The increasing popularity of patents is, ironically, diminishing their value to small businesses.
By Brad Mead
From the front line
Before you rush those blueprints of your latest invention to the U.S. Patent and Trademark Office, you might think about stuffing them into a drawer at home. Not that it's any harder these days to obtain a patent than it was in the past. Many people think it's easier. The same basic standard applies. If you can prove to a patent examiner that your invention is novel, useful, and nonobvious, you will win the exclusive rights to commercialize it for 20 years.
In fact, patents are becoming more popular all the time. That increasing popularity is, ironically, diminishing patents' value to small businesses.
To understand why, you should know that the patent office is reeling under its workload. The United States granted the first patent (for a potash-making process) in 1790. It took 180 years before the number of patent applications topped 100,000 a year. The total crossed the 200,000 barrier for the first time in 1995. This year the patent office is bracing for an estimated 350,000 applications. Meanwhile, of course, patent examiners' work has become complicated. Today's examiners must venture into such technological thickets as computer programming and genetic engineering. The patent office is shorthanded and vying with private companies to recruit the kind of high-powered technical staff that can make heads or tails of claims. All the while, the examiners are under pressure to accelerate their pace.
You can guess what effect the turmoil has on the patent office's operations. Many patents are poorly researched. Many are issued even though they conflict with preexisting patents. That works against small businesses. Of course, a small company has always been at a disadvantage in defending its patent in court against a large, better-capitalized rival. The race is to the well-heeled. An imbalance in resources dictates a settlement, often at unfavorable terms for the party less equipped to wage a protracted legal battle. Large companies armed with a conflicting patent tend to win by default.
Another recent development is putting small-business patent holders at a still greater disadvantage. The landmark case of State Street Bank & Trust Co. v. Signature Financial Group Inc., which a U.S. court of appeals in Washington, D.C., handed down in 1998, has opened the floodgates to patent litigation. The court's ruling allows broader latitude for patenting software -- notably, Internet-based business-method software. An example is Amazon.com's one-click feature (U.S. Patent No. 5,960,411), which lets customers choose an item with one click of the mouse and use a shipping address and credit-card number on file from a previous purchase. The decision has created a new impetus for large companies to file patents. If a patent has been primarily a shield -- to protect an inventor's discovery from exploitation by others -- lately it has become just as much a cudgel. Deep-pocketed companies are routinely filing thousands of patents a year to stake out their turf in an array of technology areas. The motive? Legal standing to initiate patent-infringement suits.
Some of my investment-banking firm's clients have been the targets of such ploys. They work this way: Once a small company has obtained a breakthrough patent, a large company "wallpapers" around it by filing a series of closely related patents, which the Patent and Trademark Office (known to patent lawyers as the Big Business Patent Office) all too readily issues. The large company then sues the little guy for patent infringement. Unless the little guy has a lot of money to defend the claim, it has little choice but to fold. A Boston intellectual-property lawyer with whom I work closely, Tony Laurentano, says, "If you are a small company looking down the barrel of a $2-million or $3-million lawsuit, you will be inclined to settle with the big company by granting it a license for your technology -- for small money."
One of our clients in the energy-technology business spent 15 years and millions of dollars to develop and patent its innovative designs. At long last, the company's cutting-edge technology is attracting big press and big money. But in the past 5 years some of the largest multinationals in the world have secured conflicting patents. Litigation is about to begin. Inevitably, the parties will settle for terms that spell out a cross-licensing agreement. My client would thus lose the monopoly that is rightfully his under patent law, the reward for his years of effort. If he were a Fortune 500 company, his bulk might have kept the big guys at bay.
So what do you do if you're a little guy with a good idea? First, consider whether the idea is really worth patenting. The process is lengthy, costs a lot of money, and may dictate international patenting, which adds considerably to the cost. When you file for a patent, you divulge to the world your basic idea and the plans for its implementation. If the patent is granted, you can stop anyone who tries to steal your idea only by suing, a dubious recourse if you are financially outgunned. You might benefit by not patenting your idea at all. You may possess basic know-how that's crucial to making your invention work. Know-how that's not easily replicated by a competitor may work as a kind of armor plating that deters others from ripping off your idea. The money that you would have spent pursuing a patent will be yours to devote to marketing your product.
Second, if you already have a patent or know for sure that you need a patent, think about seeking a "big brother" in a joint venture. One of our former clients, AeroSport Inc., patented a valuable metabolic-analyzer technology but lacked the money to commercialize it. If AeroSport alone had tried to commercialize the technology, it might have had to face a patent-infringement onslaught by a larger company. Instead, it enlisted Medical Graphics, which had the size and resources to bring the technology to market. (As it turned out, Medical Graphics bought AeroSport, to everyone's satisfaction.)
Most large companies play by the rules. A little due diligence will quickly establish whether a prospective partner is likely to be a trustworthy big brother. Many large companies routinely join in ventures with small companies possessing good technology. If the large company believes it can move your technology through its distribution system, it will be open to a deal. From a joint venture of that kind you gain not only patent security but also a strategic partner that can offer immediate access to a market for your product.
Article originally published by INC.
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