General IP Strategy, In-House IP, Patent Strategy, Startup IP

Maximizing Value from Patents (Part 1: The Costs)

[Before you read this post, read the IP Strategist disclaimer]

Part 1 of this multi-part post focuses on the cost side of a cost/benefit analysis of obtaining patent protection.

There are three dimensions to patent value: What territory do you want; how much of that territory can you reasonably control; and how well can you secure that control with patents.

These questions are essentially the same whether you are determining prospective patent value (Is it worth seeking patent protection for that?), or whether you are determining retrospective patent value (How much is our/their patent worth?). My focus is usually on prospective value, helping clients decide whether and how to get patent protection. In that context, the dimensions become the following 3 questions:

  1. tresspassingWould valuable business objectives be achieved by securing protection of the territory in question (e.g., a particular innovation)?
  2. What regions of that territory can we reasonably hope to secure?
  3. How can we best tailor and execute a patent strategy to secure those regions in a way that achieves those business objectives?

We will look at these questions in more detail over the next number of posts, starting with the question of business value.

Whenever I budget for a vacation, I meticulously try to estimate every cost I can imagine… then I add 25%. If I’m okay with the final number, I know I can move ahead without concern for cost.

My hundreds of patent conversations with clients have typically gone the same way. “Is it worth it for us to get a patent?” The truth is, no one can know. There are so many factors. And in almost every case, after discussing lots of factors in lots of detail, and trying our best to estimate the costs and benefits, the decision ultimately becomes an informed weighing of risk.

In assessing the question of business value, each factor (and even the list of factors) is highly dependent on each instance for each business. Still, I will try generally to describe many of the factors that impact return on investment (ROI) when analyzing potential costs and benefits of patent protection.


PART 1: The COST side of the Patent Cost/Benefit Analysis

Tightrope

Let’s begin with costs because they tend to be easier to estimate than benefits.

The first bucket are the more basic and predictable costs: those relating to preparing, prosecuting, and maintaining a patent instrument. Though even these costs can vary widely, these numbers are typical over the thousands of patents I have handled.

Preparation: ~$10-15K. This stage typically lasts for the first few months and ends around filing the application. The effort can include identifying and scoping the innovation, drafting the patent application, filing the patent application (in a single jurisdiction), and related formalities (e.g., recording assignments). Sometimes, this can include some patent searching, brainstorming, discussions with inventors, etc.

Prosecution: ~$10-20K. This stage typically spans the first few years and ends around the granting of the patent. The effort can include drafting and filing of responses, conducting telephonic interviews, appeals, and other efforts relating to back-and-forth negotiations with the Patent Office.

Maintenance: ~7-13K. This stage spans the remainder of the life of the patent (e.g., typically until year 20) and involves maintenance fee payments at years 3.5, 7.5, and 11.5 after grant to keep the patent in force.

Using only these estimates, a single patent filed only in the U.S. will likely cost about $25-45K over its life. To keep things simple, each follow-on patent and each filing outside the U.S. will likely average somewhere closer to the bottom of that range (in reality, each application can have very different costs, but this is still a helpful estimate).

Beware: you can easily find offers to get a patent more cheaply, but you get what you pay for. Usually, the total cost over time will actually be higher (due to lack of strategy and quality), and you are likely to end up with a gold-stamped piece of junk. It’s like getting a deal on a used car that ends up costing a fortune in the shop and still never runs quite right). You’ve been warned…

The second bucket of costs are all those costs that are much less predictable, because is it highly uncertain whether, when, or to what extent they will be incurred:

Third-Party Administrative Costs. The U.S. Patent Office has a number of avenues through which a third-party can challenge a pending patent application or an issued patent (e.g., submission of third-party prior art, post-grant review, inter-partes review, and reexamination). While the chance of being subjected to these proceedings is very small for most patent holders in most cases, the costs if you are can easily be in the tens or hundreds of thousands of dollars.

Opportunity Costs. Budgets are not infinite, so spending money on a patent usually means not spending it on something else. So it is important that the cost of getting a patent also accounts for having less budget to spend on salaries/benefits for innovative talent, for marketing (branding, advertising, etc.), infrastructure improvements (e.g., new equipment), etc.  Similarly, getting a patent can have a distraction cost: it can take time and attention away from inventors and their innovation activities.

So should you spend those costs? Well, as with any other business decision, you should only invest if you are likely to get a ROI. That leads us to the obvious question that almost no one seems to ask:

“How much ROI would make this a valuable investment?”

Before answering that, a caveat: I am not an economist.

Let’s start with some assumptions. First, assume the stock market yields a 7% annual return; so the patent had better return at least that much, or you might as well have just bought some stocks. Second, assume that a patent does not have much value before it grants (before grant, it is not enforceable), and that probably won’t happen until about year 4. So that leaves about 16 years of enforceable life.

Now, we can do a future value calculation. If we were to make the same investments in the stock market that are described above for patent costs (the same estimated costs made in the same estimated years), the future value at the end of the 20 year life (assuming a 7% annual return) is roughly $80-150K.

That is on the order of a 3X ROI. If you have similarly low-risk alternatives that achieve an even better yield than the stock market, you may want to look for more than a 3X ROI before making any patent investments.

To summarize:

  1. Don’t play the game, if you can’t afford the stakes. 
  2. If you have a way to get more ROI with less risk, do that instead.

So how do you figure out what kind of return you are likely to get from a patent? Part 2 explores the BENEFIT side of the Patent Cost/Benefit Analysis.

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