Why is So Little Attention Focused on Patent Economics?

I have no doubt that the answer to the title question is that the analysis is too difficult. If a company could find a close to optimal way of harvesting inventions from its troops and gainning patent protection for these inventions, the advantage it would thereby gain would be so great that, depending on the field, it could easily put out of business all of its competitors. 

As manufacturing becomes easier and represents a smaller and smaller portion of national product, manufacturing plants are bound to represent a smaller portion of the total wealth of the nation. What part of the pie is bound to grow?? Energy reserves are a likely candidate. We may also note that energy reserves may include land for growing biofuel. Land may increas in value as manufacturing plants take up a smaller portion of the pie. I also feel that patent rights are bound to increase as part of the pie, as other assets lose value by comparison. For manufacturing enterprises the message should be clear: Patent or Die. Maytag, which was not long ago purchased by Whirlpool for a relatively small amount, was patent poor. If Maytag had invested in a patent portfolio like Samsung and LG did, it might very well be alive today. 

In any event, with patents becoming so important, why is it that there is so little written on how a company can optimize its strategy for obtaining the maximum valued patent portfolio at the minimum price? I believe that a very important part of the reason is that it is just so difficult to analyze. Another part of the issue, is how a company can get the most out of its portfolio, once the patents are obtained. Again, this is very tough to analyze. In fact, we may be reduced to relying on heuristics to come up with any meaningful guidance. 

We can at least start by breaking up the problem into a progression, and examining each part individually:

1. Originating Inventions.

2. Recognizing Inventions.

3. Gaining patent protection for inventions.

4. Applying and profiting from patents, after patent grant.

I will make a general observation about these steps: In each step it pays to understand a little something about the patent system. And it helps to have a close relationship between the various people involved.

This perhaps can give insight into why large companies do not completely dominate the world. Big companies have huge advantages, but I believe that when it comes to developing a valuable patent portfolio, they also have huge disadvantages. We will explore this further in further posts. 

Why Would Mentadent Style Toothpaste Die???

Some may ask, "why would you think that Mentadent style toothpaste might die in the first place." The reason is that it may take a patent monopoly to generate enough profit, not counting advertising expense (that is, what the profit would be if there was no advertising but sales were the same) to fund an advertising campaign needed to promote the Mentadent style to the point where it is worthwhile for stores to carry it. Monopoly profits will be the greatest. If competitors enter the field, total profits will decline, and profits for the original patent holder will drop dramatically. Under these circumstances, the erstwhile patent holder has neither the means nor the incentive to spend much money promoting the Mentadent style and neither do the new market entrants. Accordingly, total sales of that style may drop. At the same time, the stocking problem of the stores carrying the style are greatly complicated. Should they carry only the original?  Or the original plus one competitor? or two competitors? And this is for declining sales for that style of toothpaste. Under these circumstances, it is likely that some stores will opt out altogether, sales will fall even more, and eventually all the market participants will withdraw. 

If would-be competitors do this analysis they might not enter that competitive space. Or, if they do enter that space, it may just be for the purposes of killing Mentadent, either to claim the space for their own, or to get rid of that part of the market, leaving the consumer with only the tube style toothpastes to choose from.

Real Time Experiment in Patent Economics

On April 16 of this year U.S. Patents 5,020,694 and 5,038,963 will expire. These two patents cover an early version of the Mentadent toothpaste dispenser, which did not accomodate refills. For those unfamiliar, Mentadent is a style of toothpaste in which two different flowable substances come out of the dispenser simultaneously onto one's toothbrush. A number of interesting questions will then be answered:

1. Is it important enough to be able to refill the Mentadent base, that competitors will be dissuaded from entering the market until the patent on a refillable version expires (there are two such patents, for different refillable versions). 

2. The really interesting question will only be answered (in the next few years) if the answer to the first question is "no." And that is, will there be a "tragedy of the commons" which kills Mentadent style toothpaste? It seems possible that if there are new market entrants upon patent expiration, that this could create a situation in which all the profits of Mentadent style toothpaste are eaten up by competition, and there is no profitable market left. This would seem a strange result, but I would maintain that for a niche product like Mentadent, which depends on advertising to educate consumers, that a negative cycle could be started by competition that would end up destroying the niche. We will see eventually, with the time frame depending on how important it is to have a resusable base. 

This type of patent question does seem remarkably similar to wildlife biology, with the competing creatures lunging for the consumer. The bout begins April 16 (or shortly thereafter).

Effectively Using Patent Attorneys to Advance Corporate Goals

How can an entity most effectively utilize patent attorneys (or agents) to advance its goals?

I am convinced that this is a question of vital importance to the business community in general and the technology community in particular. But it is an issue that is  only infrequently addressed, because of its complexity and because it is so difficult to analyze.

To show how diabolic the issue can be, let us consider the case of a company that rewards its patent attorneys according to their productivity.  Getting more patents issued for the company, helps a patent attorney advance up the ranks and become better paid. Now let us say that a patent attorney working for this company receives an Office Action (for the uninitiated an "Office Action" is a communication from the U.S. Patent and Trademark Office [USPTO] telling the applicant that one or more of the claims [invention definitions] in the application are rejected) . Further, let us say that the USPTO has allowed some claims that will result in a trivial claim scope. For example, if a prehistoric applicant was applying to patent a chair, the patent office might have allowed a claim for a chair having legs that are painted chartreuse. If the applicant cancels the other claims, a patent will issue. If he takes no further action (such as filing what is known as a continuation application) he will have the exclusive right to make, use and sell chairs with legs painted chartreuse, and no more. But if he truly invented the chair, this is a terrible result. He could have the exclusive right to make, use and sell chairs, if he just fought for it, and this would be a very valuable right for a world grown tired of leaning against the cave wall.  But this way he will only have the exclusive right to make, use and sell chairs with legs painted chartreuse, something that is close to valueless.

 

Our patent attorney now has a decision to make. On the one hand, he is getting his company a right that is meaningless. Moreover, the company will have to pay an issue fee and maintenance fees to obtain and maintan that right. On the other hand, he will get another patent in his count of patents issued to his set of applications, something that could help him advance up the ladder and make more money. If he does the right thing for his company, and continues to fight for broader protection, he will be punished. If he caves in and accepts the meaningless protection he will be rewarded. 

The above example, of course, is extremely exaggerated. But for someone who does not work with patents all the time, telling the difference between a valuable claim and a valueless claim is not easy. I remember having a client that I thought was reasonably sophisticated ask me to look at a competitor's patent. He stated that it was pretty broad, a potential threat to his business, and asked "why can't you get us patents like this." I was rather concerned for about two minutes, until I got the patent onto my computer screen and read the claims. They were very narrow and certainly no threat whatsoever to my client (who never did hear a threatening word from the patent holder). I explained this to my client and he took back his rather insulting question.

In a rather strange twist some companies are now reverse auctioning off their patent work. The problem here is that there is no meaningful unit of work product on which to base the reverse auction. Defining "patent application" as the basic unit will only encourage the patent attorney drafting the patent to spend the minimum amount of time on it. The things that really matter in a patent application are typically not noticed by a client. For example, most clients do not realize the value of including a description of the method of using a new device in the text of an application. They would not know enough to downgrade a patent attorney who failed to do this. But I have had cases in which if I had not included a description of the method of using a device, my client would have never received meaningful patent protection. This is just one example. There are many, many things a good patent attorney can do to obtain an advantage for a client that the client would have no way of recognizing as a benefit.  

Unfortunately, there is just no metric for assessing the productivity of a patent attorney that can be effective. Moreover, reviewing work product is both expensive, and may not be effective because the reviewer might not have the familiarity with the invention that the original drafter has, or could have had if he had asked a few more questions of the inventor. 

This leaves open the question of best methods of using patent attorneys. It is easy to see what does not work. The tougher question is: "what does work"??

To gain insight into this question, we should look to other fields, in which it is hard for an employer to assess program effectiveness.  I will be formuating my thoughts for my next post.

Scope of the Problem

If one wishes to learn about the latest court decisions regarding patent validity, infringement or damages it is easy to find numerous analysees in many journals and blogs. This makes sense, because for patent attorneys, charged with counseling clients, a precise knowledge of the law is essential. 

But let us say that one wishes to ask questions of the following sort:

1. Does it make sense for a manufacturer having 150 employees and an engineering staff of 15 to retain a patent attorney to look over the latest designs and see if there is anything worth patenting?

2. Would it make sense for a hospital to try to harvest employees' insights into ease of operation of various pieces of equipment, to originate new patents?

3. Are software patents a net benefit or detriment to society?

4. For a company with $30 billion in sales, filing 300 patent applications a year, would it make sense to set up a bidding system for patent procurement work, to drive down patent procurement costs.

5. Should mutual fund managers acquire a facility for analyzing patents, in order to determine a value of company's patent portfolios, to determine whether to buy or sell a particular company?

6. How can a company organize their patent procurement department to get the greatest value from each dollar spent?

It will be the goal of this blog to inquire into the answer to these questions, and other similar questions.