A Strategic Approach to Patenting

A strategic approach to patenting

Ralph van Niekerk

Today, more than ever, intellectual property rights form a significant part of the balance sheets of many businesses. These intellectual property rights include unregistered rights which arise automatically – such as copyright, goodwill, trade secrets and know-how – as well as registered rights, such as patents, registered designs and trademarks. In the case of patents, deciding whether and how to develop a portfolio of patents is an important business decision. While many companies acquire patents in a haphazad manner, unlocking the full potential of patent rights requires a strategic and structured approach.

A patent is a limited monopoly that is granted by the State to an inventor in exchange for a full disclosure of the invention. A well-drafted patent for an important technology provides the patent owner with the right to exclude its competitors from using the invention in any practical way for the duration of the patent, which is usually 20 years from the date of application.
As an initial step, ask yourself why your business is considering acquiring patents. There are several purposes for which patents can be acquired, and which can be classified as either offensive or defensive patenting strategies.

Offensive patenting strategies

Excluding competition

Patents can increase barriers to entry and prevent competitors from copying protected technologies by forcing them to design around the patents. How effectively your competition can be foreclosed from competing with you depends on how much of a breakthrough your technology is and how effectively your technology is protected by your portfolio of patents. Sometimes the mere existence of a large portfolio of patents covering many aspects of a key technology can be enough to deter competition or leverage a favourable licensing arrangement with your competitors.

Licensing

Another offensive patenting strategy involves licensing. This strategy grants the competition the right to practice the invention in exchange for royalty payments. Without a patent in place it is normally very difficult to license technology as the only thing that can be licensed is confidential information and know-how. Confidential information and know-how can very easily pass into the public domain after which there is nothing to license. With patents it is simple to license all or part of the rights to other parties. Patent licences can be restricted to specific geographical areas, fields of technologies or time limitations. This protects the patent owner’s competitive advantage in its chosen market and simultaneously unlocks other markets.
Successful businesses exist that do nothing but develop technology, patent that technology and license its use to others in exchange for royalty payments. An example is the ‘fab-less’ U.S. chip manufacturing company Rambus, which develops new semi-conductor technology and then licenses it to semi-conductor manufacturers like Intel and AMD. Universities are also examples of entities that generally patent technologies exclusively for generating licensing income rather than for exploiting the inventions themselves.
Companies can choose to license their core technologies and avoid the set-up cost of developing their own manufacturing facilities, or can license their peripheral or ancillary technologies to parties that are better positioned to exploit them. IBM is an example of a company that files many thousands of patent applications each year for technologies unrelated to their main business and then packages and licenses these patents to companies interested in exploiting them.

Increase shareholder value and attract investment

Investors like to see company technology protected by patents because these assets can be leveraged as the company grows. Patents also indicate proof of ownership of technology and validate the originality of inventions. Many investors use the size of a company’s patent portfolio as an important company valuation measure. A significant patent portfolio will impress potential investors and reassure existing shareholders.

Defensive patenting strategies

Freedom to operate and business negotiations

There are many markets in which doing business without patent protection is extremely risky. This is particularly true in the United States, where patent owners tend to be very litigious. Without a credible counter-threat of infringement, companies with no patent protection can be forced out of the market by threats of infringement. Having a well-developed portfolio of patents provides flexibility in business negotiations as disputes can often be settled amicably through crosslicensing arrangements. Patents can also provide a shield against competitors obtaining similar patents, because unlike trade secrets or confidential information, patents become prior art after they have been filed. This prevents the competition from getting protection for the same invention.

Insurance value

At an early stage of the technology development cycle it is often unclear as to what the end result of any particular invention will be. If the technology is disclosed then it falls in the public domain. A cost-effective way to ensure the possibility of following one of the options mentioned is to file a provisional patent application before the invention is disclosed to the public. In this way a provisional application can be thought of as being similar to taking out insurance. It may, for example, happen that a provisional patent that was filed simply as insurance, turns out to be very valuable with huge licensing opportunities. Remember that further patent applications based on a provisional patent application must be filed within one year, or the provisional application will lapse.

Company flexibility

During the development of technology and the expansion of a business there may often be a change in business circumstances that requires a change in approach. Having a patent portfolio that is wider than just your key business provides the flexibility to quickly enter new markets and create new products.

Setting a budget and monitoring the portfolio

Once the purpose for acquiring patents has been identified, a realistic budget must be set. As a rough rule of thumb, many businesses spend approximately 10% of the total R&D costs on patenting their inventions. While this may seem like a sizeable sum, remember that without patent protection you may find that you are unable to carve out an exclusive market or obtain licensing revenues, and competitors who have not incurred the upfront R&D costs may be able to drive you out of the market for your own technology by competing on price alone.

If you are a small company with limited resources looking to attract investors, it will probably make sense to focus your patenting efforts on key technologies. Larger, well-capitalised companies may choose to try and erect barriers to entry and acquire patents for ancillary technologies that can be licensed. Once you have more than just a few patents, it is important to measure the results of your patent expenditure against its cost. It is also important to continually re-evaluate the patenting strategy to determine whether or not it is still in line with your ultimate purpose, whether that is to secure funding, obtain licensing revenue, create new markets or prevent the sale of competing products.

About the author:

Ralph van Niekerk is a partner in the patent department at Von Seidels IP Attorneys. He holds a B.Eng degree from Stellenbosch University, an LLB from Unisa and an LLM from Stanford Law School. Ralph’s expertise includes the preparation and filing of local and foreign patent applications, especially electronic- and computer-related inventions, registered design application drafting, patent and general intellectual property litigation, the drafting of patent infringement opinions and the drafting of patent licence agreements. He also spent a year studying and working in the field of intellectual property in the United States and is familiar with the US IP system.

Contact details:

E-mail: rvniekerk@vonsidels.com

Webpage: www.vonseidels.com