Obtaining a Patent

Obtaining a Patent

U.S. Patent and Trademark Office grants a monopoly on the use and development of an invention. The costs of filing and maintaining a patent in the United States are not trivial.  The experience of an expert patent agent or attorney cannot be overstated when commercially launching a new product, service or invention.

Often, the inventor of a new product believes that he will make millions of dollars by making and selling the product without considering all of the steps required to commercialize the product. Of course the inventor has recognized an unmet need and found a solution; therefore the “build it and they will come” mentality takes over all reason. However, successful executives understand that launching a product requires much more than a good idea.

There are numerous ways to generate revenue from a patent application or an issued patent. However, careful consideration of the technology field, market, and barriers to entry is absolutely required to craft a coherent strategy to maximize profit.

The investor will have a different perspective on the value of a patent application than an inventor due to the inherent risk-averse differences in  between the two. That is, investors want an opportunity for a large return while minimizing risk compared to an inventor has little cash sunk into the venture. Sweat equity is just what it is called; there is no market for selling sweat.

Three main approaches to generating revenue from a patent application include: licensing, assignment, or market monopoly. Licensing is sale of some rights to the patent, for instance the right to distribute in a particular geographic region. Assignment is the complete sale of the rights where the inventor does not retain any interest in the patent application. Market monopoly is when the inventor does not license or sell the patent application, but develops and distributes the product without partnering. The best strategy for maximizing profit will be discussed below.

The technology field will greatly affect the valuation of a patent application. For example in the pharmaceutical arena a block buster drug like Lipitor® that generates more than ten billion dollars per year is covered by a single patent claim. Complex mechanical devices can be covered by several patents covering different aspects of the products features. At the extreme, in the electronics and telecommunications industries thousands of patents may cover a product and thus require a patent pool to allow the companies to compete.

Inventors probably recognize the size of the market and inspired to tap into a large market. The investor recognizes the size of the market but also looks at the competitive landscape from the perspective of market penetration or market share, brand loyalty, number of market participants, and likelihood of patent suit. In summary, as a rule of thumb the fewer the patents covering the product the higher the valuation.

Different industries experience various barriers of entry to market such high cost of capital, capital barriers to entry, and government regulation. For example, the oil, gas and energy industry is perhaps the most heavily regulated industry which requires experts to maneuver through the bureaucracy to obtain licensing or other permission to operate.

On the other extreme, the software industry is almost completely unregulated. The investor will view a heavily regulated industry with more caution and look not just at the patent application or the inventor but to the team that the inventor has assembled to help value the application.

An investor will also factor into the equation how long it will take to start recouping on his investment. Expensive plants for manufacturing computer chips may take a year or longer to build. Medical devices must undergo rigorous clinical trials that can last for several years before market approval. In summary, the valuation of a patent application will be impacted differently in each situation.

The competitive landscape greatly affects the investor’s valuation. The industry may have a lot of companies or very few. There are dozens if not hundreds of software companies that are publicly traded and well funded to acquire new technology that is not developed internally. Therefore, an investor would evaluate the exit strategy for the venture and could develop the technology or sell to a fairly liquid market.

Conversely, for example, it is unlikely that an inventor of a new efficient oil drilling rig will start a gasoline company because it would be cost prohibitive. However, licensing the technology to EXXON or Shell makes sense.

Inventors may not recognize that there are only a few companies operating in the target market that have artificial barriers through various lobbying activity or understand that pending legislation may affect the market. In summary, an investor will value a patent application higher if there is an active market for acquisition of the technology similar to the increased value of the marketability premium of a publicly traded security.

The maturity of the patent application is important for an investor. A newly filed application will be extremely difficult to value since there is an eighteen month window from the time of filing until publication. So, for at least eighteen months from the date of filing the patent application there is a risk that another inventor has filed for protection on the same invention.

As a patent application is prosecuted the strength of the claims can be valued based upon the Examiner’s office actions, however there is risk and uncertainty as to the scope of claims that will eventually be allowed.

Typically, investors will not purchase a patent application until claims are allowed and a patent may be issued. Lastly, the investor will evaluate how many years of useful life the issued patent has until its expiration, twenty years from the date of filing. In summary, there is a life cycle for a patent application and the valuation increases from filing to issuance and begins to deteriorate as the patent expires.

The cost of filing and maintaining a patent in the United States are not trivial. Often inventors are able to file a provisional application for $110 on their own. However, there are many pitfalls and the experience of a well trained patent agent or attorney cannot be overstated. Twelve months after a provisional application is filed it will become abandoned and the inventor must decide whether to file a non-provisional in the United States or consider filing for protection internationally.

Additional considerations beyond the scope of this article: international patent strategy, branding, goodwill, and going-concern value.

Eric Alspaugh
© 2011

Eric B. Alspaugh, Esq. is a registered patent attorney specializing in the prosecution and litigation of utility and design patent applications, and obtaining protection for all intellectual property.  Eric is a member of the Orange County California Bar Association and is licensed to practice in state and federal court.  For more info:  Visit www.alspaughlaw.com or email eric.alspaugh@alspaughlaw.com

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