Intellectual Property Alert: “Use It Or Move It” to Maximize Your Investment

Types : Alerts

Intellectual property (IP) rights are perhaps the most valuable assets held by a company, even though they are often described as intangible assets.  Such IP rights include, for example, a company’s brands, its patent/trademark/copyright or trade secret portfolio, research and development strategies, and can extend to know-how, databases, manuals, product specifications and manufacturing guidelines, etc.  The question is how can a company benefit from the value generated by its intellectual property?

In a study just reported in June 2010 by researchers at the UC Berkeley Center for Law & Technology (involving 10,000 companies, started between 1997 and 2007 in various fields), it was concluded that biotech, medical device and hardware startups almost always (80%) used patents to protect their intellectual property, although start up software companies generally did not because of the short shelf-life of their products.  However, when venture capital funding was needed, companies, including software companies, were much more likely to also seek patents.

An awareness of the value of their patents, trademarks and other IP assets permits a company to achieve or maintain a competitive edge and enhance their market position by maximizing revenues through licenses, royalties and strategic business alliances.  Thus, the capital allocation for the company’s intellectual properties becomes as important as the valuation of any physical asset.  As among the various types of intellectual properties that may be held by a company, patents are the most valuable, but they are also the most expensive to acquire, maintain and enforce.  For some companies their intellectual property rights actually exceed the value of their tangible assets, as shown by a 2002 survey of the Fortune 500 companies estimating that anywhere from 45% to 75% of the wealth of individual companies comes from their intellectual property rights.

Though patents are of little value or return on investment if a company overspends or fails to capitalize on its patent rights, there are ways to spend less and earn more from the patent assets with a planned cost/benefit approach.

Prior to investing in a patent, it is important to first understand what a patent can and cannot do.  A patent grants to the owner exclusive rights to make, use or sell an invention, meaning that the owner is granted the federal right to exclude others from unauthorized access to that particular invention, ultimately leading to valuable licensing arrangements.  However, a patent does not give the patent owner the right to actually make, use or sell the invention, since others may already own rights that dominate the new invention.  While some patented technologies are valuable in their own right, most patents encompass improvements over existing technologies.  As a result, although the invention may claim a new and previously unknown use of, e.g., a drug, if the drug itself is exclusively owned by a different entity, the patent owner of the new use may be precluded from using the drug without permission from the owner of the drug.  Conversely, the drug owner cannot apply the new use for the drug without permission from the new patent owner.  This sets up an opportunity for lucrative cross-licensing, and indicates the potential value of establishing a patent portfolio to expand the patent coverage to interest a variety of potential buyers/users.

Timing is equally important to maximize a company’s return on its patents.  Some technologies are “hot” for only a narrow period of time, after which the public no longer has interest.  Similarly, if an owner waits too long to capitalize on the value of an invention, others may develop new improvements that out-date the first invention, reducing or eliminating its value in the marketplace.

An additional consideration for a company assessing its patent investments versus revenue, is – how does the company intend to use its patents?  Will the patent be a sword to block or deter competitors, or is the patent a shield to prevent others from stepping into a position that could block the company from a critical aspect of its business?  Maybe the patent can do both when applied against different competitors.  Of course, selling or licensing the patents and related technologies can generate revenue, but such sales and licenses can also be used by the company as a value indicator for potential investors or shareholders.  Increased patent value can further increase borrowing power.  Moreover, patents are often used to measure milestones or progress of the research and development of the company, particularly for early stage research ventures or for newly formed companies.

Accordingly, the question remains – what is the value of the patent?  Of course, the answer depends on a number of factors.  Different businesses have different needs.  To put a price on a patented invention, one might ask “How much would a competitor pay to use, or to prevent others from using, the patented product or process?”  Cost per article, market size, manufacturing capability, need for the invention, and longevity of the need or sales, are all significant factors in the value of a patent.  The exclusivity granted in a patent has a maximum life of 20 years.  Correspondingly, recently granted patents with the full term of the monopoly remaining are of the highest value, as they pose the greatest threat to competitors.  However, the commercial life of the patent can be cut short if subsequent inventions provide better solutions to the problem solved by the claimed invention.  Supply and demand may reduce the value of a patent in a crowded field, wherein many alternatives are available.  The more essential the protected technology is, the greater the value the patent is in the marketplace, and the greater the owner’s ability to negotiate sales, licenses and royalties from the protected invention(s).

If a company is profiting from its patents, that is wonderful.  But conversely, if the company is not generating revenue from its patent rights, then further investment in the patent logically must cease.  There are many ways to transfer patent rights and many reasons to do so.  One person’s junk is another’s treasure, and patent rights that may be worthless to one company, may be sold to another to return a profit.  Alternately, the rights may be donated to an organization, such as a university, trade association, or non-profit.  Not only does the recipient benefit, but the donor often reaps goodwill and positive public relations, as well as a tax benefits.

Unless patents are enforced, their value is lost.  Nevertheless, in some instances, the company may find that the actual expenditure or risks relating to enforcement is too high for business, financial or political reasons.  For example, a company might be concerned about exposure to a retaliatory lawsuit.  However, a company need not simply abandon its patent rights, as alternatives are available.  A company can license or sublicense the patent rights to others, or a joint venture may be created with subsidiaries, affiliates or others to share the patent costs or to create new licensing opportunities.  Companies can be insulated from risks and liabilities by putting the intellectual property rights into a separate entity, which can remain under company control to enforce the patent rights.  Advantageously, a new patent-based entity may be organized in a tax-advantaged jurisdiction or in a jurisdiction where new businesses qualify for government grants, tax abatements or subsidies.

Thus it is clear that patents, if properly valued and managed, can provide wealth and business opportunities to a company when included within the company’s cost/benefit planning, and if the patent portfolio is maintained and evaluated with the same care and business acumen as are applied to the company’s physical assets.