Characteristics Of Patents For Designing Good Business Assets
This is a reproduction of Investing in Patents by Russ Krajec. For the complete book, get it on Amazon.
Notwithstanding the fact that most patents are worthless, the ones that are worth something are typically worth a huge fortune.
Patents have incredible economic leverage. How else can a solo inventor in a garage create something, enshrine it in a patent, and receive hundreds of millions of dollars? This only happens because of the patent.
In this section, we explore some of the nuances and interesting characteristics of patents from a business perspective.
Patents Have Big Value Only When They Are Infringed.
Patents are infringed when someone uses the technology, either intentionally or unintentionally. Either way, the infringer is using protected technology.
The implications are that if a competitor could design around the patent, there is no real value to the patent.
Another way to state the same thing is:
Patents only have value when they protect the very best way to do something.
If there are better alternatives, the patent is worthless.
Every imaginable alternative to an invention needs to be considered in due diligence. This forms the basis of an economic value of the invention.
With the baseline of a best design-around alternative, we can then compare the invention to the best alternatives and start putting a rough dollar value on the invention.
The $3 improvement to the $10 product.
The economic analysis is easy to do on the back of an envelope. Take the economic advantage of the invention over the best alternative and multiply it by the total addressable market. If an invention has a $0.10 advantage over the alternatives and there are 10,000,000 units sold per year, the economic advantage is $1,000,000/year.
The economic advantage can be directly measurable, such as cost reduction of a manufactured product. Sometimes, the economic advantage is not easily measurable, such as the additional money that a consumer might pay to have an inventive feature to a software product.
When the economic advantage is not easily measurable, it may be helpful to run some A/B or split tests with a group of consumers to determine any additional money that a consumer might pay for the inventive feature.
Entrepreneurs and inventors almost always have an inflated view of what their inventions are worth. The true worth comes out when the market dictates the value, which can come when the product is in the market, or when patents are being sold on the secondary market. The market is always a much more realistic view of the value than an inventor’s.
Patents Only Have Value When They Can Be Enforced
It is far easier than one might think to create patents that are unenforceable. The dynamics of the attorney/inventor/client relationship, as discussed in Chapter 3, cause a lot of weirdness, and the result is that the patent attorney does not have much incentive to make sure the patent is enforceable. This is an unintended side effect of our legal system, but something every CEO and inventor needs to know.
Patent enforcement is a very complex subject, with lots and lots of case law, rules, exceptions to those rules, and other issues. There are plenty of corner cases where awful patents were successfully enforced, and where excellent patents were not enforceable. But there are some simple and easy-to-understand rules, most of which will seem obvious, but are not put into practice:
Patents need to be detectable.
This may appear to be an obvious statement, but people pour money into patents where infringement simply cannot be detected.
When looking at an invention (or an issued patent), one of the first questions should be: “Can I detect that my competitor is using this invention?”
If there is no way to tell that a competitor is performing the same method or manufacturing the same product, how could that patent ever be enforced? The answer: it cannot be enforced and is therefore worthless.
Most software patents are awful and not just because they protect software. Most software patents are awful because the patent owner could never detect that a competitor uses their invention. Consider a gloriously complex and innovative artificial intelligence method for analyzing a bunch of data and returning a result. The algorithm runs deep inside a competitor’s datacenter, where we will never have access.
Could we ever tell that the competitor is using the exact same algorithm as in our patent? No. That patent is worthless and the invention would have better been kept as a trade secret.
In another example, Tropicana famously has a patent on fresh-squeezed orange juice. The patent is a detailed analysis of how to blend different varieties of oranges throughout the season to achieve a consistent product. This is because each variety has a different color factor and sugar content, and those factors further change depending on when they are harvested. Tropicana’s patent reflects a lot of work went into this research.
However, Tropicana’s claim 46 requires “at least about 1 percent by weight of a stored orange juice”. Could Tropicana take a sample of a competitor’s orange juice and tell that it had “stored orange juice”? No. That claim is impossible to detect, therefore unenforceable and commercially worthless.
Patents must be directed at the right actor.
A key to enforcement is making sure the patent captures the actions of the actor we want to stop. It goes without saying that the business value of a patent comes from enforcing the patent against someone. Who is the actual infringer?
A simple example may be a company that has heat-moldable inserts for a ski boot. A consumer may heat up the insert in boiling water, then mold the insert to their foot, then place the insert in the ski boot.
If the patent claims describe these steps, who is the infringer? The steps are something done by the consumer – the company’s customer. Can the company sue their customers? No. The patent is worthless.
In a more complicated example, there was a company that made wireless components for the cable television industry. These were wireless transmitters that were mounted on a utility pole or pedestal outside the consumer’s home and made a wireless “last-mile” connection to the consumer. The invention removed the need for a coaxial cable to be run to the subscriber’s house.
The company’s customers were MSOs (cable system operators). The company’s competitors were other equipment manufacturers who sold hardware to the cable operators.
The company’s patent claims required a box that was mounted outside the home and broadcasted wirelessly into the home.
Who was the infringer of the patent?
It turns out that the actual infringer was the cable network operator, not the company’s competitors. The network operator was the one that mounted the box, provided the receiver inside the home, and caused the various signals to be transmitted.
The patent could not be enforced against their competitors, only their customers.
Could the company sue their customer? Not without alienating them from doing business. In that context, the patent is worthless.
The result was that the company ultimately had an enforceable patent, but one that could only be used to sue their own customers. After the company folded, the patent was transferred to another company who eventually enforced the patent against the cable network operators.
How did this happen?
With this invention, the original claims were for a device that had the radios and signal processing equipment. If those claims were allowed, the patent would have been directly enforceable against a competitor and would have been exactly what the startup wanted. However, to get around a rejection by the patent examiner, the patent attorney amended the claims so that the invention had to be mounted on a utility pole and broadcast into a user’s home.
It was not until the amendment that the claims went from being directed at a direct competitor to being directed at a consumer. The amendment only added a few short lines of text to the claims, and the company was ecstatic that they had a very valuable patent.
This is a great example of how the focus of a patent can change dramatically by some otherwise innocuous work by a patent attorney. In this case, a great patent that could have protected an entire company turns into a boat anchor that they could never actually use.
This story illustrates why the enforcement analyses need to be done at each stage of the patent process. First, the detectability and enforcement factors help determine whether or not to get a patent on a specific invention. As negotiations happen with the patent examiner, these factors should be applied to each claim and each amendment to the claim. Lastly, the enforcement factors help determine whether an issued patent has value.
Patents Are Twenty Year Assets
The lifespan of a patent is 20 years from the filing date. This is a very long time, especially given the life expectancy of a startup company.
The patent is essentially a bet that the market will “come to the invention” over the next 20 years.
Ideally, a startup company will force the market to come to the invention through their marketing and eventual sales of a product. However, the patent is a bet that the market may come to the invention by its own natural and unpredictable powers.
A patent’s twenty year lifespan means that the thought process for building a valuable patent differs from a typical startup’s time horizon. Someone concerned with the patent value will be focused on the sweet spot between 5 and 15 years away, when patents typically sell for the highest amount.
The startup, on the other hand, is concerned about an 18 to 24 month window to reach their milestones.
The tension between the patent viewpoint and the startup viewpoint can be helpful to the startup. The typical startup CEO is focused on the issues at hand – raising money, rolling out a minimum viable product, and landing sales, but the CEO devotes very little time to long term forecasting. The patent portfolio is a great mechanism to force some analysis of the long-term value of the company and its technology.
Good Patents Are Written From The Claims
Unless someone has been involved in patent litigation or has some other unfortunate experience with patents, most people do not understand patent claims.
The claims are at the end of the patent and are the strict, legal definition of the invention. They are often tersely written and can be hard to understand, but they are the actual invention. Everything else in the patent is either supporting the claims or purely fluff.
A good patent starts with the claims.
A well written patent starts with the legal definition of the specific invention, then supports the patent claims with a description of how to make or use the invention.
Many people, especially inventors who write their own patents, describe a product, but the product is not an invention. A product is one way the invention can be embodied, but is not the only way.
For example, a product might be a heat-moldable insert that a consumer adjusts to their foot, then places in their shoe. However, the invention is making an orthotic easy enough to make that it could be marketed directly to consumers. The invention could also be the business concept of making an otherwise professionally-fitted product into something that a consumer could do.
When the invention is crafted in the form of the business value to the consumer, the patent description takes a much different form than a description of a heat-moldable insert.
The claims are important because the patent can only be enforced when someone infringes each and every element of the claim. Most inventors and CEOs think that their product is ‘protected’ by a patent because the rambling description is so broad, but the actual item that is protected may be the extremely narrow elements that the examiner actually approves.
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