What is a Patent, really? and Why can it have economic value?
These are some key questions we come across in our practice analyzing and testifying about the value of intellectual property such as Patents. Based on our experience, it has been very important to first clarify all parties about what a patent really is and why it can, potentially, have measurable economic value.
(1) A patent gives its owner the right to sue for infringement if others make, use, sell, offer, import, or offer to import the covered invention into the USA. It is in this sense that patents grant a legal monopoly on an invention. This right is limited to a period of, normally, 20 years from the earliest application claiming a priority date.
(2) Among the requirements to obtain a patent, the subject matter sought to be patented must be sufficiently different from what has been used or described before that it may be said to be non-obvious to a person having ordinary skill in the area of technology related to the invention. Moreover, interpretations of the statute by the courts have defined the limits of the field of subject matter that can be patented.
(3) On this basis, a distinction must be drawn in that a patent covering novel and non-obvious aspects of a technological solution is not the technology itself, nor the business implementing such solution. As a right to keep others from implementing the innovation, its usefulness is limited to the extent entering that market during the patent term is an economically attractive strategy for competitors. Regardless of the technical merits or the degree of innovation of the disclosed invention, the economic value of a patent is contingent on the prospective profitability of reducing it to practice in the country issuing the patent.
(4) Therefore, to determine the economic value of a patent, the likelihood of profitable implementation, the size of the market, the likelihood of competitors, and the costs of litigation to enforce the patent rights are important considerations.
(5) In this context, it bears noting that the potential for a patent portfolio to have any reliably determined economic value depends on significant external factors; not only does the technology disclosed be effective in achieving its objectives, it must be economically and technologically possible to put in practice and competitors must be attracted to enter the market. Furthermore, if competitors enter the protected market, in the sense of infringing the patented innovation, the onus is still on the patent owner to enforce the patent rights by undertaking litigation. Thus, the value of patents is further reduced in practice by the costs of enforcing those rights. The most authoritative source on this issue has found that the median inclusive patent infringement litigation cost, in 2013, stands at $2 million dollars. In other words, if the direct value of a patent portfolio does not exceed $2 million dollars, its net economic value is negative as it would be cost prohibitive to enforce the rights it entails. The profitability of monopolizing that type of market is not sufficient and the patent owner is left to profit only from the potentially reduced market share once the infringing competitor enters the market.
(6) Thus, given the relatively low cost of obtaining a patent, it is not surprising that many more patents are issued than would be economically viable to enforce. According to peer-reviewed studies on the subject, only 2% of patents are expected to be commercialized with a high probability of success, and 75% of patents have virtually no likelihood of being commercialized. Moreover, about 50% of pending patent applications is abandoned at some point during the examination process at the USPTO, and a further substantial percentage of issued patents are abandoned years after issue as maintenance fees are due.
In conclusion, therefore, only those patents that are issued and meet the economic requirements of protecting a profitable business attractive to third parties can have any reliably-measurable value. In reality, it turns out that only relatively few patents are worth significant amounts.
Business owners, legal counsel, or inventors often see the need to evaluate the economic value of their or their competitors’ patent portfolios. This type of analysis is needed even before any enforcement litigation is contemplated, and is often times a useful part of the decision-making process in that regard. If your company relies on patents for competitive reasons, it will surely be worth analyzing their economic value.