Building a high-quality patent portfolio in China and the United States

In our article “Effective patent first-filing approaches for international teams of inventors” (IAM 66), we touched on the importance of intellectual property for companies of all sizes. In fact, a holistic IP strategy should be the cornerstone of your company’s overall strategy. As shown in Figure 1, IP strategy plays an important role in three key areas:

Figure 1. A holistic IP strategy should be a cornerstone of your company strategy

• defending a company’s existing business by fending off competitors’ assertions or litigation and delivering design freedom through cross-licences;
• capturing innovative ideas generated from your R&D investments and keeping competitors from copying your product features or encroaching on your market share; and
• providing financial contributions to your company’s bottom line by generating high-margin IP revenues.

However, none of this is possible without a high-quality patent portfolio. The era of simply comparing numbers of patents in order to determine who pays royalties is over. Any successful IP action requires clear evidence of use of the asserted patent, regardless of whether its objective is defensive, offensive or revenue generation. In addition, these asserted patents must be capable of surviving invalidity challenges. In the United States, the America Invents Act has introduced several new or revised patent review processes – including post-grant review, inter partes review and covered business method review – which make it much easier to invalidate another party’s patents. Therefore, patent owners are required to pay significantly more attention to the quality of their patent portfolios.

To increase the quality of patents in a portfolio, one must begin with sound criteria combined with solid processes in order to weed out low-quality ideas when determining whether to file a patent application. These efforts must continue during the application drafting/prosecuting phase in order to ensure that only high-quality patents are generated. However, the specific processes or requirements may vary between countries as a result of local laws and practices. This article focuses on the United States and China, based on the authors’ experience in these countries.

To file or not to file?

In their efforts to try to file only high-quality patent applications in order to improve return on investment (ROI) and reduce the overall costs of patent maintenance, many companies use complicated matrices to evaluate inventions. Some of the most commonly used parameters include:

• technology innovativeness;
• number of applicable industries;
• the broadness of the claim;
• file history estoppels;
• ease of infringement detection;
• potential workarounds;
• the number of products affected and associated dollar amount;
• litigation history;
• forward citations;
• backward citations;
• prosecution length;
• number of claims;
• length of independent claims;
• enablement of the specification;
• inventor proliferation;
• whether the case has continuations;
• foreign counterparts;
• size of the existing patent portfolio;
• strategic alignment to the company’s roadmap; and
• relevance to standards.

Some rank as many as 15 factors and rely on the total score of these parameters to evaluate either a granted patent or an initial idea in order to decide whether to file a case and what resources to allocate to it. The higher the total score, the more resources and attention will be devoted to prosecuting the case.

However, some of these parameters could be seriously misleading and thus divert precious resources to the wrong cases. For example, companies often score how innovative an idea is from zero to 10. The higher the innovation score, the more likely that the idea will be approved and a patent application filed. Therefore, if the innovation score is low – perhaps because the idea represents only an incremental improvement – then the idea will likely be dropped. This approach could result in the abandonment of ideas which might be only minor improvements in functionality, but read squarely onto a competitor’s products. Consequently, companies could miss an opportunity to obtain a valuable patent which could be used offensively or defensively against a competitor.

Another problem with focusing too much on a high innovative score is that this fails to take into account the timeframe. One might have a brilliantly innovative idea that is revolutionary and forward-looking by decades. However, if nobody is going to use it during the patent’s lifetime (typically 20 years from the priority date), then the resources spent on filing a patent application will be a waste of your company’s time and money. This is especially true in industries where most innovations are incremental. In such case it is common to find many patents that read onto competitors’ products, even though the inventions themselves are only minor improvements.

Therefore, when deciding whether to file a patent application, the answer should be a simple yes or no. It is simply not efficient to calculate a total score based on many factors. A streamlined process is necessary to help inventors understand what is important and reduce the chance of failing to file patents for valuable inventions. We believe that whether a patent is worth filing or not boils down to two key questions:

• Is the patent office of the target jurisdiction likely to grant a patent for this invention?
• Are others likely to use this invention at any time in the next two to 20 years?

Is the patent office likely to grant a patent?

A patent need not be highly innovative in order to be valuable. One of the most important requirements for a high-value invention is that it be allowed as a valid patent by the relevant patent office. It is also important that the patent is unlikely to be invalidated later on. Once an invention truly meets the requirements of the patent office (including being able to survive invalidity challenges) and is granted, its value is no longer affected by how innovative it is. In other words, a patent has a binary status: valid or not valid.

In the United States, the US Patent and Trademark Office (USPTO) requires inventions to be useful, new and non-obvious. For a Chinese patent, two questions must be carefully examined: is the invention patentable and does it meet the requirement of novelty and non-obviousness? For large enterprises, this requires that the committee responsible for evaluating inventions include technical experts who are familiar with technological developments in their subject-matter areas and can readily make sound determinations on innovativeness. Otherwise, proper prior art searches are necessary when initially evaluating an idea.

Companies have vastly different philosophies and practices regarding whether to conduct prior art searches before filing a patent application. Some require thorough prior art searches before filing, while others prohibit inventors from conducting any prior art search for fear of either potential wilful infringement risks later or mandatory disclosure requirement by the patent office (or both). A midway approach involves conducting a controlled prior art search with clear boundaries – for instance, inventors might only conduct searches for publicly available literature, while legal councils could conduct legal searches. Alternatively, searches can be performed entirely by patent attorneys rather than the inventors themselves. We believe that a proper prior art search is vital in order to generate high-quality patents. Companies can adopt various measures to control their legal risks, but the truism that quality comes from knowledge definitely applies here.

One also needs to be familiar with the relevant patent office’s prior art search process and prosecution practice in order to judge whether a case is likely to grant. In addition, one should monitor the patent appeal board’s decisions carefully to determine whether a patent might be invalidated later. For example, software patents have encountered increasing resistance in various countries lately. In September 2013 The Washington Post stated that “The patent troll crisis is really a software patent crisis”, and many countries have declared software patents unpatentable. In the United States, current practice is that software patents are patentable, provided that they meet the Bilski ‘machine or transformation’ test. However, the US Supreme Court is reviewing several software cases and its decision may alter requirements for software patents. We already beginning to witness the impact of the Supreme Court ruling in Alice in recent court decisions. In addition, a software patent deemed patentable in the United States may not be patentable in other countries. For example, a computer-readable medium claim is explicitly excluded as a patentable claim in the Guidelines for Examination by China’s State Intellectual Property Office (SIPO).

Based on such country-specific standards on patent quality, one needs to make an educated determination as to whether an invention is likely to be allowed by the national patent office. If it is unlikely that the office will allow a patent due to highly crowded prior art in the specific technology area, it is probably not worth the effort and money of filing an application. On the other hand, if it is likely that the applicant will receive a grant, then one should look at the second factor – that is, whether others will likely use the invention – and then decide whether to file an application.

Are others likely to use the invention in the next two to 20 years?

When deciding whether to file a patent application, the second question to ask is whether anyone is likely to use this invention within two to 20 years of filing. If a feature improves the product performance or customer experience significantly, it is likely that many people will want to adopt it, meaning that it would be wise to file a patent application. Moreover, if a patent maps onto a mandatory standard feature, it is almost inevitable that products conforming to the standard will use the patent, making it advisable to file a patent application in order to exclude others from using your idea.

Other companies may use your invention by simply copying your product feature after hearing your idea. Alternatively, a company may have independently developed the same technology as you, but have yet to make a public announcement on its upcoming product. It may have already applied for a patent on this idea or may file soon after seeing your idea. As a result, this third party may be able to file a patent suit against you and stop your product shipment. In these scenarios you should file a patent application in order to retain the option of excluding others from using your invention and/or preventing others from stopping your own product shipment.

In addition, you should take into consideration the product’s lifecycle. If an invention has an extremely short lifecycle compared to the patent prosecution period (typically two to five years in the United States), there is no compelling reason to file a patent application, as it will be obsolete by the time that the patent is granted. Similarly, if the invention is too expensive or too complicated to commercialise within the patent lifetime of 20 years, there is no good reason to file an application.

Some companies consider factors such as market size, infringement and detectability in deciding whether to file a patent application. In the authors’ opinion, these are important only when determining the value of the granted patents, but not when deciding the fundamental issue of whether to file an application in the first place. For example, most patents used in recent litigations between smartphone companies were filed before 2000, making it highly unlikely that the inventors anticipated just how valuable these ideas would turn out to be. Certainly, they could not have foreseen the eventual size of the market, which is why it is more practical to de-emphasise or omit such unpredictable factors.

Some companies put too high a value on inventions that are used in their own products. In fact, one common question asked of inventors during the invention review meeting is: “Are there any plans to use the feature in our own company’s products?” This is not the correct approach, unless the inventing company is an industry leader and others are likely to want to copy its products. The correct question should be: “Is it likely that third parties will use this feature in the future?” A patent is highly valuable when it reads onto others’ products, but not useful for reading onto your own product, unless others also use your idea in their products. One possible scenario is that an invention is used in your own product and the product is made by an original equipment manufacturer which makes products not only for you, but also for other companies. There is a greater probability that other companies will use the invention in the future, because the manufacturer may learn from the invention and make proposals to a third party to use the invention.

Figure 2. The matrix for determining whether to file a patent

Once you have answered these two fundamental questions, you are ready to decide which IP action to take. In Figure 2 we propose various actions depending on your answers.

As shown in Figure 2, in the upper-right quadrant, when the answer to both questions is ‘yes’, one should definitely file a patent application. This scenario means that the invention is likely to be granted by the patent office. In addition, it is likely that other companies will want to use this invention after seeing this idea or could independently develop a similar idea on their own. In this case, it is necessary to file a patent.

However, this decision may vary based on the countries in which you are filing. Different patent offices have different policies and patterns of prosecution for different industries. For example, many pharmaceutical companies often avoid filing patent applications in China because it is very difficult to obtain a patent in that industry.

When considering whether third parties will use your invention in their products, besides considering whether they will incorporate your inventive feature into their products in their country, you should also consider whether they may sell, offer to sell, import, manufacture or use such a product in that country.

If at least one answer to the two questions is a ‘no’, it is not necessary to file a patent application. Instead, other approaches are probably more cost effective. For example, as shown in the upper-left quadrant of Figure 2, if an idea is unlikely to be granted patent protection, it is still worth considering keeping it as a trade secret. In fact, it is recommended that information be restricted to a small team on a strict need-to-know basis, so that others cannot get hold of the idea easily before the product is shipped or there is a public announcement of the related functionality/feature. Such actions are known as restrictive trade secrets.

The lower-right quadrant of Figure 2 represents a scenario where the patent office is likely to grant a patent, but the feature is so peculiar that others are unlikely to copy the idea. Even if no one else is likely to use your idea in their products, you may still want to prevent others from obtaining a patent if you plan to incorporate this feature into your own products. Here the recommendation is to publish the idea in order to establish prior art so that no patents can be obtained on this particular feature and thus third parties cannot stop your product shipment in the future. This is much more cost effective than filing and maintaining a patent.

The lower-left quadrant of Figure 2 depicts an idea that is unlikely to obtain patent office allowance as a patent and unlikely to be used by others in their products. In this case, keeping the idea as a normal trade secret should suffice.

Ensuring high-patent quality

Deciding whether it is worth filing a patent application is only the first step of ensuring a high-quality patent portfolio. The next step involves rigorously controlling the process and choke points during drafting and prosecution in order to increase the probability of generating high-quality patents. Let us first look at what constitutes a high-quality patent.

Defining a ‘high-quality patent’

People often say that ‘beauty is in the eyes of the beholder’ or that whether a patent has a high value depends on who is buying. The authors disagree. We believe that there should be a common measure regarding a patent’s quality and we hereby propose a relatively simple measure for a patent’s intrinsic value in defining a ‘high-value patent’. However, it is true that the actual price that a buyer is willing to pay for a high-quality patent depends on the buyer’s particular situation. For example, an active litigation defendant may be willing to pay a price that is significantly higher than the patent’s intrinsic value in order to defend itself better in court. On the other hand, a licensing entity may not want to pay too much in pricing even for a high-quality patent if there is no immediate time pressure. In this article we focus only on the intrinsic value of a patent, which can be measured objectively. The final pricing of any patent will be influenced by external factors such as the buyer’s special needs at the time of purchase, the seller’s particular situation at the time of sale, the number of bidders and the market perception; however, these are not discussed here.

There are some common approaches in evaluating a patent – for example, market approach, cost approach and income approach. All three are based on gaining a substantial understanding of the quality of a patent, so as to benchmark it in the market, estimate its cost or estimate the offensive/defensive income that it could generate. Many objective indicators are used to value patent quality, such as number of forward citations, countries covered by counterparts, number of claims and length of independent claim. While these can be useful for giving a sense of a patent’s relative status quickly, they are seldom useful for valuing a patent. For example, one patent may have many forward citations and thus one may claim that it is technically important. However, if the patent claims are poorly drafted, its quality decreases significantly. Therefore, you need to pay attention to the patent’s technical/business applicability, as well as its legal enforceability.

Figure 3. Valuing a patent

We propose that patent valuation may be determined mainly by two key parameters, as shown in Figure 3: total cost of avoidance (mainly a technical/business question) and evidence of use quality (mainly a legal question).

‘Total cost of avoidance’ means the amount of money and resources required, as well as the financial impact experienced, to avoid patent infringement. This will include how broad the claim is, how many workarounds there are, how difficult it is to switch from one solution to another for current users, market size, how angry customers might be upon being forced to switch and whether the feature is a mandatory required feature for a commonly used standard. Nowadays, the practice of patent fencing or patent surrounding is popular in some industries. Often one may file several patents covering a single product feature. As a result, another company will have to obtain rights to all relevant patents when designing around this one feature. Therefore, it is also important, when assessing the total cost of avoidance, to take into consideration all related patents or what is required in order to avoid the entire portfolio.

‘Evidence of use quality’ refers to how well a patent maps onto the product, how easy it is to detect the infringement, how good the specification and file history are in supporting the claims and how well the claim is written to ensure that the patent is valid.

An important factor to consider is how difficult it would be to invalidate the patent. Due diligence in this area also needs to consider different practices in different countries. For example, the USPTO routinely allows claims that may not be fully described in the specification. In comparison, Chinese patent law imposes more restrictive criteria in order to support priority claims. In addition, a complainant can file a patent suit seeking injunctive relief in a US International Trade Commission court, provided that it meets the domestic industry requirement, while a plaintiff in Chinese patent infringement litigation bears the burden of producing evidence. Although legislative efforts have been made in recent years, it remains a well-recognised problem for plaintiffs to produce evidence of infringement and damage in a Chinese court. If a patent claims computer-implemented methods, algorithms or software modules which are difficult to reverse engineer, the chances are that it will lose a lawsuit in China for lack of evidence. In addition, the US Patent Trial and Review Board currently construes patent claims broadly and thus produces a high percentage of invalidity decision in inter partes review rulings. Although SIPO does not have an exact equivalent to inter partes or covered business method reviews, it is also possible to petition to invalidate a Chinese patent. Therefore, the cost of patent invalidity depends on the particular country.

In summary, if both the total cost of avoidance and evidence of use quality are high, this means that it will be very difficult for the infringer to switch to another solution without spending a lot of money or resources. Thus, a patent will be defined as ‘high quality’ or ‘high value’ if the following apply, in order of priority:

• It maps onto third-party products very well;
• It is costly to avoid infringement;
• Key claims are fully enabled by the specification; and
• There are no major estoppels in the file history.

Even though a patent’s price is subjective and market driven, its intrinsic value is an objective quantity. However, such intrinsic value could be time dependent. For example, a patent that maps onto a third-party product today may not map onto any product next year. Therefore, a high-value patent today may become a medium-value patent later. As a result, a patent portfolio should be continually re-evaluated based on market changes and product evolution.

On the other hand, if both total cost of avoidance and evidence of use quality are low, then the patent is deemed to be of low value. Cases in between are either medium or medium to high-value patents. If evidence of use quality is high, even if the total cost of avoidance is low, the patent could still be reasonable and thus deemed as medium to high value.

Producing high-quality patents

A high-quality patent attorney is one of your most valuable assets in generating high-quality patents. An inventor might have a brilliant idea, but if the patent attorney is not experienced, he or she could draft a poor patent application and devalue or invalidate the patent completely.

In late 2012 the Court of Appeals for the Federal Circuit ruled against Apple (Apple v Samsung) in its claim construction. Apple’s patent claimed a method of searching on a mobile device, requiring that the device comprise “a plurality of heuristic modules… each heuristic module corresponds to a respective area of search and employs a different, predetermined heuristic algorithm”. Apple argued that this meant that some heuristic modules may use the same algorithm, but Samsung claimed that it meant that each module must use a different algorithm. The court agreed with Samsung and suggested that Apple should have written the claim as “each of the plurality of heuristic module corresponds to …” by adding the italicised three words, which would have avoided the different interpretation. Although some courts may agree with Apple’s interpretation and disregard this ruling, the case illustrates the relationship between drafting and patent quality.

A properly motivated patent attorney will work closely with the inventors to draft a high-quality patent application. How the drafter is compensated may affect the patent quality. For example, some companies use largely internal resources to draft their patent applications. The advantage of this is that the in-house lawyers are responsible for the long-term effect of what they write. If they are still with the company three to five years later when the patent is granted, it is in their best interest to write a solid patent. However, some companies prefer to use external law firms to write patent applications, partly because they can control the costs better, especially where they produce patentable ideas only sporadically. External law firms may generate high-value patents if they are experienced in the particular technology. However, one needs to be cognisant of the outside law firm’s behaviour based on the billing model. Law firms that are paid per patent have less incentive to work on the expansion of the ideas covering all workarounds. However, if the reward is tied to a percentage of the granted patent, then the claims might be written overly simply or narrowly. The most effective model is probably a long-term partnership between the idea-generating company and the outside law firm, where outside counsel are deeply engaged with the inventors. The outside law firm needs to worry about long-term results due to the close partnership and should be able to generate high-quality patents due to its familiarity with the technology.

Table 1 summarises each aspect that requires close attention by the patent drafter.

To ensure high-quality patents, one must first determine in Step 1, the pre-filing stage, whether a patent is worth filing (ie, whether it is likely to grant and whether others will likely use the invention). High-quality patents have strong evidence of use characteristics and the total cost of avoiding infringement is extremely high. Proper control during patent drafting, Step 2, is required to ensure the generation of high-quality patents.

Table 1. Parameters which require close attention by the drafter to ensure high quality

As shown in Table 1, in Step 2 patent drafters should still keep in mind the two key questions asked during Step 1. At the same time, detailed attention should be paid to the total cost of avoidance, which includes claim broadness, possible workarounds, market size and relevance to standards. In addition, proper consideration must be made for evidence of use quality, which includes mapping well to products, being easy to detect, well-drafted claims and a clean prosecution history.

Creating and maintaining a high-quality patent portfolio takes a lot of money and effort. We propose the above methodologies for a more effective process and better ROI.