Patent quality and improved innovation

The creation of high-quality patents not only enhances a company’s ability to protect its market share and derive licensing revenue, but also improves the innovation process itself

A comprehensive patent strategy can help companies to innovate more precisely by aligning their business needs, avoiding patents that will be invalidated if challenged, improving the quality of the patents that they do apply for and improving the innovation itself. This in turn can help to reduce the cost of acquiring patents and ensure the efficacy of those patents within the corporate strategy. Practitioners who embrace such a strategy will quickly win respect as high-quality innovators.

This article examines fundamental changes taking place in the innovation landscape and simultaneously in the world of patents – especially with regard to patent quality. It describes why these developments create opportunities for improving innovation and outlines the specific steps that businesses can take to create a patent quality strategy.

Given that innovation can be the cornerstone of a business’s success, the historical paradigm has been to innovate fast, far and wide, with the winners being those who could develop the largest war chest of patents. Certainly, the perception has been that companies with a large number of patents tend to be not only innovative, but also market leaders. That paradigm has been upended for good reason – the high cost of innovation and, especially, the high cost of patents.

While a big budget gives you certain freedoms, spending wisely is never guaranteed. Business leaders are quite rightly starting to take a closer look at the efficacy of their spending, the resulting patent volume and, most importantly, the patent quality and value of their portfolio to their actual business. Companies are asking how this investment is helping them to develop better products and services:

  • Is it helping them to differentiate themselves and win in the marketplace?
  • Does the innovation really matter or do only a small percentage of innovations actually yield a return?
  • Is the innovation even worth the cost of maintaining and defending the patent portfolio?
  • Are these patents related to the business and, most recently, are they even valid?

These are all good questions that now need to be answered.

At IPBC Global in June 2015 (IP Market 2.0) and IPBC Asia in November 2015 (Maximising IP Value), the talk was all about monetisation and business value. Both conferences discussed the evolution and business community acceptance of IP monetisation strategies, investor implications and ecosystems, standards, valuations and the evolving legal systems within which all of these need to take place. Clearly, everyone is focused on making money with their intellectual property and talking about it openly – whether directly through their business or indirectly through licensing, sales and partnerships. However, in all of the discussions and presentations, there was also an unequivocal recognition that mere volume is no longer of any value. Quality is now the most important factor.

To embrace or not to embrace (quality)

Doubtless this focus on budgets and return on investment (ROI) is behind the shift and those pressures will not abate any time soon. So the question is whether the demand for quality work runs counter to the need for better, more rapid and more valuable innovation. Intuitively, you might answer yes – these are counter forces that need to be managed. However, as Brian Hinman, chief IP officer at Philips NV, observed: “Quality can actually help achieve a better ROI on innovation: less waste, more targeted innovation, more creative innovation that avoids prior art and takes advantage of the most current developments.”

One way to ensure that your innovation makes the grade and delivers critical value to the business is by embracing a patent quality strategy over the entire lifecycle, especially during the innovation and patenting stages. Before we jump into the ‘how’ of that, let us define what we mean by both ‘quality’ and ‘valuable innovation’.

‘Quality’ refers to two aspects of the resulting patent. First, the patent must have legal integrity relative to its structure and its content (ie, it must be patentable content). Second, the patent must be able to withstand a rational challenge on the basis of prior art.

The risk of poor quality is tangible. We could spend the rest of this article citing various studies and baselines of patent data to demonstrate this and it would not change the core issue that more than a few percentage points of the patent population are wholly or partially invalid. Hinman summarises the state of affairs: “General consensus is easily in double-digit percentages with 30% to 60% being a commonly cited range.” Table 1 looks at this from the perspective of US Patent and Trademark Office (USPTO) statistics on re-examinations.

Table 1. USPTO re-examination outcomes

 

Number

Percentage

Ex parte (1981 – September 2014)

10,698

 

Certificates with all claims confirmed

2,302

22%

Certificates with all claims cancelled

1,301

12%

Certificates with claims changes

7,094

66%

Inter partes (1999 – September 2014)

964

 

Certificates with all claims confirmed

68

7%

Certificates with all claims cancelled (or disclaimed)

303

31%

Certificate with claims changes

593

62%

Source: USPTO, www.uspto.gov/learning-and-resources/statistics/reexamination-information

For more on this topic, please visit www.ambercite.com/index.php/amberblog/entry/how-many-granted-patents-contain-invalid-claims.

Another key indicator of poor quality is the number of patents that cite no prior art. This is a red flag for invalidity, as the likelihood that there is nothing of relevance in the patent or technical literature is virtually zero. As Dennis Crouch pointed out in his August 28 2015 PatentlyO blog, one out of six recently granted patents cited no prior art. The median is eight references (see Figure 1).

Figure 1. Median references cited by patentee

Source: PatentlyO, August 28 2015

I have asked many practitioners if they carry out prior art searches during the prosecution process. A common answer is: “Sort of. We really know all the art out there, so by definition we take it into consideration.” It is a big and growing world; is your technology and market really that well defined and static?

When I refer to the value of innovation, I am of course speaking to its value to the business. First and most important is the offensive value, which allows you unimpeded practice of the art in your products or services (ie, to drive revenue). This was the primary topic in many of this year’s IPBC sessions: “How do we make money with this stuff?” At the same time, innovation can have a tangible value when used defensively. If you out-innovate your competition on their own strategy as you understand it, you will impede them in their own game (ie, create barriers to entry to their own show).

So back to the ‘how’. How does one invest in quality in a way that helps promote the value of the innovation you ultimately create, while keeping costs at a minimum?

Interplay between quality and innovation

For simplicity, I will break down the patent lifecycle into just four stages: innovating, patenting, monetising and defending. Building in quality is, of course, most critical in the first two stages, but it applies to the final two as well.

Innovating

Innovation occurs in many ways and every company has its means, with some more defined and process-based than others. However, creating valuable innovation first requires that business goals be incorporated into the creative process. Without getting into the myriad ways that this can occur, at some point, there is an innovation disclosure that needs to be assessed against the business goals.

Prior art is fundamental to this process. “Investing in something that is ultimately invalid is a fool’s errand. A prior art search is a cost-effective way to avoid this unpleasant surprise and the accompanying waste of resources that it implies,” comments Marshall Phelps, chairman of ipCreate and former corporate vice president at both Microsoft (IP policy and strategy) and IBM (IP and licensing).

Prior art comes in two general types: patents and non-patent literature. I like to say that patents are the nice tail lights on the development of technology. Non-patent literature, on the other hand, is closer to a headlight (the real headlights being in the minds of the individual inventors and the unpublished documents within a company).

If you can inform your innovator or innovation team as to the state of the art, especially non-patent literature (the headlights) and specific instances of innovation that are directly related to your invention, you can inspire further and more creative innovation on the disclosure at hand. How you might deal with the art in terms of patentability is discussed below and will certainly be part of this process – the point here is that the prior art and, in particular, the non-patent literature (especially literature outside your normal exposure, language, market and tech space) can inspire an entirely different or more innovative idea. Even if you believe that you already know about all the art, this step of reading your invention and the known art in light of one another could inspire better innovation.

On this point John Cronin, CEO of ipCreate, weighs in: “We’ve found in the great majority of cases that we can improve the initial innovation when we consider the most recent non-patent literature in an open and creative way. We challenge ourselves to really innovate ahead of the curve.”

Patenting

So you have the most innovative idea you can come up with and it has immediate relevance to your business. Now you have to turn it into a patent. Surprisingly, even in light of the obvious shifts in the market towards patent quality, the prior art search step is often skipped. Again, I think this is penny wise and pound foolish; I would question why one would want to invest in a patent that did not survive at least a basic search for prior art.

Once you have a solid prior art search, you can do two things to improve the quality of your patent. First, and most obvious, you can avoid making claims on the parts of the invention that are encumbered by prior art. Mapping the disclosure or intended claims against the art can pinpoint exactly where you need to focus. That avoidance can be flat out or it can be accomplished by creatively writing around that art to achieve the same goal. Informed patent attorneys are very good at this. As Larry Meier of Downs Rachlin Martin PLLC points out: “We draft the highest-quality patent applications when, at the beginning of the patent drafting process, we have access to the most relevant prior art available. This is particularly true when the invention is just a modest advance over what others have already developed.”

“The absence of prior art on certain aspects of your invention can help to uncover areas where claims can be expanded with more confidence”

There is a second use of the prior art as well. The prior art search also discloses opportunities in the form of omissions. While there is no such thing as an exhaustive search, the absence of prior art on certain aspects of your invention can help to uncover areas where claims can be expanded with more confidence.

As mentioned, many practitioners believe that they have a good handle on prior art based on their daily work and exposure in the field. While this may be true, the world is increasingly competitive in nearly every technology and new and disrupting innovations can always surprise you. Why not take advantage of that knowledge and build the awareness of it into your innovations?

Thus, prior art, accurately and precisely matched to your disclosure or claims, can help you to avoid conflicts and exploit omissions.

In the end, these relatively low-cost searches and the accompanying analysis and incorporation of changes to the innovation can yield both better-quality patents (ie, patents that are unlikely to be invalidated) and more valuable innovations (ie, more creative, harder to invent around and more differentiating for your product or service). Clearly a good ROI.

Now what?

Beyond these first two stages, where building quality is so easy and so valuable (but unfortunately, so often missed – as the statistics demonstrate), are the final two stages where the concept of building quality into a patent no longer applies. At this point, either it is there or it is not, and you need to deal with that reality.

Monetising

When monetising your portfolio, you are likely doing one of four things if you have quality and valuable patents:

  • Building into your products exclusively – you have solid patents that allow you to invest in your products with the confidence that the investment is creating real differentiation that you can defend against. If you encounter an infringer, there is no need to be bashful about asserting your rights.
  • Building into your products and licensing to others – similar to using them exclusively, some product strategies include more of a ‘coopetition’ wherein you not only build it into your products, but also license it to competitors (or those outside your market). In this event the quality of the patent(s) will help you to sit at the table with true confidence in the asset over which you are negotiating.
  • Outright licensing – this is the same as the second point above. In the case of a carrot licensing deal, you know you have a solid asset; for a stick licensing deal, you know that you have little to fear. If your patent has not been previously tested, you can always carry out your own invalidity search before sitting down at the table. It is one thing to surprise yourself, but another to have the other party surprise you.
  • Sales – in some cases, these can be individual patents; and in others, companies decide to dispose of whole portfolios for a variety of solid business reasons. Again, quality sells. After attending IPBC Global in June, Peter Holden, president of ipCreate and a veteran of the patent transaction market, observed: “No one wants to buy someone else’s problems. Numerous participants in this year’s conferences, and in particular an entire panel on this topic, described how the lack of some sort of validation of patent quality on a portfolio is likely to have one of two outcomes. First, it could cause potential buyers not to consider your portfolio at all. These days, there are just too many portfolios for sale that can actually demonstrate diligence in testing the quality of the individual patents. Second, if you do get an audience, you will likely have to accept an unwelcome ‘quality discount’ given the assumption that some portion of the portfolio is certainly invalid. Neither outcome is good.” Being able to demonstrate quality will pay dividends as you dispose of the assets.

Figure 2 illustrates the challenge of breaking through the noise of patent sale opportunities. With the volume and growth in this area of the patent market, it is imperative that owners can demonstrate some measure of quality diligence.

Figure 2. US patents offered for sale 2010-2014

Source: RPX, “2014 Patent Marketplace Report” (used with permission)

Defending

Playing defence typically starts with some form of assertion (eg, a call, letter or email), which may or may not escalate beyond the initial contact. Here too, and maybe especially here, an early and clear line of sight into patent quality is invaluable to a winning strategy.

To the extent that you have a war chest of patents, you might be disappointed if the size of the pile is no longer viewed as all that daunting when you are dealing with an assertion. It is certainly not valuable when you are up against a non-practising entity. Until you select something from the pile and test its quality, you have only a hollow threat. Given the invalidations in litigation and the new inter partes review process, the assumption of quality is no longer there and piles of untested patents are just that – untested. If you cannot produce a rock-solid patent which causes your opponent direct revenue-based anxiety, you really do not have much.

On the other hand, you could quality test the asserted patent (very affordably at this early stage) in order to get a sense of whether the lack of quality is on your side.

Once in the throes of litigation, the game changes once again. Your best hope is that your opponent did not take patent quality as seriously as you did in the early stages of the patent lifecycle. Of course, you can argue non-infringement. But assuming that this is not going to work, you must work on the patent integrity from a structure and content perspective, as well as from a prior art perspective. The earlier and more aggressively you do this in the process, the smarter you will be and the better choices you will make. A cost-conscious iterative approach can be highly effective here. As soon as you become aware of a potential problem, you can get a quick search to understand the size of the invalidity challenge. Increasing the breadth and depth of the search informed by the earlier work, perhaps more focused in one area or another, can deliver more actionable results as well.

“There needs to be a conscious process by which prior art is discovered, assessed and used to determine next steps in the invalidation process in a timely manner”

Eventually, you might need to scorch the earth for prior art (depending on the urgency, you might even start here). The point is that there needs to be a conscious process by which prior art is discovered, assessed and used to determine next steps in the invalidation process in a timely manner. As much as you will be working to prove the patent invalid, there is the chance that it is in fact one of the good ones. That being the case, is it not better to develop that insight sooner rather than later, so that you can create a strategy for dealing with that fact in terms of settlement options?

Less is often more

Companies can gain great benefit from a comprehensive strategy focused on patent quality and value creation in the innovation process. Budget pressures and historically poor quality for patents in general are inspiring practitioners to innovate more precisely by aligning their work with the needs of the business. They are also proactively avoiding prosecuting patents that will ultimately be invalid if challenged by a more methodical analysis of the prior art. These same players are simultaneously improving the quality of the patents they create by reading the art and their inventions in light of one another to further improve the innovation itself.

This more proactive approach to accepting the prior art and using it to one’s advantage will help to reduce the cost of acquiring patents while ensuring the efficacy of the patents within the corporate strategy. Those who practise this strategy might produce fewer patents, but the assets they do create will be more meaningful to their business. In short, their ROI on innovation and patenting will go up.

Action plan

Patent quality comes into play not just in the drafting process, but at every point in the innovation cycle.

When innovating, leverage the prior art, especially the non-patent literature, to inspire new and more creative innovations and improvements to your invention.

When patenting:

  • identify key elements of the invention;
  • perform searches of both patent and non-patent literature;
  • if you discover that you are in a knock-out situation, face it and move on (and avoid the costs);
  • where the art comes close to the elements:
    • avoid the claim that is covered; and
    • use the art to guide the writing of the claim to avoid the encumbrance; and
  • where you have the freedom to make claims, make them – you can then use the art to take your innovation to the next level and expand the claims into areas of opportunity.

When monetising, a lack of demonstrable quality will cause you to:

  • fail to obtain an audience for your portfolio; or
  • introduce a quality discount into the negotiations to help the buyer account for what will surely be some low-quality patents.

It will also focus attention on the quality of your key patents, which could sink your portfolio entirely.

When defending, bear in mind that:

  • a war chest of patents is of no use against non-practising entities;
  • an untested war chest is of limited value against operating companies; and
  • early and aggressive examination of prior art is the best way to formulate a cost-effective and winning strategy. However, do recognise that the patent could be valid and find this out as soon as possible.

Peter Vanderheyden is president of Article One Partners, Chicago, Illinois, United States

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