Originally Posted 10/27/05
It has been awhile since I wrote Part IV and since this last and final Part deals with leveraging patents, I suggest you go back and read Part II first which deals with protecting your IP especially as it pertains to patents.
This is perhaps the most difficult topic to write about (at least concisely) as there are so many ways to leverage patented inventions. And no one way is the end all or the best; it really depends on circumstances and resources.
For companies who are or intend to manufacture a product or offer a service, the ultimate goal is most desirably to keep any potential competition at bay, whereby they have the ability to charge a little more for their product or service and accordingly increase their profitability.
Many new and innovative products have more than a single point of novelty: that is they are unique in more than one way. Each point of novelty is often deserving of patent protection. One product can often result in more than a single patent. One of the larger clients I represented in the past has been known to obtain 5-1- or even more individual patents on a single product. For instance, they would protect the overall concept surrounding the product. They would protect the unique individual parts or components used in the product. They would protect the machinery used to manufacturer the product. And they would protect the manner in which the product was used. Ultimately, it would be very hard if not impossible for their competition to knock off their product without infringing one or more of the patents. Because of this, their competition hated them.
The forgoing is known as the portfolio approach wherein a company protects its products or services in as many ways as possible. This approach is obviously expensive, but if the associated products and services stand to generate substantial revenue for a company, it is often worth it.
The company is then free to leverage the patents in any number of ways. One, they can keep their competition at bay preventing them from making or using the new and innovative product or service and thereby increase their market share and profits. Two, they can license the patented technology to their competition for a licensing fee. Sure, this will increase competition but it will also help grow a market segment faster, and the licensing revenues extracted from the competition will give the company a competitive advantage in terms of the cost to produce the product or provide the service. Third, the company can use the portfolio as protection against being sued for infringing a competitor’s patent. For example, if a competitor charges the company with infringing one of its patents, the company may be able to turn around and assert that the competitor is infringing one or more patents in its portfolio. In the end, the two companies often end up cross licensing patents in their respective portfolios and they avoid the uncertainty of litigation. Finally, perhaps the least desirable way to leverage a patent, the company can sue infringers. Patent litigation is rarely entered into lightly: it is extremely expansive and extremely risky. You may go in thinking you will receive an award of millions and end up with an invalidated patent and millions in legal bills. So if litigation can be avoided it probably should be, but sometimes no other alternatives are possible.
For the entrepreneur or startup company, patents must be leveraged differently. Typically, the inventor can only afford at most a few patents. And unlike the big company, the patent(s) represent the majority of value for inventor. The inventor cannot afford to compete with big companies in terms of capital or distribution, so the patent is the thing that hopefully levels the playing field somewhat. In a big company, the product or service and its sales represent the greatest value and the patent is there only to help support the product’s value.
Considering the forgoing, there are really only two preferred ways for an inventor or entrepreneur to leverage their patent(s): (1) license the patent(s) to a big company typically for a royalty on sales of 2-10% of the associated products or service’s wholesale price; or (2) use the patents to obtain angel and/or venture capital financing to rapidly establish market share and presence for the product of service.
Notice that I did not mention wholly going it alone and building a company from the ground without an infusion of capital from the outside. It is just too difficult for the entrepreneur to succeed without significant and even massive amounts of cash. Why? Cashflow! Even if the product is widely successful and you have a great profit margin, you will not be able to meet the demand and the venture will go deeper into debt until it folds or you raise the necessary capital for expansion. But if you do not act fast enough, you will be knocked off your patent be damned and because of the cash flow problem, you will not have the several hundred thousand to a million to pursue patent infringement litigation.
Does this mean you shouldn’t manufacture and sell your product on a scale you can afford? Oh to the contrary, to interest the big company to license or to attract deep pocket investors, you will have to show that the product can be successful in the marketplace. Essentially, you have to reduce the perceived risk to the company or the investor associated with the venture. Just always realize in the end, you either want to be acquired or you have to raise significant capital. And understand that venture capitalists are going to want a controlling interest in your company. Usually, there is just no way around it.
I recommend before patenting an invention that you think about where you want to go with it. Write a business plan. Read everything you can get your hands on about inventing and bring a product to market. Take classes about entrepreneurship. Attend local venture club events. Take classes at the local college. The really hard work actually begins after the patent is filed, but the work and the outcome can be very rewarding and well worth it in the end. The experience is invaluable, and if your invention is a good one and if you put the necessary energy and determination into the invention, the financial rewards just might be incredible as well.
