How to stretch your IP budget
Convincing senior management to allocate more money to an IP department can be one of the biggest challenges for in-house counsel, but there are some straightforward tactics to get more bang for your buck
Compared to large, well-established businesses, developing tech companies must often contend with limited resources for managing their intellectual property. This can be tough, especially when in-house counsel are regularly called upon to deal with other day-to-day legal concerns. The resource issue most commonly expressed by counsel is lack of money, which hamstrings the execution of even the simplest strategy. There are many reasons for a limited IP budget, but at the root is the natural tendency of upper management to defer investing in intellectual property, usually because this is generally a long-term proposition and a growing business always has many more immediate needs. However, deferring IP investment often leaves growing tech companies at a disadvantage as their patent portfolio is outpaced by the growth of the business.
Take John H – not his real name, although the following examples are all real – in-house counsel at a successful software start-up. John’s start-up had just reached $250 million in annual revenue and was predicted to hit $500 million for the next year. Ten patent filings for the core technology had become issued grants, with 10 additional patent applications written and submitted. While John had also just secured a much-needed increased budget of $2 million for the subsequent year, his experience told him that his biggest challenge was likely to be aggressive litigation from competitors. But where would the threat come from, who would make the first call and how would his $2 million budget ever cover the complexities of multiple competitor licensing advances?
Over the years and through multiple patent market downturns, we have advised patent counsel on tactics that they can utilise to increase and better manage their patent budget. Some of these are common practice, while others are more creative but no less essential. We have seen each strategy yield extra money stuffed behind the proverbial IP couch cushions. Just as importantly, they all underscore the real value of a well-thought out IP plan to a growing business.
There are three direct ways to help a fixed budget:
- reducing the existing cost basis;
- utilising other sources of money; and
- generating value.
Each of these can affect other strategies in complex ways. Recognising when to use a given tactic – even though it may be an obvious one to consider – can be a difficult art to master. Because everything depends on context at the time of implementation, it is natural to grab any opportunity as soon as it presents itself. However, we have found that this is seldom the best course of action. Looking ahead and sticking to a plan can smooth out unforeseen bumps, lead to better outcomes and maximise limited resources to best effect.
The most-used tactic for saving money is to triage maintenance review. As the maintenance payment window nears, it is essential to review whether that patent should be kept alive. Regular maintenance review is common practice, but for companies that have not previously executed this strategy, a full portfolio review can be a proactive solution for a one-time influx of cash savings. A judicious and scrupulous appraisal on which patents to keep and which to cut is the hallmark of a strong patent programme.
A common question that we hear is: “How should our company decide which patents to keep and which to abandon?” There are three prime areas on which to focus. The first is to identify patents with overly narrow claims. Claims often become so narrowed through the course of prosecution that by the time they issue they have lost their breadth and fail to cover key aspects of the original invention. The second area to consider for abandonment is redundancies within the IP portfolio. Many tech companies will find that they have a number of essentially duplicate patents. For instance, a family of five patents may have three key patents but two others that, for all intents and purposes, cover very similar aspects of the invention. These two could be abandoned without losing much (if any) of the family’s value. The third prime area is non-core patents. The patent portfolio of a growing tech company may begin to amass patents covering technologies that are not core to the business. This can happen for a variety of reasons, including a change in company strategy or the acquisition of patents through M&A deals. All three of these areas could present patents to abandon that would reduce the existing cost basis.
Consider a hypothetical growing tech company with a modest portfolio of 50 US patents. A review of filings may reveal upwards of 10 patent filings that are narrow, redundant or non-core. For young patents that are approaching the first maintenance fee window, abandonment would save $6,300 for a small entity over the lifecycle of the patent, while abandoning all 10 would save $63,000. If the company has more than 500 employees, which many growing tech companies do, it no longer qualifies for small-entity status, in which case the cost savings double to $12,600 over the lifecycle of the patent and $126,000 from all 10 patents. Such funds can be directly re-invested into newer and stronger filings – and this is without taking into account the time and cost savings from the ongoing management of the patents.
However, when performing a maintenance review, always be judicious with which patents to keep. One thing to consider is the indirect effects that abandoning assets can have on the business as a whole. For example, as your company grows, it will naturally adjust its course in the marketplace. This may leave some patent applications less germane than when they were first filed and thus ideal candidates for abandonment. However, continuing to maintain a select few can be advantageous for potential licensing opportunities or if the company decides to tack back. In addition, the discipline of applying a dispassionate review under the constraint of always having to keep something for an undefined future can be helpful in teasing out the real value and quality of each asset, which is crucial for the value and quality of the portfolio as a whole. If questioning whether to keep or abandon a particular patent, companies should err on the side of keeping the asset.
An important data point over the course of the review is the cost savings that result from maintenance fees each year for the would-be lifecycle of the patents. Creating a detailed report of such savings for the money decision makers displays your department’s fiscal responsibility and can help to persuade them to add any reduced expenses to future budgets.
The aforementioned in-house counsel, John H, was able to save money by deciding which of his applications matched his IP strategy. He compiled a report that outlined the savings that he would create by reducing redundant filings and eliminating excess prosecution, issuance and maintenance fees. With only 10 patent applications to review at the time, the savings were not significant – although, as we will see, he was able to combine this review with other strategies in order to effectively increase his budget. Regular maintenance reviews will not add millions, but every little bit helps.
Controlling maintenance costs
US maintenance fees can add up over the life of a patent. A regular review to identify whether a patent should be maintained or abandoned can be crucial in reducing the existing IP cost basis. The table below outlines cost savings for abandoning one non-critical patent and abandoning 10 patents in a larger portfolio.
|Small entity (< 500 employees)||Large entity (> 500 employees)|
Utilise other budget sources
When a large tech company in Silicon Valley neared its initial public offering (IPO) announcement, the IP director knew that he was going to face challenges. He had made a number of requests for an increased IP budget over the past year. While many had been approved, management made clear that no more increases would be signed off before the IPO (typical practice as IPO announcements near). From experience, he knew that the announcement was sure to paint a target on the company, especially given litigious incumbents in its technology space and their likely reaction to the IPO. A 2018 study by the University of Amsterdam published in SSRN (by Tolga Caskurlu, posted 13 February 2018) found “that firms become targets of excessive patent lawsuits starting just one quarter before the IPO, and the intensity of such lawsuits persists in the post-IPO period” (see box out for a recent history of patent threats for companies nearing IPO). Therefore, the director sought counsel on how he could increase the amount available to him without having to increase the overall IP budget.
His team was managing new intellectual property from two recent acquisitions and the burden of analysing, cataloguing and maintaining the patents and trade secrets had landed on them. During a review of the department’s current expenses, he identified items that could be shifted outside. The team responded rapidly and made the necessary internal arrangements to have these expenditures moved to existing budgets set aside for company acquisitions. By acting fast, it was afforded some budget relief.
Next, the IP director reviewed patent costs at both the early and late stages of the patent lifecycle. Expenses early in the invention process were being paid for by the IP department, so he created some budget flexibility by obtaining approval to allocate the initial patenting process – specifically, initial invention disclosure and the first review of whether to pursue a patent – to the engineering and R&D budget. In addition, the employee incentive programme for participating in the generation of patents was moved to the R&D budget.
The director was then able to create even more budget flexibility by shifting a portion of his expenses to a litigation budget that had been ringfenced. As the number of inbound patent licensing requests increased, so did the cost of assessing and neutralising these threats. He was thus able to allocate these costs to the legal budget by calling them a litigation deterrence, thereby removing another upcoming expense.
While not all of these strategies may be available to every IP head and general counsel, it is often possible to create some budget relief by utilising other sources of funds for the discrete tasks that they must undertake.
Using intellectual property as an asset in broader business deals
Some strategies for generating cash from patents are well known. For example, it is common practice for companies to divest themselves of non-core technology from which they have pivoted. In addition, some tech companies leverage their patent portfolios in licensing efforts. Both strategies help to shift the perception that the IP department is merely a cost centre and relieve some of the short-term pressure often applied by management. However, these avenues to patent monetisation are not available to a large number of companies. Licensing creates a slew of complications, not least of which is disrupting the vendor and partner ecosystem. In addition, patent divestment can be a difficult proposition for a tech company with an eye on technological expansion. However, one often under-utilised strategy that growing tech companies should consider is to leverage their intellectual property in partner and vendor negotiations.
Using intellectual property as an asset in broader business dealings is not designed to be a threatening approach – quite the opposite. Educating potential partners and vendors on the value in creating a shared ecosystem can help to create premiums by adding weight to agreements made during final negotiations. This is clearly an art – and we have seen as many variations of this as we have deal structures – but the underlying key to success is always a clearly quantified and early patent assessment. Setting out the value of a portfolio at the start of a deal, even if some of the assets are only tangentially related, is essential for maximising the upside. Even plans for IP growth can be valuable and will often tip the balance in delicate negotiations.
For example, in recent discussions between two medical software companies on the specifics of creating and releasing a joint product in the market, one party was finding it difficult to reach favourable terms on two items in particular. Both sides were a small percentage apart on the agreed distribution of value that would be allocated to each company from the product’s success. Company A wanted a 60%-40% split, while Company B was after an even 50%-50% division of revenue. Additionally, since Company A was investing most of the engineering personnel into the development project, it was important to it to retain the intellectual property. With some guidance, the CEO congenially introduced the company’s modest but growing portfolio of 15 issued US patents and applications into the discussions. By demonstrating the unique value of its patents and agreeing to offer a broad non-exclusive licence, Company A was able to retain all rights to the newly developed intellectual property and reach an agreement on a 57%-43% split of revenue – a percentage allocation much closer to its desired position.
Rather than letting intellectual property sit on the shelf until it must be enforced, smart tech companies regularly utilise it as an asset in broader business dealings. It can create considerable value for the company; sometimes this is tangible and trackable, while at other times it is hard to quantify, but the positive business effects are observable.
On the acquisition trail
Companies often face patent threats in the run-up to their IPOs and regularly acquire patents in anticipation of such threats. Some recent examples include the following:
- Twitter acquired nearly 1,000 patents from IBM in 2014 for $36 million after Big Blue threatened patent infringement action against the micro-blogging, social media company.
- Prior to Twitter’s run-in with IBM, Facebook bought 696 patents from it for $83 million after Yahoo filed a patent infringement suit ahead of Facebook’s IPO.
- Leading up to its 2019 IPO and in anticipation of infringement threats from a number of companies, Uber acquired nearly 300 patents from a number of sources, including AT&T, Microsoft, deCarta, PARC, Apparate International and the patent consortium AST’s IP3 Series.
The most creative tactics for increasing patent budgets always involve managing up. The first and most obvious step is to arm upper management with patent data. A good starting point is to compile litigation data in your market space and the litigation history of your competition. The idea is not to create fear, uncertainty and doubt within upper management, but rather to present a realistic picture of the tendencies of the competition and help to crystalise in their minds why an increased budget may be required – if not now, then in the future. The effect that a good understanding of IP leverage can have even on day-to-day decisions is often underappreciated. A patent landscape study comparing your portfolio to the size and strength of the competition is another good starting point. This is easily managed, inexpensive and can be carried out in partnership with outside expertise.
An effective and often missed opportunity is threat forecasting, whereby an analysis identifies possible risks and threats from competitors and outlines the potential future costs needed to defend against those threats. Outlining the problem can encourage upper management to be open to the idea of assigning money now in preparation. For example, a general counsel of a fast-growing med-tech company created a threat forecast that showed that between $10 million and $20 million would be needed to nullify likely litigation threats over the next three years. In the end, management assigned her an extra $1 million on top of her previously approved $1 million IP budget to defer later costs and to take advantage of a patent market that was at a low point in its cycle.
An easily missed but important piece of data is an equivalent review of the competition with respect to its intellectual property. For example, a competitor may be struggling to maintain traction in a particular market segment but may possess some excellent intellectual property. By understanding the ebb and flow of the competition’s IP holdings, opportunities to acquire or protect assets may arise, allowing upper management to adapt their thinking at the right time. The aforementioned general counsel of the med-tech company provided data to her management about a minor competitor that was missing updates to a particular product line, but which owned several key patents in this area. By acting early, a licence for those patents was agreed, which laid the groundwork for the company to be acquired later for reasonable terms.
Creating an IP strategy that fits
Every industry and company is different. Strategies that might work for mid-sized companies in the medical device space are unlikely to be suitable for a small software start-up. The key is to create a comprehensive IP strategy that fits your company’s current needs and then regularly review this plan as the company grows and pivots. No single strategy is likely to be the IP silver bullet, especially when it comes to increasing your IP budget. Thus, a variety of strategies should be used to stretch every allocated dollar in order to extract maximum value.
Remember John H, who saved money by deciding which of his applications were essential to his IP strategy? The actions that he implemented to increase his IP budget were more wide ranging. In addition to prosecution and maintenance savings, he was able to use part of a litigation war chest that had been set aside for the company to acquire a licence to a patent portfolio of a company that had a history of being aggressive when protecting its market share. John’s win with upper management was striking for the fact that the competition had become more comfortable with the direction in which the company was headed. Nearly as important was the peace of mind for management that the company was no longer number one on its competitor’s hit list – at least for the next few years. (As an aside, the licensee later allied with John in a much larger litigation effort from other incumbents. Whether this deal was a defining moment is unknowable, but any action often has far-reaching consequences and so may be worth pursuing.)
There is no simple prescription for adding money to your budget, but simple steps can be effective and may have advantages that you cannot foresee. Being creative can provide upper management with better data and, as a result, a more inclusive appreciation of the intricate ecosystem that IP counsel are building and its importance to a growing company.
Generating a greater return from what is often a constrained budget can be one of the biggest challenges for IP counsel. This is particularly true for SMEs that might be on the path to an initial public offering. However, there are a few tactics that can help to stretch limited resources much further.
- Reduce the existing cost base – judicious patent maintenance can be particularly effective here.
- Utilise other sources of money – while it may not be possible in all cases, looking elsewhere in a company’s budget can help to free up resources for intellectual property.
- Generating value – royalty-based licensing may be viable for only a few companies, but there are ways of creatively using IP assets as part of broader-based business deals.