. For each patent enforcement client, GPC provides some combination of these services based on the patent owner’s specific situation and needs, but the patent owner is not billed for any of these services.

1. Evaluate the Viability of the Patent Infringement Claim: It only makes sense to pursue a patent infringement claim if several conditions are met:

a. Merits: The claim must have merit. That is, we must be able to prove patent infringement. Bringing a frivolous lawsuit will fail to produce a financial return, and it is unethical and illegal. We take great pains to verify your infringement claim before we consider filing a suit. We will not make unrealistic promises or sugar-coat what we perceive to be a hole in the infringement theory. We are honest with ourselves and with our clients. If we believe your patent is not being infringed, we will explain why so you do not spend years chasing a mirage.

b. Validity: Although every patent is presumed to be valid, its validity is tentative. Patent examiners in the Patent Office have limited time to examine claims of patent applications. They also may not have found non-patent prior art. Once we enter into litigation, and millions of dollars are at stake, defendants spare no cost looking for prior art. They invariably find much more than the patent examiner at the PTO found when the patent was issued. A defendant may file for reexamination by submitting to the PTO newly found prior art and asking the Patent Office to invalidate the patent in view of this prior art. Or the defendant may file a motion for summary judgment asking the judge to invalidate the patent before the lawsuit ever gets heard by a jury.

When we consider undertaking a patent infringement case for enforcement, we need to ascertain the validity of the patent and the likelihood it can be invalidated in reexamination or by a motion for summary judgment. We may commission a validity search and look at not only patent prior art, but prior art the examiner at the PTO might have missed. There is no point in filing a lawsuit if it is likely the patent will be invalidated. Sometimes, when we find problematic prior art that will put the validity of the patent in question, we recommend submitting the patent for reexamination. If the patent is invalidated, we have saved you, the patent owner, considerable aggravation as well as years that would have been spent in a litigation that was doomed to fail.

If, however, the patent survives reexamination, it may emerge stronger than before. At General Patent, we are not in pursuit of a quick profit. We take a long view of the business, so we often spend years building and strengthening a patent portfolio through continuations, continuations-in-part (CIP) and reexaminations before we actually file a lawsuit. Our strategy is to optimize the return on your intellectual property over the long term.

c. Financial Return: Before General Patent invests hundreds of thousands or millions of dollars in patent litigation, we need to make sure there is the potential for a significant enough recovery to make the investment worthwhile. Once we develop an infringement theory, we may do a market study to estimate the sales of the infringing products or services.

d. Other Factors: We also need to take a look at market fragmentation. That is, how many companies will we have to sue to recover most of the damages? We also need to determine if there was willfulness on the part of the infringer(s) and if breach of contract or misappropriation of trade secrets are involved.

2. Determine Who the Infringers Are: A patent owner often comes to us about just one company that is suspected of infringing his (or her or its) patent. We are often able to uncover additional infringers. The more infringers there are, the more financially viable it becomes to pursue a patent enforcement campaign, and the more profitable it is for the patent owner. Also, once we have either won at trial or reached a settlement agreement with one infringer, it may become easier to pursue other infringers.

3. Minimize the Patent Owner’s Potential Liability: Every patent owner that decides to assert his patent runs the risk of counter-lawsuits from the infringers. In rare cases, the defendant wins the lawsuit and asks for reimbursement of attorney fees. If granted, these may be assessed against the plaintiff. General Patent created – as part of our unique patent enforcement model – a methodology that substantially reduces risk and liability for you, the patent owner. We may recommend that the patent(s) be transferred to a special entity – an LLC (Limited Liability Company) that we set up – and the LLC becomes the plaintiff in all patent infringement litigation. The original patent owner has an ownership interest in the LLC along with other parties.

However, if you are practicing your invention, it may be unwise to assign patents to an LLC as it could lead to your forgoing lost profits and the threat of a permanent injunction as a potent weapon against the infringer. All these issues are considered and discussed with you before making a final decision.

4. Select a Law Firm or Firms: General Patent has worked with many law firms over the last 20-plus years to litigate lawsuits on behalf of our clients, so we have first-hand experience with these IP litigators. Selecting the right law firm – the firm with the right legal and technological expertise, and the right mix of talent and resources for the lawsuit it will be litigating – is critical to a successful outcome. When there are multiple infringers, it may be necessary to engage more than one law firm as some firms may have conflicts of interest.

The patent owner who has never been involved in patent infringement litigation cannot be expected to have the expertise required to select the right law firm. General Patent and its experienced in-house patent litigators select the best firm for each specific client.

5. Supervise and Coordinate the Work of the Law Firm(s): General Patent’s staff attorneys are experienced patent litigators who in their prior careers were partners in major law firms and/or managed corporate legal departments. They have litigated and supervised litigation of many patent infringement lawsuits.

Our in-house legal staff works closely with outside litigation counsel. We actively participate in devising an optimal litigation strategy, we are involved in day-to-day tactical decisions, and we review and often contribute to legal briefs before they are filed in court. We oversee and supervise the work of outside litigation counsel on a daily basis. And because our in-house attorneys are experienced litigators themselves, they know what to expect and they know what matters. If the patent-in-suit is forced into reexamination, we will hire a patent practitioner to prosecute reexamination at the Patent Office.

6. Provide Strategic Direction: Before a patent infringement lawsuit is filed, and after commencement of litigation, several key decisions need to be made. GPC’s legal staff and the attorneys litigating the case make these critical choices. A few of these strategic decisions include which venue (court location) will be most favorable to the plaintiff, which infringer should be sued first (if there are several infringers), and whether to file in a federal court or before the ITC (International Trade Commission) or both.

7. Manage Reexamination of the Patent: If the patent-in-suit is forced into reexamination by the Patent Office, General Patent handles the entire process. That includes engaging a patent attorney or patent agent to defend the patent before the Patent Office and paying for the process. In some cases, however, we may decide it is strategically advantageous to put the patent into reexamination voluntarily because it may come out of reexamination a stronger patent with reduced prior art issues.

8. Supervise Patent Continuation(s): If the client has a pending patent application, General Patent may recommend that a continuation or continuations-in-part (CIP) of the parent patent be filed with the Patent Office. This could result in the issuance of additional patents containing different claims. This may significantly strengthen the legal protection afforded by the patent portfolio. These new patents with their new claims could create additional licensing and enforcement opportunities. Should we file for continuation(s), GPC engages a patent attorney to prosecute these continuation(s) and pays all costs associated with these filings.

In the April issue of Wealth of Ideas, we will cover the litigation expenses GPC underwrites, settlement and licensing negotiations, maintaining our clients’ patents, and monitoring royalty payments.

Read "The GPC Suite of Services, Part II"

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Make the Most of Your IP with Patent Brokerage Services

Wealth of Ideas Newsletter, February 2010

In these tough economic times, business owners must learn to do more with less, stretching the resources they have to meet their needs while they try to grow their businesses. Truly effective managers find more efficient ways to manage cash, receivables, inventory and other assets.

But some businesses may be ignoring – or underutilizing – an important source of revenue. Perhaps worse, corporations of all sizes are not utilizing "wasting assets" that are decreasing in value every year, and will eventually become worthless.

We're talking about intellectual property (IP) assets, especially patent portfolios. Patents, once issued, are expensive to maintain because of maintenance fees that must be paid to the Patent Office. So it makes sense to either use those patents, or sell or license them. Or perhaps even strengthen your existing patent portfolio by purchasing more patents.

Which option should you choose for any given patent in your portfolio? That's a good question – and a patent broker can
help answer it.

What Is Patent Brokerage?

Beyond handling patent sales, acquisition of new patents and patent licensing, patent brokerage firms – such as IPOfferings LLC, the newest member of the GPC group of companies – perform patent valuations and can evaluate your IP assets according to internal usage, industry usage of similar technology, and each patent’s licensing potential. IPOfferings also offers a comprehensive package of IP consulting services, such as IP strategy recommendations and implementation.

But as their name implies, patent brokers are best known for finding and matching buyers and sellers, negotiating between them, and helping close the deal. And like real estate or mortgage brokers, patent brokers work on a commission basis when they represent the seller, earning a commission on the revenue they generate for the patent seller.

When to Hold and When to Fold

Many businesses overlook the value of their patent portfolios while continuing to pay maintenance fees that can run into the thousands of dollars. But those patents and other IP could be a significant asset. Effective managers must make the most of every asset, and that includes their patents!

Patents lose their value very quickly, and may not even be worth paying the fees to keep them valid. A patent broker can help identify the patents a company should keep and those it should sell, license, donate or abandon. An internal IP department can certainly handle many of these functions. But when it comes to monetizing patent portfolios, using a patent broker has a number of advantages over doing everything in-house:

  • Patent brokers like IPOfferings have an extensive network of patent buyers. You can't sell a patent if you can't find a buyer, and that's where a patent brokerage firm can make a difference.
  • IPOfferings develops a marketing piece called a “Sales Brokerage Package” to promote the patent(s) it is selling on behalf of a client. This comprehensive package provides the information a prospective buyer needs to thoroughly evaluate and value the patent or portfolio being offered for sale.
  • On the other hand, if you're looking to buy patents for the purposes of strengthening or expanding your patent portfolio, a patent broker can save you time finding the patents that are the best fit for your portfolio.
  • Having a patent broker represent you anonymously when you are looking to buy patents can result in a lower price for the patent(s), especially if the buyer is a large organization and the seller sees dollar signs! Also, having a broker represent you anonymously keeps your company’s expansion plans confidential so your competitors are not tipped off to your company’s growth strategy.
  • Using a patent broker for patent sales, licensing and acquisitions allows business owners to save time and let patent experts handle the time-consuming tasks of research, patent evaluation, patent valuation, prospecting, due diligence, negotiations and other vital aspects of patent portfolio transactions.

Also, make sure your patent broker is a Certified Licensing Professional (CLP). This will insure that you are represented by a qualified IP professional who can both monetize and optimize your IP portfolio.

Patent Brokers and Licensing Programs

A patent broker can either support or invigorate an existing IP program or help implement a new one, recommending an action plan for your company's IP campaigns. A patent brokerage firm like IPOfferings has the advantage of perspective. It comes to your patent portfolio with no pre-conceived notions, takes a fresh look at each patent or other form of IP, and can often identify applications and prospective buyers or licensees you may have overlooked.

In a business environment in which no asset can afford to be wasted, "wasting assets" such as patents must be monetized. And a patent broker is an impartial, experienced third party who can be your partner in making the most of your intellectual property assets.

General Patent Corporation and IPOfferings

In January, GPC acquired IPOfferings LLC, an IP brokerage and consulting firm based in Boca Raton, Florida. In conjunction with the acquisition, Richard Ehrlickman, the founder and President of IPOfferings, was named a Vice President at General Patent Corporation. IPOfferings will function as the patent brokerage subsidiary of IP Holdings LLC.

What does this mean for GPC's clients? Besides continuing to offer patent, trademark and copyright licensing and enforcement on a contingency basis, as well as IP advisory services, we now also offer a more comprehensive package of IP brokerage services.

For more information about our patent brokerage services, contact Rich Ehrlickman at rich@ipofferings.com or 845-368-4000 Ext. 113.

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On Patent Trolls and Other Patent Myths

Wealth of Ideas Newsletter, January 2010

By Alexander Poltorak

(An earlier version of this essay was published in Making Innovation Pay - Turning IP into Shareholder Value, ed. B. Berman, John Wiley & Sons Publishers, Inc., 2006.)

The fear of the unknown channeled through the creativity of the human mind begot many legends and myths that make up the folklore of nations. Before any scientific knowledge of the Enlightenment had a chance to dispel ignorance, the latter produced wonderful stories in which people were demonized by the forces of nature, which had been vivified by the unbridled imagination of the frightened mind.

The enchanted world of demons and trolls, witches and warlocks, fairies and elves, gnomes and imps… Had Greeks known science as well as philosophy, much of our literature would never have been written. And thank God for the Dark Ages!

In the age of nanotechnology, the literary genius continues to feed on the fear of the unknown. And what is more frightening than being sued by a patent holder these days? And what is more misunderstood than the arcane world of intellectual property?

Many myths are told in the patent wonderland. Nowadays, corporate dads read their children scary stories before kissing them good night, stories about patent trolls that terrorize noble business folks. Instead of nursery rhymes, corporate dads read their children the Ballad of The Patent Troll:

On the road of innovation
Sits an ugly Patent Troll.
From the largest corporations
He extorts a patent toll.

Armed with mighty patent claims,
Claiming willfulness and tort,
Treble damages and pains
He drags infringers into court.

Faster than a Rocket-docket
He sticks his hand into your pocket.
Troll, disguised as an inventor,
Will deprive you of your splendor.

First ignore him, then DJ him,
Try to motion him to death.
At the end you’ll have to pay him.
Troll will share in your wealth.

Casting wide a patent net,
All infringers he will get.

Faced with permanent injunction
Ask for Rule 11 sanction!

Raise your laches and estoppel,
102 and 103…
Your defenses Troll will trample –
You will end as licensee.

Your resistance is futile
Patent Troll is strong and vile.
Wielding claim as an ax
He’ll exact his patent tax.

Corporations, be united!
He who slays the Patent Troll,
By the Queen he will be knighted
And exalted by us all.

As much as I find these stories enthralling and despite the protest of the poet in me, I will debunk these myths without mercy so that children can sleep at night without fear.

A Patent Is an Exclusionary Right

So long as we are going to talk about patent trolls, it wouldn’t hurt to give a definition of this term. Peter Detkin, who coined the expression during his tenure as Intel’s patent counsel, defined the patent troll as someone who buys a patent for enforcement purposes but does not practice the patented invention. This definition implies that to be a legitimate patent owner, inter alia, the owner must practice his or her invention.

Myth #1. A patent is needed to practice the invention.

Many inventors believe that they need a patent in order to practice their invention. In fact, nothing can be further from the truth. Firstly, nobody needs a patent in order to practice their invention and, in fact, most companies produce goods for which they do not have a patent or the patent has expired. Secondly, a patent does not give the patentee the right to practice the patented invention. It confers no positive rights. A patent is strictly a negative or exclusionary right. A patent gives the patentee the right to exclude others from using, making, selling, offering for sale or importing the patented invention. Essentially, a patent is a license to sue for infringement. Or, in financial terms, a patent is a call option on patent litigation.

How does this myth affect the notion of the patent troll? Well, a patent troll, according to the above definition, is someone who does not practice the invention protected by the patent he owns (since no female trolls have ever been sighted, we will dispense henceforth with the politically correct “he or she” with respect to trolls), it implies that a patent owned by someone who practices the invention differs from a so-called “paper” patent owned by someone who does not practice the teachings of the patent.

Since a patent does not confer on the patentee the right to practice his own invention, the patent right has nothing to do with whether or not the inventor practices his invention. Consequently, the whole notion of a “paper” patent has no basis in patent law.

In fact, the noble corporate folks sue each other on paper patents without any hesitation. A patent infringement lawsuit brought by Kodak against Sun Microsystems is a recent example of this phenomenon. Kodak sued Sun for infringing Java patents that Kodak inherited from Wang Laboratories. Kodak itself, as it is well known, is not in the software business. This fact did not stop Kodak from collecting $95 million from Sun. So much for the nobility of the corporate folks.

Myth #2. It is not nice to sue for patent infringement.

As an exclusionary right, a patent is nothing but a license to sue or an option to bring an action for infringement. It has no other function. Consequently, to blame inventors for suing infringers of their patents is at best disingenuous – that is what patents are for! As the ancients said, damnant quod non intellegunt (they condemn what they do not understand).

Moreover, a corporate officer or director who is aware of infringement of some patents owned by his or her company and who fails to enforce these patents may be held liable for breach of the duty of care with respect to the management of corporate assets. Indeed, corporate folks sue each other for patent infringement like it was going out of style. Corporate attorneys schooled in Latin take the position enunciated by the Romans, Quod licet Iovi, non licet bovi, i.e. “What Jupiter may do, the ox may not”. To this the inventor not schooled in classics cleverly retorts, what is good for the goose is good for the gander.

Patent licenses are of two kinds: the so-called carrot (voluntary) licenses and stick (compulsory) licenses. The former are lately exalted by the gurus of management consulting (the word guru is easier to spell than charlatan) as the way to monetize their intellectual assets. They proudly announce that IBM alone derives one billion dollars in licensing revenues annually. This is deemed a good thing. Stick licensing, on the other hand, is held to be a bad thing. Truth be told, however, every carrot license is a stick license in disguise. (In the patent wonderland these disguises are quite common.) Indeed, who would ever license a patent (and pay for it) if not for the fear of a possible patent infringement suit? If good fences make good neighbors, good patents make good partners (licensees and licensors).

In the good ol’ days, the noble folks used to duel over such deplorable offenses as the theft of intellectual property. Back then, ideas were held in high esteem. Nowadays people go to court. Sabers are changed for patents, and pistols for legal briefs. It may be less romantic but no less noble. If we do it more often, perhaps ideas will be held in high esteem once again.

Patent Value

Myth #3. The value of a patent is the same as the value of the patented technology.

Many patent valuation consultants make the not-so-subtle mistake of equating the value of the patented technology with the value of the patent that protects it. Like the wizards of old, they start with valuing a patent, distract your attention for a moment with wizardly math and then, by sleight of hand, substitute the patent for the technology it protects. Well, anything goes in the patent wonderland.

This, however, is nothing short of absurd no matter how wizardly. Both in law and economics, a patent is a monopoly and its value is the incremental value of the enhanced cash flows resulting from that monopoly. Indeed, the patent and the product covered by the patent live two separate lives. The patent has little to do with the patented product, besides protecting the monopoly afforded to the product by virtue of the patent; and the product has little to do with the patent that protects it. This is another illustration that whether or not the patent is practiced is irrelevant to the right to assert the patent.

The value of a patent depends on the willingness and ability of the patentee to enforce it. The owner of an infringed patent who hesitates to enforce it reduces the value of the patent to zero. It is incumbent on inventors and corporate managers alike to enforce their infringed patents.

Equity

Myth #4. The patent system is fair.

As a quid-pro-quo for invention disclosure, a patent has positively nothing to do with whether or not the inventor practices her patent! Society has a vested interest in promoting invention disclosure to foster innovation. We certainly don’t want inventors and scientists to reinvent the proverbial wheel. We want them to build on each other’s achievements, each standing on the shoulders of those who came before him. How do we induce an inventor to disclose her invention to the public? By offering limited monopoly rights, i.e., a patent. That is why patents are a good public policy, as they promote the progress of technology.

The public, however, has no vested interest in encouraging inventors to go into the business of practicing their inventions. As long as the invention is disclosed, if it is useful, someone will bring its benefits to the public. Entrepreneurship is a different skill than inventive genius. We don’t require a composer to perform his music. Nor do we require an architect to build the house she designed. Why should we require an inventor to manufacture a product he invented? He may have neither the skills nor the capital required for it. To say that inventors should be required to practice their inventions is patently absurd!

Besides, a patent is a property right. You own your house, whether you live in it or not. You own your car whether you drive it or keep it in the garage. Similarly, a patent is the property of the patent owner, whether he chooses to practice it or not.

A patent is a bargain between the State and an inventor wherein the inventor is induced to disclose his invention by the promise of a limited monopoly. With the median cost of patent litigation exceeding $5 million, this promise is of little value to a small inventor.

Ironically, the law (35 U.S.C. §112) requires an enabling disclosure from a patentee. However, it does nothing to enable the patentee to enforce his exclusionary rights. The inventor upholds his end of the bargain by disclosing his invention in the patent application, thereby forfeiting a possibly valuable trade secret. By failing to provide the impecunious patentee any effective means of enforcing the paper monopoly, the State breaches its promise of a limited monopoly for the patentee. Left to their own devices, inventors inevitably get the short end of the stick in this bargain. So much for equity and justice in the patent wonderland.

Aided by this tilted playing field, the noble corporate folks infringe patents owned by helpless inventors with impunity. In the good ol’ days it would have been considered vulgar to speak of money among the noble folks. Today, as US News and World Report put it on a different occasion: American justice is the best justice your money can buy. Or, as the late Johnnie Cochran put it, Justice is indeed color-blind – it sees only one color – green.

Are There Patent Trolls?

As previously noted, Peter Detkin defined a patent troll as someone who buys a patent for enforcement purposes but does not practice the patented invention. It would be silly to argue about a definition. After all, a patentee can be his own lexicographer (i.e., they speak in their own language in the patent wonderland). The question is, is this bad or not?

As I wrote above, patent law does not distinguish between a patent that is practiced and a paper patent. Therefore, this notion of a paper patent has no basis either in the law or in economics.

Having said that, there have been some instances of patent misuse and abuse, but they don’t fall into the definition of a patent troll. Submarine patents are the prime example, but they are hardly a threat today. Firstly, they were depth charged in 1995, when the term of a United States patent was changed from 17 years from the date of issue to 20 years from the effective date of filing. It is no longer profitable to delay issuance of patents as that diminishes their statutory life. Moreover, the Fed. Circuit ruled them unenforceable on the theory of prosecution laches. By and large, submarine patents are a thing of the past.

Those patentees who, like trolls, sit on their patents waiting for damages to accumulate are shooting themselves in the foot. Laches is an effective defense against a patentee who lurks hidden in the bushes (or under the bridge, as trolls do) while an infringer’s sales continue to grow. Similarly, patent owners who frivolously assert their patents without any evidence of infringement, hoping to exact nuisance value settlements, can be sanctioned under Rule 11.

The law has already addressed the difference between a patentee who practices the patented invention and one who doesn’t. The difference is not in the right to assert the patent – they share the same right – but in the remedies available to them. A market participant may be entitled to receive lost profits, while a paper patent holder can get only reasonable royalties which, typically, are a fraction of the lost profits.

Just as trolls are mythological figures in Scandinavian folklore, Patent Trolls are nothing but mythological figures of the corporate folklore.

Is a Patent a Tax on Innovation?

Myth #5. A patent is a tax on innovation.

A patent is an intangible asset. Information contained in the patent, once published, can be readily copied and used. In economics it is call a positive externality. This presents what is known in economics as the classical free rider problem. A free rider problem is often solved by levying taxes. The army, the police and your municipal services are all supported by our taxes. The patent system was in part created to solve the free rider problem.

As I wrote above, a patent is a bargain between the State and an inventor wherein the inventor discloses his or her invention to the public in exchange for a limited monopoly. The inventor can share this monopoly by way of licensing the patent in consideration of royalty payments – a tax if you will. A patent may, therefore, be viewed as a form of tax. However, a patent is not a tax on innovation (it is not the inventor who is taxed) – it is a tax on the exploitation of innovation created by others.

***
In the patent wonderland there are many myths, but myths they are. Don’t scare your children with them. Just kiss them good night.

Newsletter

Accelerate or Abandon: A Tough Choice for Independent Inventors and Small Biz Owners

Wealth of Ideas Newsletter, December 2009

UPSTO Director David Kappos first announced a new program in his opening remarks at the Intellectual Property Owners (IPO) annual meeting this past September, then discussed the initiative further last month at the Independent Inventors Conference, held at the USPTO’s headquarters in Arlington, Virginia.

Designed to reduce the backlog of patent applications at the overburdened and underfunded Patent Office, the new “accelerate or abandon” option allows certain patent applicants to, in Kappos’ words, “select an application to advance in the queue in exchange for each application they withdraw before substantive examination.”

“Accelerate or Abandon” Program – Pros and Cons

The benefits of such a program seem clear at first glance. Encouraging inventors to take a critical look at their applications will cut down on “junk patents” (too many of which have been issued in recent years, the PTO’s critics say), reduce the backlog of applications facing overworked patent examiners, and give independent inventors and smaller companies the ability to accelerate their strongest patent applications without extra cost.

So, independent inventors speed up the prosecution of their best patent applications and the PTO both reduces its backlog of applications and improves the quality of the patents that do issue. At first blush, it seems like a win-win proposition. Or is it?

The problem is that inventors may have a very difficult time sacrificing one patent application to accelerate another. The “small entities” which are eligible for this program range from individual “garage” inventors to companies and research universities with 500 or fewer employees. What happens, for example, if one scientist’s application is accelerated at the cost of abandoning his colleague’s application? Clearly, that would be an awkward (and possibly unacceptable) choice for universities – but a choice they may be forced to make if they wish to avail themselves of this program.

Small Businesses Face Difficult Choice

For a concrete example of the dilemmas this program is likely to cause for inventors, consider the plight of Cappy’s Concepts LLC, a two-person industrial design shop recently profiled in the Milwaukee, Wisconsin Journal Sentinel. Dick “Cappy” Capstrum and Mirk Buzdum, the company’s owners, have five pending patent applications between them and at least ten more ideas they can’t use – because filing a patent application is expensive and gets them nowhere fast, and showing their inventions to larger companies virtually guarantees infringement.

To Buzdum, says the Journal Sentinel article, abandoning a patent application to accelerate another is “like burning the furniture to keep warm.”

Besides the difficult choice of abandoning an application that an inventor has spent ample time and money on to prepare and file, inventors may also be hesitant to take the accelerate-or-abandon bait because once a patent application is abandoned, it cannot be resurrected.

To an inventor, whose invention is her brainchild, choosing one patent over another may seem like an unthinkable “Sophie’s Choice.”

Accelerate or abandon? It’s a tough choice to make, especially for smaller companies with limited resources. But for some independent inventors, abandoning a patent application they have prosecuted and filed in good faith may seem to be their only option for obtaining quick patent protection for their inventions.

Green Inventions on the Fast Track

Meanwhile, the good news for environmentally-conscious inventors is that there is another initiative underway to accelerate patent applications for certain inventions without having to throw another invention under the bus, so to speak. The USPTO announced on December 7 that applications for “green technology patents” – meaning “proposed technology focused on the environment, renewable energy and reducing greenhouse gas emissions” – will be automatically expedited.

The pilot program will target the first 3,000 eligible patent applications which have already been filed, and the fast-track program is expected to shave off about a year from the patent-review process – which currently takes about 40 months.

Newsletter

Software Companies, Internet Retailers and Other Groups File “Bilski” Briefs

Wealth of Ideas Newsletter, November 2009

By the time oral arguments began November 9 before the US Supreme Court in the Bernard L. Bilski v. David J. Kappos case, more than 70 separate industry and policy groups had filed amicus curiae (“friend of the court”) briefs, seeking to bring various issues to the Court’s attention.

These groups have different reasons for opposing or supporting a ruling in favor of Bilski, but many share the opinion that business method patents have the potential to stifle innovation, free trade and maybe even free speech.

Are business methods patents really such a menace?

Bilski in Brief

The case that would become Bilski v. Kappos (or, simply, “Bilski”) first began over a decade ago, when inventors Rand Warsaw and Bernard Bilski, founders of Pittsburgh-based WeatherWise USA Inc., filed a patent application for a method of trading weather risk. The patent office rejected their application on the basis that it did not involve a patentable subject matter. The inventors first appealed the examiner’s decision to the Board of Appeals and Interferences (BAI) at the USPTO. The BAI upheld the examiner’s rejection.

Bilski and Warsaw then appealed that decision to the Court of Appeals for the Federal Circuit (CAFC), which hears patent appeals. In October 2008, the CAFC issued an en banc decision upholding the USPTO's rejection on the grounds that the method was not patentable. In this landmark decision, the CAFC addressed the core question of patentability of business method patents.

Reversing itself, the CAFC defined patentability in a much more narrow way than it previously did in its famous State Street decision (State Street Bank v. Signature Financial Group). Patentability is now limited to inventions that are 1) tied to a specific machine or 2) transform an “article” into a different state or thing. This became known as the “machine or transformation” test. (For more background info on the Bilski case, see “Business Method Patents and the Bilski Case,” Wealth of Ideas newsletter, January 2009.) Bilski appealed this to the Supreme Court and was granted certiorari.

Red Hat’s Amicus Brief: Should Software Be Patentable?

Red Hat announced on October 1, 2009 that it had filed its own amicus brief with the Supreme Court. Although the Bilski case concerns the standard for patenting a process that isn’t tied to a particular machine – not software in particular – it raises many questions that also relate to software patents.

“Our patent system is supposed to foster innovation, but for open source and software in general, it does the opposite,” said Rob Tiller, Red Hat vice president and assistant general counsel for IP, in a news release issued by the open source company on October 1. “Software patents form a minefield that slows and discourages software innovation. The Bilski case presents a great opportunity for the Supreme Court to rectify this problem.”

Red Hat contends that the complex nature of software and the often vague descriptions of software processes in many software patents make it difficult for software developers – both open source and otherwise – to produce new programs without risking a lawsuit. For that reason, Red Hat is requesting that software be excluded from patentability altogether.

It is easy to see the motivation behind this position. Red Hat is not an innovator. They have never developed any new software. Their business model was based on taking an open source Linux operating system, packaging it in a box, offering some tech support and selling the heretofore free product developed by others for a profit. Just as generic drug companies profit from R&D done by an innovator pharma company, Red Hat – which does no R&D on its own and has no need for patents, which are meant to protect innovation – does the same to other software companies. For Red Hat, patents are a menace standing in the way of ripping off profits from products invented by others.

Business Method Patents and E-Commerce

Although one of the most well-known business method patents was issued to an online retailer – namely, Amazon.com’s famous “One-Click” patent, which it wielded against competitor BarnesandNoble.com – online retailers nonetheless are largely opposed to business method patents.

In an amicus brief filed on behalf of seven major online merchants – including Overstock.com, Crutchfield Corp. and L.L. Bean Inc. – attorney Peter Brann argues that there are 11,000 patents related to the Internet, and many, if not most, of them are business method patents. Furthermore, Brann points out that “the number of patent infringement cases filed has nearly doubled in the 15 years since federal courts first recognized the legitimacy of business method patents.”

The brief argues that because of the nature of e-commerce, online retailers are especially vulnerable to patent lawsuits. And because it’s much cheaper and easier to take a license for several thousand dollars than to enter into a lengthy lawsuit that could cost upwards of $2 million, online retailers usually settle without a fight.

“Internet retailers collectively spend hundreds of millions of dollars on patent settlements that would be much better spent on innovation, job creation and job retention,” Brann contends in the brief.

Here, again, the motivation behind this position is transparent. Unlike Amazon, which invented a new business model – online retailing – most other online retailers are not innovators and follow in Amazon’s footsteps. They don’t usually file for patents and have no need for them.

Et tu, ACLU?

Oddly enough, even the ACLU has found an angle in the Bilski case that it finds problematic. In an amicus curiae brief it filed back in 2008 – before the Federal Circuit Court heard, and rejected, Bilski’s appeal – the ACLU argued that allowing the Bilski patent is tantamount to allowing the patenting of abstract ideas. And that, contended the ACLU, could endanger free speech.

"If the government had the authority to grant exclusive rights to an idea,” says Christopher Hansen, senior staff attorney with the ACLU’s First Amendment Working Group, in the ACLU’s press release regarding the brief, “the fundamental purpose of the First Amendment - to protect an individual's right to thought and expression - would be rendered meaningless."

This, of course, is sheer nonsense, as no patent can limit the content itself, only a specific mechanism of content delivery. It is not unusual that the ACLU finds itself on the wrong side of an argument.

In Defense of Business Method Patents

Not all the briefs filed regarding the Bilski case were anti-business method patents, however. Global management consulting leader Accenture and Pitney Bowes filed an amicus brief back in March 2009 stating that business methods should be patentable without physical limitations such as the “machine or transformation” test.

"[T]he Federal Circuit in Bilski struck down an analysis that has worked for more than a century, regardless of the technology," said the brief, arguing that the machine-or-transformation test "violates this Court's precedent, ignores Congressional intent, arbitrarily limits the available scope of patentable processes, and anchors the standard for patent eligibility in the Machine Age of the early 20th century."

Indeed, despite erroneous allegations to the contrary, business method patents did not originate with the State Street decision in 1998. They go way back. In 1778, an English patent was issued to John Knox for a “Plan for assurances on lives of persons from 10 to 80 years of age.” Business methods patents had been issued in the US since 1799 when Jacob Perkins received a patent for a method of “Detecting Counterfeit Notes”.

The motivation for patents comes from the need to foster the progress of society by encouraging inventors to disclose their inventions to the public in a quid-pro-quo exchange for limited exclusivity. Science benefits from it, technology benefits from it, so why shouldn’t business benefit from it too? Innovative methods of doing business ultimately benefit consumers.

The fundamental test for patentability has always been: (a) usefulness; (b) novelty; and (c) non-obviousness. If an invention is useful, novel and non-obvious, it should be patentable no matter what the subject matter of the invention is, as public disclosure of novel methods will ultimately benefit the society.

Software patents have also been issued long before the State Street Bank decision. Although pure algorithms are not patentable, a computer running a specific and novel software program was long deemed to be patentable. The age of industrial revolution is long behind us. In the Information Age, most innovation is done today in the area of software that runs processors and other information processing – making everyday devices around us smart. Innovation in software and information processing drives much of the innovation in other industries. Making software unpatentable would undoubtedly stifle innovation across many industries.

Overlooked in many of these arguments is the fact that business method patents have been recognized by Congress, which in the 1999 American Inventors’ Protection Act legislated special provisions for business method patents (which became the law – 35 U.S.C. §273). It would be the height of judicial activism for the Supreme Court to overrule the Congress and to rule business method patents out of existence.

Newsletter

How Patent Vulnerability Impacts Valuation

Wealth of Ideas Newsletter, October 2009

By David Wanetick

As I often tell business leaders who attend my course on Valuing Early-Stage Technologies, valuing patents isn’t rocket science. It is much more difficult. Or to paraphrase Winston Churchill, valuing patents is a riddle, wrapped in a mystery, inside an enigma.

Measuring even a well-delineated permanent entity is much more difficult than may be imagined. As Neil deGrasse Tyson (a renowned astrophysicist) and Benoit Mandelbrot (the father of fractal geometry) have discussed, no one really knows what the circumference of the coastline of the United Kingdom is. The tides will cause varying degrees of erosion on the coastline depending on the hour of measurement while the cumulative affect of choosing which rock formations to measure around will have a dramatic impact on the final assessment of circumference.

Patent valuation is infinitely more difficult to determine than the measurements of a given land mass due to the interminable variation of underlying technologies, legal issues, business issues, and context in which patent valuations are conducted.

Companies that have patents often attempt to achieve a more attractive valuation by boasting about their patent portfolio. This is often a successful gambit as many investors, customers and media figures are impressed when a company reports a relatively large number of patents or pending patents in its portfolio.

Thus, it is no surprise that many entrepreneurs and venture capitalists have admitted to me that they view patent preparation and filing costs akin to marketing expenditures.

However, valuation analysts should not reflexively assign a higher valuation to companies that own patents or are applying for patent protection. Companies can have a patent on a technology for which there is no possibility of commercializing or selling. Patents pending are particularly specious.

Pendency (the length of time it takes the US Patent and Trademark Office to make a decision on a patent application) is now an average of 32 months. In some industries—such as semiconductors and electronics—pendency is more on the order of four to five years. Thus, the market targeted by a patent could become obsolete before the USPTO makes a decision.

In fact, only between 2% and 5% of patents generate any royalties and another 45% to 50% don’t even have any strategic value. Further, two out of every three patents lapse because of failure to pay fees, most often because their owners believe that the thousands of dollars in maintenance fees exceeds the value of the patents.

What is a Patent?

It is first necessary to dispel a few of the common misperceptions revolving around the definition of patent. A patent is certainly not a right to a full monopoly.

Inventors can design around a patent by producing another technology that yields the same effects. Having a patent that becomes incorporated into a commercially successful product doesn’t always provide substantial profits to its owners. (The patent may generate nominal royalties because of its minimal value added to the end product or its early stage of development may require significant future investment on the part of the licensee.)

A patent is simply a license to exclude anyone else from reproducing the same affect by applying a specified process during the time in which the patent remains in force.

Similarly, patents can be viewed as merely instruments which grant their holders the right to sue alleged infringers.

What makes a patent vulnerable?

One reason that valuation professionals should not over-rate a patent is that the patent could very well be deemed to be invalid. Roughly 50% of the patents that are litigated are held to be invalid.

Simply granting of a patent by the USPTO does not ensure patent validity. There is no way that one could expect patent examiners to only issue patents that would invariably be ruled valid during litigation.

On average, patentees spend less than $10,000 on legal fees in connection with the drafting of their patents and patent examiners dedicate an average of 11 hours of review per patent application. Less than $10,000 in legal services and 11 hours of an examiner’s time can never withstand the $7 million average cost of litigation (that is expended in patent cases where more than $25 million is at risk) and thousands of hours of effort by locked-on lawyers dedicated to defeating a patent.

In fact, the only way that a patent’s validity can be proven is through litigation. Determining which patents will be ruled valid is very tenuous: validity often hinges on the interpretation of seemingly common words such as “when” and “either”.

Another major reason that patents are vulnerable is that patentees often cannot afford to assert their rights. With litigation costs on the order of $7 million, few solo inventors or small companies have the financial resources or managerial bandwidth to challenge infringers.

If the suspected infringer is a large company, it can usually threaten the plaintiff with a countersuit as these parties may be violating one of the defendant’s patents.

It is this vulnerability that is a significant factor behind license brokerage rates (the rates realized when selling patents) ranging in a seemingly insulting band of between one and ten percent of the anticipated cumulative licensing fees.

Buyers can acquire a patent for as little as one percent of the royalties that such patent is expected to produce because there are risks of the patent being ruled invalid immediately after the acquisition transpires or there could be an injunction imposed on a product that incorporates the patent which would cause associated revenues to dry up.

The Impact of Uncertainty on Patent Valuation

There is tremendous uncertainty associated with assessing the value of patents. However, it is this uncertainty that can be used to make an argument about the value of a patent. The valuation analyst could review certain characteristics pertaining to a patent and argue that such set of factors is a positive or a negative factor in the patent’s expected value. For example:

Years of patent life remaining. Most investors would not want a patent that has limited years of patent protection (e.g. one that is more than 16 years old). However, a patent that was too recently issued (e.g. within the past three years) is unlikely to have been litigated.

The average age of patents when they are litigated is three years old. It is better to acquire a patent after it has been proven valid during litigation or has passed through the period when challenge to its validity is most likely.

As a sweeping generality, those patents that are most valuable are between 10 and 13 years old.

Number of inventors listed on a patent. A higher number of inventors listed on a patent indicates that the patent is of higher quality than a patent that has a lower number of patent inventors listed. The reason is that more intelligent scientists or engineers believed in – and dedicated their time to championing – the technology behind the patent.

However, having numerous inventors listed on a patent can be a source of vulnerability: if these inventors are deposed or cross-examined when their patent’s validity is challenged, it becomes more likely that one of the inventors will mention the existence of prior art. Also, failing to list an inventor on a patent risks giving rise to litigation.

What makes a patent valuable?

While the complexity of – and uncertainty surrounding – patents makes it impossible to derive definitive valuations, there are a host of factors that are determinative of patent value.

While a few of these factors are provided below, it is critically important to realize that businesses that attempt to commercialize their patents don’t receive the value (deal) that their technology (patent) deserves; they receive the value (deal) that they negotiate.

Anticipated licensing revenue. A standard procedure in patent valuation is determining the net present value of royalties that will be received as a result of licensing the patent. One benefit of developing a highly delineated model of projected royalties is that very specific factors can be taken into account.

Ability to trigger sales of end products. Patents are most valuable when they cause consumers to buy more of the product or newer versions of the product. For instance, some ten years ago Intel and Microsoft were able to spark sales of personal computers when they introduced new semiconductors and software. Consumers willingly retired perfectly good PCs as they raced to embrace PCs with the greatest processing power and snazziest software.

Similarly, patents that increase the utility for existing or new users are generally very valuable. Examples of this can be found in the patents behind the features on cell phones. Finally, patents are valued dearly when the patented feature is a primary factor in the demand for the product. This is to say that the patent is the product.

Examples of this contention include the primary patents underpinning many pharmaceuticals, Velcro and Post-It notes.

Ability to generate add-on sales. A licensee may derive important ancillary benefits associated with selling products with embedded cutting-edge technologies. The benefits may be in the form of greater traffic generation to its website, catalogs, or stores.

A more direct example of generating add-on sales would be a patent that improves on the functionality of ice skates, which could also contribute to higher sales of protective gear.

In such instances, the licensor should seek higher licensing fees from the licensee since the licensee will enjoy spill-over benefits associated with selling the cutting-edge technologies.

Ability to generate sales in new markets. Licensors typically seek lower royalty rates from licensees who will sell the related products in a new market compared to the royalty rates they seek from competitors who will challenge the licensors in their existing markets.

While the royalties per unit from the former licensee will be lower, there are two factors that are accretive to patent value in this scenario. First, the total royalties generated by a licensee pioneering a new market are likely to be substantial. Secondly, licensees penetrating new markets do not pose the profit denigration issues for licensors that competing licensees represent.

Stage of development. Typically, the earlier in the commercialization stage a technology is, the lower the licensing value. This is because there are significant risks in the technology never being brought to the market and if the technology eventually becomes market ready this will only be achieved at great expense. In the scenarios in which the licensee would have to make much of this investment, the licensing fees would be less lucrative for the patentee.

Quality of law firm. Services such as PatentCafe rate and rank law firms on their history of writing patents that successfully sustain invalidity challenges. Patents drafted by law firms that score highly on such rosters are generally of higher quality than patents that score poorly on such surveys.

Quality of patent examiner. Patents that are granted by patent examiners with longer tenures and more impressive records of granting patents that successfully sustain invalidity challenge are statistically more valuable than patents without such lineage.

Size of portfolio being sold. Our research indicates that each patent family will receive the highest price when between 25 and 76 patent families are included in a patent portfolio. Portfolios with more than 76 patent families are discounted because the buyers believe that the sellers are purging a lot of their mediocre patents in the portfolio sale.

On the other side of the spectrum, selling too few patents yields a discounted value per patent because of the natural aversion that patent managers have to seek significant funds (e.g. $3 million) from their Boards of Directors in order to buy a small number of patents (e.g. two). (See Chart 2, below.)

Strategic implications. A given patent usually has dramatically different value for various potential licensees or acquirers. Savvy licensing professionals will conduct intensive due diligence to understand the dynamics of their potential licensing partners in order to seize the incremental advantages associated with deconstructing their business models.

Some of the factors that determine how much value a licensee or acquirer would place on a particular patent include:

Ability to commercialize. The value of licensing a patent is reduced if the licensee would have to make significant capital investments to produce a product that incorporates the patented invention compared to a licensee who already has the requisite production infrastructure in place.

Stature of the inventor. In many closely-knit industries such as colorectal surgery, the players with buying power are well-aware of the most renowned inventors. These decision makers are often inclined to buy products that incorporate the inventions introduced by renowned inventors. In these scenarios, patents granted to the most respected inventors inherently have more value than patents granted to unknown inventors. This incarnation of “the Matthew Effect” is analogous to the value that art dealers place on provenance (the history of an artwork’s ownership).

Value of depriving competitors of key technologies. Sometimes (particularly large) companies license in or acquire technology solely to keep it out of the hands of competitors. Depriving a competitor of a crucial ingredient in producing a product could result in their delay in introducing competing products to lucrative markets and force them to make significant expenditures in terms of having to design around hard-to-reproduce technologies. Professionals engaged in negotiating patent licensees should shop their technologies to several competing potential licensees so as to raise the competitive spirits among the potential licensees.

Acquirer’s or Licensee’s portfolio concentration. The breadth and depth of the destination portfolio is a function of the value that an acquirer will place on a patent under consideration for purchase. For instance, companies contemplating acquiring a patent for strategic (rather than commercialization) reasons that have no patents in a particular discipline will typically value a patent with broad claims covering that discipline more favorably than a company that has a rich patent thicket in the given discipline. The explanation for the variance is that companies that already have a robust portfolio derive less incremental freedom to operate by acquiring such a patent than companies for which such acquisition could be used as a Trojan Horse for placing a stake in a new discipline.

Capital raising implications. Licensees can win economic advantage by realizing that winning a license agreement can be enormously helpful to a patentee seeking to raise capital. In other words, a large company can often pay a lower royalty rate when it knows that its agreement will validate the licensor’s technology and such validation and license agreement will increase the ability of the licensor to attract funding. The leverage that the licensee may exert in such a scenario is a function of the number of licensee agreements that the licensor has executed. The licensee will have quite a bit of leverage if it stands to become the first licensee but perhaps no leverage if it is the twentieth such licensee.

Economic impact of licensing agreement. A licensor can negotiate a reduced royalty rate by demonstrating that its licensing agreement will enable the licensee to achieve reduced production costs for its entire product line. For instance, if a licensee is currently producing 150,000 sensors at a cost of $1.25 each, it may be able to reduce its costs per sensor to $1.00 if it enters into a license agreement to produce another 50,000 sensors.

The profitability of the industry and the importance of acquiring such patents. The wealthier the purchasers or licensees are, the more they can afford to pay. Thus, companies involved in direct battles with competitors will pay more than companies with no particularly pronounced competitive concerns.

The rivalry between Qualcomm and Broadcom is resulting in generous licensing and reassignment opportunities for patent-holders. However, when this rivalry diminishes, so too will their compensation to inventors and patentees.

Finally, patents that are expected to be adopted by standard-setting bodies are valued higher than business method patents.

Patent valuation requires knowledge of the relevant inventions, market conditions, and patent law. It also entails the ability to bring a myriad of facts and considerations together to build an argument about the value that you believe your patent merits.

In the final analysis, the value of patents is not only a function of the revenues and other economic and strategic benefits that it will yield. It is also a function of the timing of the transaction and the negotiating abilities of the principals involved.

About the Author: David Wanetick is a Managing Director at IncreMental Advantage, a valuation and consulting firm based in Princeton, NJ. He teaches Valuation of Early-Stage Technologies and Negotiating Licensing Agreements at The Business Development Academy. He may be contact at dwanetick@incrementaladvantage.com.

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