A renewed focus on patent quality – implications for patent owners
This is an Insight article, written by a selected partner as part of IAM's co-published content. Read more on Insight
As patent licensing and litigation activities have increasingly captured headlines, a perception has emerged that patents issued by the US Patent and Trademark Office (USPTO) lack quality. Whether justified or not, this perception has led Congress, the courts and the USPTO itself to create obstacles to those seeking protection for their inventions, albeit with the commendable purpose of issuing only high-quality patents. However, this ideal is ultimately unachievable in practice, as patents are typically evaluated for quality years after issue, during assertion against alleged infringers – and such evaluation may be based on judicial and statutory standards that did not exist when the patents were drafted and examined.
In practice, strategies should be adopted to ensure that the patent portfolio is robust enough to withstand changes in the legal and business landscape as they occur. Such a long-term perspective necessitates conceptualising an ideal-quality patent portfolio today and how much deviation from this ideal portfolio is tolerable to the business. This acceptable deviation is constrained by two main challenges: budget and risk awareness. Accordingly, companies must take measures to ensure that their portfolio enables them to achieve both their short-term and long-term business objectives under the constraints set by their budget and risk awareness.
The ideal patent portfolio
An ideal patent portfolio would include many patents, each of which can cover the activities of competitors, vendors and customers. Every patent in this ideal patent portfolio would nominally be valid (eg, meeting all requirements under the patent laws) and infringed (ie, implemented by a competitor). Therefore, multiple implementations covering all possible ways that a competitor might use the invention would be included in the patent portfolio.
Constraints to building the ideal patent portfolio
The first constraint – budget – is usually a key driver of patent strategy. Few companies, if any, devote the resources necessary to achieve the ideal patent portfolio, as doing so is simply too expensive to make economic sense. No organisation can justify six-digit expenditure for every idea identified by the technical staff for patenting. A proper strategy for building a patent portfolio must include a strategy for determining where to spend a limited budget (ie, the best expected return on your investment). One must consciously decide where to spend not only money, but also the employee time and management focus to support portfolio-building endeavours.
Another significant consequence of budget limitations on patent quality is the issuance of patents that should not have been issued in the first place. This phenomenon arises from budget constraints imposed on the USPTO. An argument is often made that the USPTO issues patents that are poor in quality. This argument is based on numerous instances of issued patents being subsequently invalidated by a court when the patent owner asserts the patent (eg, to prevent copying or extract compensation for unauthorised use of the invention).
Although this appears to be a compelling argument, in practice, it is almost inevitable that a party responding to an assertion of patent infringement will spend much more than (typically 50 to 100 times) the patent examination cost paid to the USPTO. As such, the party hostile to the patent can better determine whether the patent owner has actually claimed a new invention or whether someone else already invented what is being claimed in the patent.
One way to avoid this result is to perform a thorough examination before issuing a patent – for example, by independently searching for prior disclosure of the invention and presenting the results to the USPTO. However, few patent owners can afford the increased costs associated with such a thorough examination for every patent application presented to the USPTO. Hence, it is unavoidable that some patents will issue that can be revoked in future.
Risk awareness is also a necessary element of building a quality patent portfolio. An essential part of risk awareness is understanding factors that increase risk.
Uncertainties in the patent law have created a unique challenge – what intellectual property should be created today that will be effective in the future? Patent laws are evolving continuously. A patent’s strength is evaluated according to the laws of the land at the time of assertion, which is often many years removed from the date the patent issued. Therefore, sound decisions today may seem incorrect in retrospect, particularly in light on an intervening change or even reversal in the applicable law.
One source of this increased uncertainty in the legal landscape arose from the use of innovative business models, including non-practising entities (NPEs). NPEs can be legitimate businesses that perform R&D to advance technology or help patent owners of failed or unprofitable endeavours to recoup their R&D investment. For instance, a business may have trouble finding traction in the marketplace, especially when competitors use their patented technology without authorisation. An NPE can take the risk and burden associated with seeking compensation for the misappropriated intellectual property.
Unfortunately, because of the absence of product sales that themselves might infringe a third party’s patents, an NPE can more easily seek compensation based on dubious claims of patent infringement. Difficulties arise when such unscrupulous ‘patent trolls’ take advantage of the flaws of the patent system for improper gain. Defending a patent litigation in the United States is expensive and time consuming. It is difficult for the courts to distinguish an unscrupulous patent owner from one seeking legitimate compensation before diving deep into litigation. The troll takes advantage of this dilemma.
Attempts to solve this problem have created uncertainties that challenge those building a patent portfolio. A strong and robust patent system – including the right to assert patents against competitors and seek compensation for R&D investment – is vital to a country’s economic health. In contrast, litigation brought by entities that do not contribute to innovation may be perceived as an economic drain on innovation, rather than advancing innovation. The trouble in differentiating between legitimate and illegitimate bases for asserting a patent has created difficulties in finding a cure to the ‘troll problem’. As the government grapples with this problem, the law and its interpretation are evolving in ways that can affect engaged practising business interests as much as NPEs and trolls.
As a notable example, significant money and resources were invested in obtaining business method patents after a court decision in the late 1990s suggested that such patents would be viewed with favour by the courts. However, subsequent controlling court decisions have refuted the merits and validity of business method patents, thus significantly undermining the value of – perhaps even rendering worthless – a significant portion of such patents.
Develop an affordable strategy for a quality portfolio
Quality: what does it mean to you?
To begin building a quality patent portfolio, an initial question must be asked: What is quality? In general, a quality patent portfolio is one that can be used to help meet the owner’s business objective. With this thinking, a portfolio should be aligned with business objectives and overall corporate strategy.
One common goal is to prevent others from copying product designs and functionality. In this case, the portfolio should closely align to the product mix. In other cases, the portfolio is used as a tool for cross-licensing or receiving royalties from (or minimising royalties paid to) competitors. Here, the portfolio should closely align with the competitor’s product mix, which could vary greatly from that of the patent owner.
The goals of the portfolio tend to vary across industries. For example, a pharmaceutical company needs perhaps a single patent that strongly protects a blockbuster drug. This single asset can be worth billions of dollars in terms of protecting market share and generating licensing revenues. Meanwhile, an electronics company needs a broader portfolio to cover evolving products and technologies. The effective life of any single product in the electronics industry is often limited so that new patents are needed to cover improvements.
NPEs acquire patents for licensing to others without selling corresponding products. One notable example of an NPE is based on the Nortel Networks patent portfolio. Nortel was an industry leader in telecommunications, investing many billions of dollars in R&D. After failing in the market, Nortel declared bankruptcy and subsequently sold thousands of patents to an NPE created by a consortium that included Apple, Microsoft, Sony and BlackBerry. The price of this 2010 sale was reported at $4.5 billion (£2.8 billion). While this result was not the intended purpose for Nortel when the patent portfolio was being established, it demonstrates how a quality portfolio can meet changing corporate needs.
There are many other uses for intellectual property. Patents and other assets can be used in financing business. Investors will often look to the IP portfolio in valuing a business and evaluating creditworthiness. Patents are often used as collateral for loans. In these instances, a quality patent portfolio will typically have a large volume of patents, as financial transactions often use portfolio size as a proxy for the overall value or quality of the portfolio.
Incentivise ideas that are more likely to be commercially successful
A quality patent portfolio includes a number of individual high-quality patents. Many entities overlook this point, being lulled into thinking of patents as fungible assets, especially given that quality cannot readily be deduced without understanding the particular invention and how it relates to what has been done previously and the context in which the patent is to be exploited. In view of this challenge, some rely on objective, readily determined characteristics (eg, number and length of claims, number of other patents that cite the patent under consideration or drafting costs associated with filing). While useful for a broad-brush assessment, this does not provide an in-depth analysis of whether and to what extent this patent will meet long-term business objectives.
The single most important characteristic of a quality patent is a quality invention. Inventors that come up with ideas that are commercially useful provide the opportunity to create valuable patents. Unsurprisingly, the easiest patents to obtain are directed to inventions that provide no commercial benefit, since it is unlikely that others will have previously patented or published these ideas. These patents are also the least valuable on their own, since it is unlikely that others will use these ideas in the future. These less valuable patents serve little purpose other than to build a large portfolio at a smaller cost.
The first step in identifying the best inventions is having innovators identify and communicate their ideas to those who will decide how to proceed. Once an invention is identified, a patent application is prepared and will ultimately issue into a patent that will provide a right to exclude others from making, using or selling the invention. What can be excluded is defined by a set of claims that are included in all patents. Since the claims define the rights, they are considered the single most important portion of a patent.
In determining what can be excluded, one must consider the industry and how the players interact. For example, who will infringe the patent? The choices may be the maker of a component, the maker of a system that uses the component or the end user of that system. These entities may be competitors, customers or vendors. The manner in which the invention is presented will provide a determination of who will or will not infringe. Ideally, each patent claim will be implemented by a single entity.
Another question that must be considered is whether the invention is detectable in an end product. Perhaps companies in the relevant industry publish data sheets or white papers. Can the invention be detected from these documents? Alternatively, can the products be reverse engineered to determine whether the product uses the patented invention? If the invention is undetectable, consideration must be given as to whether a patent should be applied for at all. In some instances, trade secret protection may be a better alternative for protecting undetectable inventions.
Another consideration is how easily the invention can be avoided or designed around. In a perfect world, a patent claims an invention in a manner that covers all possible implementations of the invention. However, patent laws relating to novelty, obviousness and definiteness can create barriers to this ideal goal. This is because patents are awarded only for inventions. When a patent is written to cover all possible implementations, it is possible that some implementations were already invented by others, thus violating the boundary of what is novel (or unobvious) and therefore patentable. A quality patent will include claims that push up against this boundary of what is already known and other claims that are safely separated from the boundary.
Strive to mitigate risk based on affordability
Developing a quality patent portfolio entails accepting the reality of uncertainty and developing a strategy to minimise the adverse effect of not knowing the future. Such a strategy is based on diversifying the risk across numerous patents and wisely investing resources.
The limitations set by one’s budget will limit the number of ideas to pursue for patent protection. An organisation should invest the most resources into those ideas that are most likely to be commercially significant. The next tier of ideas can be patented on a more limited basis. For example, a simple patent directed to the most likely implementation might be sufficient for the second-tier ideas. The first-tier ideas, on the other hand, preferably receive far greater attention.
The geography of the industry must also be considered. The expense necessary to seek patents for all ideas in all countries is unjustifiable in most instances, a problem exacerbated by the need for translations. Instead, one must review where sales are significant and where competitors are producing products, both now and into the future. Another consideration is the enforceability of the patent in a given country. Some countries have limited IP protection. Accordingly, selected patents should then be filed in countries focusing on these factors.
The organisation must also evaluate ongoing success in a particular area. For example, a company may be a latecomer to a particular area, and consequently be a patent laggard. At this point, one can look outside the organisation, for example, by purchasing or licensing intellectual property from others. Identifying these areas early can lead to the ability to obtain assets at a more reasonable cost.
Patent portfolios must be periodically monitored for effectiveness and strategy must be adjusted accordingly. Different tools are available for evaluating the success of patent portfolios. Beyond comparing the patents to the product mixes of the company and its competitors, external resources can provide indicia of quality. For example, companies such as Ocean Tomo have indices to rank relative quality of various patents and patent portfolios. These evaluations can provide insight as to whether adjustments in one’s own portfolio strategy should be made.
A high-quality patent portfolio is one that meets patent owners’ business objectives both in the short term and the long term, and that can retain its relevance and value even as technology, business constraints and applicable law change over time. With an emphasis on identifying the best ideas and inventions, practising strategic prosecution techniques and keeping abreast of developments in industry and law, one can develop and maintain a patent portfolio that fully meets these criteria and hence ranks as a high-quality patent portfolio.
Slater Matsil, LLP
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