Patents, as one part of intellectual property protection, provides a valuable tool for protecting ideas, R&D, and business growth. It is a political policy decision of how patents are obtained, maintained, enforced, etc. Different countries have different views on patent policy. For many, though, patents are a driving force for economic development. And for other naysayers, especially in the world of pharmaceutical and other medical developments, they say patents are antithetical to human progress and human rights. Again, that discussion of who is right (if anyone) is a matter left for policy makers.
Aside from the macroscopic view of patent policy, patents are obtained by private companies or individuals, not usually governments. For companies and individuals, why patent at all? Can one make money on patents? In this article, we discuss some basics reasons why people patent and what effect it has.
Patenting to Protect Core Innovation
Most patentees believe that patents are necessary to protect the core innovation. That is not entirely accurate because it misunderstands the fundamental nature of the patent right. The patent right is an exclusionary right that effectively sets out a fence around the property right (like a land parcel). It prohibits trespassers (competitors) from trespassing onto the property. It doesn’t really matter if there are no buildings on the land, or whether any building is a house, an apartment building, school, factor, or office. One does not patent the structure built thereupon. The value, therefore, is premised on the inherent desire for others to cross the land. If the fence surrounds a large parcel of land, then the landowner (here the patentee) can charge others for the privilege of crossing the land, as opposed going around it. For example, suppose one created a fence entirely around the state of Utah. To travel westbound to California, transporters would need to circumvent the fence via a northern route through Idaho, into Oregon, then down into California. Similarly, a southern route is equally inconvenient. The Utah landowner could charge tolls or rents for the privilege of cutting through to San Francisco or Los Angeles. Equally, a landowner owning the narrow 30 foot wide east-west roads across New York City’s Central Park, though having a smaller footprint of land, has a valuable property to allow others to traverse by paying tolls or rents.
Patenting To Add To The Asset List
Patentees can be small companies or individuals who need investment. Investors will evaluate the investment opportunity for myriad reasons, including patent protection. Patentees will often file many applications, obtain many issued US patents, and also international ones. They then list these patent and patent families in a schedule of assets or as one or two line items on a pitch-deck further suggesting that the company has a patent runway of protection out to year 20XX. Most sophisticated patent analysts know these are meaningless statements because the devil is in the details of what those patents actually claim. Due diligence vets out the accuracy of such statements on runways and skilled due diligence evaluators are rarely impressed with the numbers. Though, numbers of patents and the international scope can be important in any valuation. All things equal though, patentees can monetize patents by having them and ensuring investors see them in the Schedule.
Making Direct Money From Patents
Because a patent is a property right, it can be monetized. Consider the example of an apartment building owner. The owner can monetize the building by renting out the units to paying tenants. If the value of the building increases, the owner keeps that value. Though the tenant occupies an apartment, the owner retains ownership. The owner can similarly decide to sell the building to a new owner. After the deal closes, the selling owner gets no more money. If the buying owner discovers oil or gold under the building the selling owner gets nothing of this new value. On the other hand, if the buying owner discovers a toxic waste dump underneath, the previous selling owner got the money already and is unbothered by the new decrease in property value.
In the patent realm, one can rent or sell the patent rights. Renting the patent is called licensing. The patent rights include the right to exclude another from making, using, selling, offering for sale, or import into the US the patented invention. Inversely, a patentee can therefore license out any of these rights to another and charge accordingly. The patentee can grant manufacturing rights to X, sale rights to Y, territorial rights to Z, etc. Frankly, the license is nothing more than a contract and skilled contractors can hash out the details.
A patent can also be sold to transfer ownership rights, wholly or in part. This is called patent assignment. Typically, the sale of the patent is a single transaction. To the seller it does not matter what the buyer does with the patent. One can also create joint ownership by assigning ownership rights to another.
This begs the question: is it better to license (rent) or assign (sell)? There is no right answer. A patentee may sell a patent cheaply thinking it is worthless yet the buyer turns it into gold. A patentee may license the patent to one who does little with it.
Considerations in Licensing
There of course some tried and true considerations in licensing patents. First, there is exclusivity: is the license exclusive (even as to yourself) or non-exclusive. Second, as mentioned earlier, the patentee can license out different rights to different entities. Another is the price, e.g. the royalties to be charged. Royalties are based on negotiated terms, though there are some generally accepted ones in different industries. In the pharmaceutical context, a patentee could license different species of a compound or different fields/methods of use to different companies. Shrewd licensors will ensure that monetary milestones are built in irrespective of whether the development is ultimately successful. Licenses should contain best efforts to commercialize clauses or minimum royalties to ensure that the licensor makes money. Unsophisticated licensors may be duped into high royalty rates (thinking that it will pay handsomely) but without minimums or best efforts.
Patent Enforcement and Monetization
Because of the right to exclude, when the trespass occurs the patentee can sue for injunctive relief to prevent further trespass and for monetary damages for past infringement. The scope of patent infringement damages is well beyond this article. In general, however, patent damages take the form of the patentee’s lost profits or a reasonable royalty. Notably, under the patent law as currently interpreted, disgorgement of the infringer’s profits is not permitted. Taking a case through trial and appeal can cost millions so the amount of damages collected has to be worth the effort. Unless the patentee can also show some nefarious conduct, the patentee cannot recover legal fees or costs. Nefarious conduct can be used to obtain up to triple damages. In general, the typical patentee does not rely on winning patent damages post-litigation as a monetization vehicle. It is far too costly and time consuming. This is not to say that litigation is a worthless tool. Just like other litigation, a settlement may produce money recovery without going the full litigation distance. The settlement terms can provide for money for past infringement and future royalties.
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