Assessing patent renewal decisions in the United States and Europe
Global patent filings continue to grow; but the rate at which applications and granted patents are abandoned may provide more meaningful insights into the way in which these myriad assets are being used – or not used – by their owners
Under current patent law, the term of a US patent is 20 years from the filing date of the earliest US application to which priority is claimed, provided that maintenance fees are paid on time. Similarly, a European patent has a term of 20 years from the date that the application is filed. Patent owners are required to pay annuities and/or maintenance fees to keep the patents active at various points in time. Failure to pay these, intentionally or not, results in the patent being abandoned and no longer being active.
The number of US and European patents that were allowed to expire in 2014 due to failure to pay maintenance and renewal fees was 86,459 and 37,172, respectively. This is approximately 35% higher in both jurisdictions compared to the volume of abandoned patents 10 years ago (see Figure 1). An upward trend in the volume of abandoned patents is in line with the growing number of both filed and granted patents. Between 2005 and 2014, the annual number of US patent applications increased by 47%, while the number of patent grants more than doubled, significantly outpacing the rate of abandonment. In Europe, the 10-year growth in abandonment volume has kept pace with the increase in filing (39%), but has outpaced the more modest increase in the number of patent grants (21%).
This article explores the reasons for patent abandonment and the implications of recent abandonment trends.
Figure 1. US Patent and Trademark Office (USPTO) and European Patent Office (EPO) abandonment volume
Reasons for patent portfolio pruning
The most common reasons for companies to trim their patent portfolios include cutting costs, responding to fluctuations in market demand and ensuring compliance with recent legal changes, although changes can also be the result of an M&A deal or large portfolio transaction in which a few key patents are bundled with patents of less importance to the acquirer.
Because patents cost more to maintain later in their life, an ageing portfolio is inevitably more expensive to a company and is likely to be scrutinised more closely than a younger one. US patent maintenance fees are due at 3.5 years, 7.5 years and 11.5 years from the date that the patent was granted and amount to $1,600, $3,600 and $7,400, respectively. In Europe, annual renewal fees are payable to the national offices of the European Patent Convention (EPC) contracting states in which the European patent came into effect. The total renewal fee amount due each year depends on the number of countries in which the patent is maintained and can be quite substantial – in excess of €20,000 in the 20th year if all 38 national renewal fees are paid. The motivation behind this increasing fee structure is to encourage patent holders to abandon rights that they are no longer exploiting.
Companies also heed market demand for the products or services covered by their patents. Changes in demand can be caused by the obsolescence of the underlying technology or shifts in the geographic significance of certain markets, as a locus of either sales activity or manufacturing activity. Maintenance decisions consider the nature and value of the products and services that are being protected and the cost and benefit of each patent is typically assessed on a jurisdiction-by-jurisdiction basis. A company’s corporate goals and commercialisation strategy often dictate portfolio-pruning decisions.
Companies also respond to changes in the ever-evolving legal patent landscape. The rise in lawsuits brought by patent assertion entities (PAEs) in recent years has prompted a series of changes in the US patent system. Recent legislative reforms include the enactment of the America Invents Act and the introduction of new post-grant proceedings – inter partes reviews, covered business method reviews and post-grant reviews – all of which make it easier to challenge issued patents. In addition, recent Supreme Court cases relating to patent eligibility of software patents (Alice v CLS Bank) and the ‘definiteness’ standard for patent claims (Nautilus Inc v Biosig Instruments Inc) have also created a more challenging environment for patentees. While these legislative changes are a new and active phenomenon, the 2013/2014 rise in abandonment rates in the United States is potential evidence of their impact on portfolio management.
Figure 2. USPTO and EPO abandonment rates
Patent abandonment rates
When compared to the total body of active patents, the average 10-year abandonment rate (abandoned patents of total issued and non-expired patents) was 1.3% in the United States and 5.9% in Europe (see Figure 2).
The higher abandonment rates in Europe likely reflect the much higher fees there and the resulting tendency to maintain patents only in a limited number of member states where gross domestic product is higher and enforcement is perceived as more effective. Currently, the total renewal fees over the life of a patent for only the top three most frequently designated EPC states – Germany, France and the United Kingdom – are approximately $28,300, compared to only $12,600 total maintenance fees in the United States. Moreover, maintaining a patent in an EPC state is much more costly later in its life. To put this into context, over 83% of the total cost of maintaining a patent in the top three EPC states is incurred over the last nine years of its life (see Figure 3). By contrast, the third and final maintenance fee on a US patent (due 8.5 years before its expiration) is less than 60% of the total maintenance cost.
Figure 3. Annual renewal fees in Germany, France and the United Kingdom (US dollars)
Renewal costs are a major consideration for companies when it comes to choosing which patents to renew and which to abandon – such decisions are made in the context of their business objectives and IP budgets. Due to its size, maturity and complexity, the United States continues to be the most important market for patents in general. Given the relatively low expense of maintaining a patent there and the cost of a potentially lost opportunity from abandoning a patent, companies are less likely to allow their US patents to lapse, compared to patents in European jurisdictions where the cost/benefit ratio may be less favourable.
Patent abandonment trends
Figure 4 is a graphical representation of the number of US Patent and Trademark Office (USPTO) and European Patent Office (EPO) patents that were filed and abandoned between 2005 and 2014. The chart includes a secondary axis enabling trends in filing and abandonment to be compared on a single graph and highlighting the relationship between the two.
Figure 4. USPTO and EPO filing and abandonment
Over the 10-year period examined, patent filings were on the rise in both jurisdictions, with average year-on-year growth rates of 4.5% and 3.8% in the United States and Europe, respectively. In fact, 2009 was the only year in which the number of patents filed was lower than that in the year immediately preceding it. This brief decline was more prominent in Europe, where the annual number of patents filed fell by 6.5%, compared to a drop of only 0.5% in the United States. As expected, the rate of change in the volume of patent filings tends to be inversely related to the rate of change in the volume of abandoned patents, although the relationship is rather loose. Generally speaking, macro-economic trends that are likely to encourage companies to file more patents are also likely to depress patent abandonment, and vice versa.
Figure 5. USPTO annual growth rates in filing and abandonment volume
Economic downturn (2008-2009) and recovery (2010-2012)
According to the National Bureau of Economic Research, business activity peaked in December 2007, which marked the start of the most recent downturn. The subsequent recovery began two-and-a-half years later in June 2009, as the recession bottomed out. The impact of this period of economic decline on patenting activity is demonstrated by the data examined in this article. The number of USPTO and EPO patents filed between 2005 and 2007 – the last two years of economic growth prior to the downturn – increased by 16.2% and 12.7%, respectively. Following the start of the recession, patent filings levelled off in 2008 and fell in 2009 in both jurisdictions, although only slightly in the United States. The number of USPTO and EPO patents filed between 2007 and 2009 fell by 0.4% and 5%, respectively. However, one year into the recovery, patenting was on the rise again.
The economic downturn also had an impact on the number of patents allowed to lapse due to failure to pay maintenance and renewal fees. In the United States, the number of abandoned patents fell by 7.4% between 2006 and 2008 and then increased sharply by 37% between 2008 and 2010 before falling again in 2011. Europe experienced a similar increase in the number of abandoned patents between 2008 and 2010, of 22.9%. According to the data, companies adjusted their filing behaviour more quickly than they made and implemented decisions about abandoning patents. Abandonment appeared to lag behind filing activity by about a year. This could be due to the fact that it takes longer to identify patents suitable for pruning than it does to implement a new filing strategy. While it is likely that the economic downturn forced many companies to reassess their IP processes – including portfolio pruning – as early as 2008, many of the implemented changes did not take effect until the following year.
Figure 2 offers further evidence of the impact of the economic downturn. There was a spike in abandonment rates in both regions in the years immediately following the start of the recession. In the United States, the 2008 abandonment rate was only 1.1% – the lowest over the period examined. By 2010, this had reached 1.5% – the highest over the period examined. Similarly, in Europe, the abandonment rate went from 5.7% in 2008 to 6.8% in 2009 and remained high in 2010 before declining again in subsequent years.
Figure 6. EPO annual growth rates in filing and abandonment volume
In both the United States and Europe, the average quality of abandoned patents declined every year between 2005 and 2012. While 2013 and 2014 saw an increase in patent quality, the average quality in both jurisdictions remained below their 2005 levels (see Figure 7). This could mean that companies are becoming increasingly savvier at identifying IP assets suitable for pruning.
The quality score in Figure 7 is a computer-generated numerical ranking or score based on a multi-variate regression analysis of a number of identified predictor variables (patent metrics) determined to have a significant statistical correlation to patent maintenance or mortality rates. Scores are calculated completely objectively for each patent according to the determined metrics. Raw scores are mathematically adjusted to a nominal expected score of 100. Adjusted scores are akin to the familiar IQ score for rating human intelligence. Thus, a score of 100 generally corresponds to an expected normal or median patent quality, while a score higher or lower than 100 indicates an expected above-average or below-average patent quality and/or value probability, respectively.
Figure 7. Quality of abandoned patents
The reader is cautioned not to compare the patent quality between the USPTO and EPO systems directly, as the ratings are derived from a unique rating system for each specific jurisdiction of patent issuance. However, on average, EPO patents at the point of abandonment are above average in terms of relative patent quality, while US patents are of below-average patent quality at abandonment, with 100 being average. A possible explanation for this could be that European patents are being abandoned based not only on their quality, but also on their relative value contribution from a geographic point of view. There are two key drivers of the value of a patent – its commercial use within a given jurisdiction and the quality of that nation’s IP regime (ie, the ability of rights holders to obtain, retain, exploit and enforce their IP rights). All else being equal, a German patent is more valuable than a Spanish patent because of the relative size of the German market and the relative strength of its IP environment. Therefore, the German patent is less likely to be abandoned compared to its Spanish counterpart. Moreover, prior to commercialisation, many companies choose to file broadly in Europe and, over time, to align their patenting activity to their commercialisation strategy through pruning.
Remaining life of abandoned patents
The average remaining life of USPTO patents that were allowed to expire between 2005 and 2014 due to failure to pay maintenance fees was 1.7 years longer than the average remaining life of European patents that were abandoned over the same period, though this gap has narrowed in the last two years (see Figure 8). This means that companies are abandoning US patents earlier than they are abandoning European patents.
The 10-year average remaining life of US patents at the time of abandonment was 9.3 years. By contrast, the 10-year average remaining life of EPO patents at the time of abandonment was only 7.7 years. These numbers are significant because they indicate that most US patents are abandoned in the months before the last and most sizeable maintenance fee is due. Since renewal fees are paid annually in Europe and since these fees increase over the life of the patent, very few European patents reach expiration compared to their US counterparts.
Another interesting trend that can be discerned from Figure 8 is that entities are abandoning US patents later in their life. The average remaining life of an abandoned US patent fell every year between 2005 and 2012 before increasing slightly in 2013 and 2014. This means that more patents are being abandoned closer to when their last maintenance fee is due. This downward trend could be due to IP value increasing in the United States during that period and companies taking longer to determine whether there is value in a given patent. The 2013-2014 increase in the remaining life of an abandoned US patent could be due to more proactive pruning as companies respond to the recent legislative changes discussed earlier in this article.
Figure 8. Remaining life of abandoned patents
Figure 9. USPTO abandoned patents as percentage of patents due for maintenance fees
When compared to the number of patents that were up for maintenance, the average 10-year abandonment rate in the United States (abandoned patents of total patents on which maintenance fee was due in a given year) was 15.9% (see Figure 9). As expected, there was a spike in the years immediately following the start of the last recession – the abandonment rate went from a low of 14.4% in 2008 to a high of 17.4% in 2010, before falling again in subsequent years.
Abandonment by industry sector/technology type
Next, a closer look at abandonment patterns by patent class shows a substantial overlap between the top 10 International Patent Classification (IPC) groups by abandonment volume in each of the two jurisdictions examined in this article. Both lists feature patent classes related to the fields of data processing (G06F), electricity (H01R, H04N), information storage (G11B), measuring and testing (G01N), medical science (A61B, A61K, A61P), organic chemistry (C07C, C07D) and semiconductors (H01L). The top 10 IPC classes by abandonment volume represent nearly one-quarter (24%) of all abandoned USPTO patents and about one-fifth (21%) of all abandoned EPO patents since 2005.
Figures 10 and 11 include a secondary axis enabling trends in abandonment by specific IPC class to be compared to the total number of abandoned patents on a single graph. The USPTO chart reveals that individual IPC classes tracked the overall US abandonment activity fairly closely. However, the largest of these IPC classes with respect to US patents – G06F and H01L – warrant a closer look. G06F corresponds to electrical digital data processing and H01L corresponds to semiconductor devices. While software patents are not assigned to a particular class or sub-class, research has shown that G06F includes more software patents than any other IPC class. During the downturn, the number of abandoned patents classified in G06F increased much sooner and, for the most part, at a faster rate than that of the overall abandonment volume. This suggests that, following the start of the recession, software companies made adjustments to their IP policies fairly swiftly, while other firms responded more slowly. Once the recovery began, G06F patent abandonment dropped significantly and at a much faster rate than that of the overall abandonment volume. This disparity between G06F patents and the overall volume continued between 2012 and 2014, when software patents were being dropped at a faster rate than the overall abandonment rate. H01L patents also experienced a faster rate of abandonment compared to the overall abandonment trend between 2012 and 2014.
Figure 10. USPTO abandonment volume by IPC class
Figure 11. EPO abandonment volume by IPC class
Unlike the US data, the EPO chart shows a weak relationship between individual IPC classes and the overall EPO abandonment activity. This is particularly obvious with the largest of these IPC classes – A61K or preparations for medical, dental or toilet purposes.
Top companies by abandonment volume
Of the top 50 companies by abandonment volume over the period examined, over 70% appear on both lists. The average quality scores of these abandoned US and European patents are 94.5 and 96.0, respectively (see Figures 12 to 15). Approximately 60% of the top 50 companies by abandonment volume are also in the top 50 by number of applications filed.
The top 10 companies in each jurisdiction – along with their average 10-year abandonment volume and average quality score – are displayed in Figures 12 to 15. Seven of the top 10 companies by number of abandoned US patents and half of the top 10 companies by number of abandoned European patents are Japanese. One could posit that the economic downturn in Japan has led to much of this abandonment. Moreover, Japanese companies have traditionally rewarded inventors on how many patents they issue, which has led to a lot of incremental as opposed to true innovation. The former are arguably easier to abandon, especially with the added economic pressure.
There are many observable trends based on the data presented. As expected, significant economic recessions cause an increase in abandonment, but these periods of retraction are followed by an increase in filings and then the inverse relationship continues in repeated cycles.
Figure 12. USPTO 10-year average abandonment volume by company
Figure 13. USPTO 2005-2014 abandonment volume by company
Figure 14. EPO 10-year average abandonment volume, top 10 companies
Figure 15. EPO 2005-2014 abandonment volume by company