Understanding patents as opportunities and obstacles for business

July 2020 | EXPERT BRIEFING | INTELLECTUAL PROPERTY

financierworldwide.com

A patent in a business’ own hands can be a powerful tool for creating and maintaining a technological advantage in a market. Equally, a patent in the hands of a competitor can create a significant impediment for a business in striving to offer the full range of products and services demanded by its existing and potential customers.

For some companies, building and managing a strong portfolio of patents in key jurisdictions is an important pillar of their business model and strategy. However, many companies (small, medium and large) have little familiarity with patents and even less experience in dealing with them – at least until they find themselves in a corporate acquisition, technology licensing negotiation or defending patent infringement litigation.

Understanding ahead of time what a patent is, what it is not, how it can be used and how it might be challenged, can provide important advantages in making quick and informed decisions. This article intends to provide readers with an understanding of these fundamental aspects of patents, the opportunities they can offer and the threats they can pose.

What is a patent, exactly?

Patents are monopoly rights granted for a finite but significant period (typically 20 years) by governments, for the exploitation of products, processes and methods that are ‘inventions’. Patents protect technological advancements and therefore contrast with copyright (which protects software and artistic creations, such as literary, artistic, musical and dramatic works), trade marks (which protect brands) and designs (which protect the aesthetic appearance of products). Patents must be applied for and granted before they can be enforced against infringers, which again differs from copyright, which in some countries can be legally enforceable without any proactive steps toward registration and to a lesser extent trade marks, as some countries offer forms of protection to brands other than trade mark registration.

A patent can be a powerful sword, but not a shield

The granted ‘claims’ of a patent define the scope of the owner’s exclusive rights, and it is the invention (product, process or method) defined by those claims that the owner can license, sell or enforce against third parties. Importantly, patents confer only rights to stop others from producing, using or selling the product, or performing the process or method, within the claims. They do not confer any positive rights on the owner or its licensees to exploit the invention, meaning it is still possible to infringe a patent or other legal rights of third parties when exploiting one’s own patented invention. That is, a patent is a sword, but not a shield.

There is no ‘international patent’

Patents are national rights granted separately by governments in each country. International treaties provide mechanisms for parties to apply for patent rights in the same invention in multiple countries at the same time, a staged process which can create cost efficiencies and allow additional time to decide when and where to apply. However, ultimately each patent application will be considered in each country under that country’s own patent laws, which frequently leads to patent rights in the same invention being of quite different scope in different countries. Similarly, patent infringement occurs and is generally only actionable at a national level, although there are some exceptions such as in the European Union (EU) where an injunction against infringement obtained in one member country can, in some circumstances, operate in multiple other member countries.

Commercial products or processes may be protected by one patent, or many patents

The extent to which a single patent protects a commercial product, process or method varies widely. Sometimes, particularly in new technology areas, a patent can effectively protect the basic concept of a product or process and make it very difficult for competitors to produce anything remotely similar or equivalent in terms of functionality. Perhaps more often, in more developed technology areas, a patent will only relate to a minor aspect of an overall product or process, such that changing or omitting one patented feature can potentially enable competitors to still sell the product without infringement. Many complex commercial products are therefore often protected by a number of different patents with respect to each of their key technological features: dozens for a pharmaceutical product, hundreds for a software product or even thousands for a luxury car, for example. The same products can often also have other layers of protection from copyright, trade marks and registered designs.

Patents can create and preserve a technological advantage

At the core of the value of a patent is the ability to enforce it against others and exclude any person or company from exploiting the invention without permission. Infringement proceedings are generally expensive to bring, though the cost varies from country to country, but they are equally expensive to defend, particularly as a common aspect of the defence is to challenge the validity of the patent based on numerous available grounds of revocation. Accordingly, patent litigation is generally not taken on lightly and the cases that do go through to trial typically have strategic importance to the technology or the industry of the parties in dispute.

For these reasons, the mere existence of granted and even pending patent rights, on publicly accessible registers that are available and searchable on the internet, is itself valuable due to the deterrent effect it can have on competitors’ activities. In many higher technology industries, competitors monitor each other’s patent portfolios and sometimes proactively challenge problematic patents, either shortly before or after they are granted by governmental authorities.

Patents can generate one-off revenue windfalls

A patent can be an effective way to capture the value of investments made in developing new technologies and realising returns on those investments. A patent is a personal property right capable of being assigned (transferred), and therefore it can be sold for potentially significant value to a willing purchaser. It is also possible to assign the rights in causes of action for past infringements that occurred while the patent was owned by the previous owner, although the damages recoverable are generally referable to that previous owner’s loss at that time, and also subject to limitations periods.

Patent owners who do not want to give up ownership, but also do not want to invest the time and money in exploiting the invention themselves, can make a significant windfall by granting licences to other people to exploit the invention for payment of an upfront fee.

Patents can create ongoing revenue streams

A common approach to generating income from patent rights is to license them to third parties, on the basis that those third parties will pay periodic licence fees referable to the time they have the benefit of the licence, or royalties referable to the volume and value of sales made with respect to the licensed invention. In this way, patent owners can create valuable revenue streams throughout the long life of a patent, even where they may not wish to, or do not have the capabilities to, market the invention themselves. Where an invention is patented in multiple jurisdictions throughout the world, the owner may choose to exploit the invention itself in some jurisdictions, but license third parties in others where it does not operate. A patent owner may choose to license only one third party on an exclusive basis, or multiple third parties on a non-exclusive basis, and may take different approaches in different jurisdictions.

Patents can be a tool for gaining access to third-party technologies

Having patent rights, particularly substantial portfolios of them, can also create significant advantages for companies in seeking to access third-party technologies. Offering a patent licence (a cross-licence as consideration for receiving a licence of the other party’s technology) is often preferable to paying cash for access to technologies, and may sometimes be more attractive to the third-party technology owner because what is being offered can only be offered by that party as patent owner.

Patent owners regularly cross-license one another’s patent rights as a means of ensuring their respective freedom to operate within an industry. Technological standards, such as with respect to telecommunications platforms or video or audio media formats, are founded upon multiple patent owners with respect to inventions that are components of the technology each contributing their patent rights into a pool. The patent pool is then licensed collectively to users, who pay royalties which are, in turn, distributed to the patent owners who contributed.

Patents can be a tool for settling disputes

Where two parties are in dispute with respect to infringement of one another’s patent rights, a common resolution is for those parties to cross-license each other’s portfolios in a way that facilitates their coexistence in the market, without contravening applicable competition or antitrust laws. Having a significant patent portfolio can therefore serve as an important insurance policy against major patent infringement action being taken by a competitor.

Patents can add value to the balance sheet and secure funding

Patents are assets that companies must record on their balance sheets, and often they are ascribed significant value where they are seen to be relevant to protecting major commercial products or services. For both public and private companies, the value of patents on their balance sheet can therefore be very important. Like any other company asset, how a company generates revenue from, or assigns, a patent can have tax implications, and this often influences the ownership and licensing structure adopted for patent rights within large corporate groups.

The importance of ‘freedom to operate’ searching

Just as patents are potentially powerful tools in the hands of a company, they have the potential to be hugely disruptive in the hands of a competitor. It is therefore prudent for companies to be aware of their competitors’ patent portfolios and to evaluate, at least to some extent, the third-party patent landscape whenever they are considering developing or launching a new product or process. Understanding the extent to which there is ‘freedom to operate’ can inform product and service design decisions at a time when changes can be made with less costs and practical consequences. Navigating around third-party patents will almost always be cheaper than facing patent infringement proceedings or paying licence fees or royalties – but sometimes the fight is worthwhile.

Duncan Longstaff, Katrina Crooks and Mark Vincent are principals at Shelston IP. Mr Longstaff can be contacted on + 61 2 9777 2450 or by email: duncanlongstaff@shelstonip.com. Ms Crooks can be contacted on +61 2 9777 2453 or by email: katrinacrooks@shelstonip.com. Mr Vincent can be contacted on +61 2 9777 2450 or by email: markvincent@shelstonip.com.

Duncan Longstaff, Katrina Crooks and Mark Vincent

Shelston IP