Patent Pending Blog - Patents and the History of Technology

How Much Can a Patent License Be Worth?

One way to figure out what a patent is worth when it is licensed is to do some sort of calculation of:

1. the expected cash flow from the patent

2. the expected growth rate of the cash flow

3. the risk of the cash flow and growth estimates being wrong

4. and the length of time the cash flow is expected to be recieved

The less the inventor has defined these factors, the greater the uncertainly and the less a potential licensee would likely pay.  Some patents are for sale on ebay which basically say "I have a patent, and I think its worth $23,000,000, so that is where the bidding will start."  What the inventor has to communicate is why the investor would be better off putting his $23M into this patent rather than somewhere else, like the stock market.  Most people who have $23M first of all don't want to lose it, and second, they want to turn it into $50M!  Unless the inventor can show how that $50M is going to happen in a rather certain and rapid way, the licensee would be crazy to drop his money into a venture with high risk. 

The Protection Afforded by being Patent Pending

Some inventors mistakenly believe that by being patent pending they have some authorization to make infringers stop copying their product.  Patent pending means that a patent application has been filed, whether it is a design patent application, a provisional application, or a utility patent application (which is technically called a non-provisional application). This discussion relates to U.S. patent law only.

An inventor has no authorization to make someone stop infringing activities until a design or utility patent issues.  Provisional applications never mature into issued patents. Until a patent issues the final form of the allowed claims is unknown, and it is not even known if any claims will be allowed.  During prosecution claims may be deleted, added, edited, and combined.

What being patent pending does give an inventor is a filing date that a copier can't beat, so that when the patent issues the inventor or his licensee can stop infringing activities.  If the application was published at 18  months after filing, the damages for infringement can be calculated from the date of publication.  If infringement is likely, the inventor probably would prefer to file a utility application rather than a provisional application, in order to get an issued patent one year sooner.

Confidentiality Agreement vs Patent Pending

Sometimes an inventor may wonder if he/she is safe to disclose his invention to a potential licensee if he has the licensee sign a confidentiality agreement.  Or perhaps an inventor has a patent application filed, and wonders if he should also have a potential licensee sign a confidentiality agreement just to be extra safe.  Here is my view on the value of both forms of protection. 

Many companies view independent inventors as a total waste of their time, a pain in the butt, and a potential lawsuit.  They often have policies that they won’t sign confidentiality agreements, and really don’t want to see an inventor’s invention.  The danger for them is that people in their own organization may be working on the same problem, and they could view the inventor’s stuff, reject it, then a year later come out with the product they have been working on in their lab.  The inventor could then sue them for breach of contract.  With that possibility in mind they usually won’t even look at an invention unless it is patent pending.  If it is patent pending, then the invention is defined, so then their decision becomes 1) whether their in-house product is an infringement of the claims of the patent, and 2) can they prove they conceived of it first. 

Their policy may be to never sign confidentiality agreements, to protect themselves from lawsuits by whacko inventors.

From the inventors point of view, if the potential licensee signs a confidentiality agreement and then breaches it, he can sue them for breach of contract.  That’s not too practical for most inventors, and the licensee knows it.  So its not much of a threat. 

If the inventor has a patent pending and the licensee rips him off the inventor can proceed to get the patent issued, and sue them for patent infringement.  As damages he can get triple damages if he can prove that the infringement is willful.  Patent damages start to accrue from the date that the application is published 18 months after it is filed, and he can ask for expedited prosecution if infringement is involved.  The inventor could also get an injunction against the licensee ever selling the product.  The inventor could also license the patent rights to the licensee's biggest competitor, or five of their competitors, who could afford to chase them through the courts and give them a spanking.  Once the patent infringement case was won, the infringer would pay triple damages if the infringement was willful, have to quit selling the invention, and their investment in marketing is lost, but they will have created a need in the industry for the product which will translate to lots more sales of the product to the inventor or his licensee.   

It's not likely that this sequence will happen, because the potential licensee will be able to see where things are going, and its just a lot better business to license the patent rights, and pay the inventor some money, and then for them to be able to keep their competitors out of that market if it’s a good idea. 

So if the inventor is patent pending the consequences of ripping him off are greater than if a confidentiality agreement is breached.  By being patent pending going into the meeting, the inventor conveys that he is not a dummy, he has some legal advice, and is approaching this in a business-like manner.

It would not hurt to have a confidentiality agreement as well, but I don’t think the inventor is likely to get it signed, and it doesn't buys him that much leverage anyway.

Patent Law Reform Update

Steve Nipper's "The Invent Blog" has recent posts about the patent law reform discussions.  Matt Buchannan's "Promote the Progress" blog continues to be clearing house central for patent law reform updates, and he also had some kind words to say about the "Patent Pending Blog."  Thanks, Matt!

Patent Reform Issues

Mr. Matt Buchannan is a patent attorney and friend of mine who is closely tracking the patent reform discussions.  His "Promote the Progress" blog is a place that patent attorneys go to see whats going on at present.  It is at http://www.promotetheprogress.com/.  Anyone interested in these reform moves should sign up for his blog. 

There is a move afoot to make some reforms to the patent system in the U.S.  One goal is to remove or lessen differences between the U.S. patent system and the systems of Europe and Japan.  This effort is called "harmonization", not "kowtowing."  Another driver is to make the patent office function more efficiently.  As has been proposed in previous reforms, one measure to improve the U.S. Patent Office is to keep the money paid by inventors as fees within the patent system, to hire more examiners, and to reduce the pendency of patents.  The Patent Office has always been a cash cow, and inventors fee money has always been "diverted" (robbed) by Congress from benefiting inventors to pay for other programs.  In the meantime, a patent application is not read for 12 months to 48 months after it is filed, due to the shortage of Examiners.

The issues that are on the table for discussion of reform include:

1.  adoption of a first to file system, like Europe and Japan, instead of the first to invent system we have now. In a first to file system, whoever files first gets the patent, even if someone else invented it first. A First to File system is disadvantageous to small inventors, who may not be super fast to file for a patent.

2. post grant administrative review of new patents

3. publication of all application within 18 months (not issuance, just publication).

4. limits on continuation practice

5. modification or elimination of penalty for willful infringement (wanted by big companies).  This would take away much of the risk of infringement lawsuits for the big boys, and make it even tougher for the small guys to prevent infringement of a patent by the big boys.

6.  modification of elimination of standard for inequitable conduct of attorney

7.  elimination of the best mode requirement now present in the U.S. system but not in Europe or Japan.

8.  harmonization of US, European, and Japanese examination systems

9.  reinvigoration of the non-obviousness standard

10.  modification of the standard for finding a patent invalid to a preponderance of the evidence

11.  modification of rules for injunctions, making it harder to get an injunction, which the big boys like.

12.  keeping funds paid by inventors for use by the patent office instead of being siphoned off to pay for other government programs. The money to be used to make pendency of patents shorter, so they issue sooner.

More later, as discussions continue.  

What is a Patent Worth

I sometimes have an inventor ask what a patent is worth.  This is often in the context of possible licensing of the patent to a licensee.  Just like real estate, a patent is worth whatever someone will pay for it.  However, unlike real estate, appraisals and determining market value are very difficult with a patent.  With a patent, there are only two parties who are “true believers” about the patent.  The inventor is a true believer, because he has spent a lot of time contemplating the possibilities.  The other true believer is the marketing company, but their belief is a cynical one, presented only to lure the inventor into costy sucker traps. 

However, when in investor considers a patent, he sees it as a venture filled with uncertainties.  The uncertainties include: Is the patent valid? Can it be proven invalid? Can it be designed around? Will the device sell? What will it cost to make the device? What will people pay for the device? What is the best way to make the device? What sources are the best for parts and materials for the device? What kind of people will buy the device? How many people will buy the device?  The more uncertainties there are, the more risk there is for an investor, and the less they are likely to pay for an invention, or to license the patent. 

An inventor can increase the value of his patent by removing as many of those uncertainties as possible.  One way to do this is to have a current patent search done, to get some assurance that it is different than the prior art.  Another way to remove some uncertainty is by test marketing the invention, or putting in on retail shelves in some way to present to consumers.  After test marketing, he can then tell a potential investor how the device is best made, what it costs to make it, what people will pay for it, how many of them sell, and other information.  The more of these uncertainties are determined, the more the patent is worth, and also the less the inventor needs the investor. 

Inventor's Chance of Success

This is a follow up to the earlier post on an inventor's statistical chance of success.  Those numbers should tell one that of 50 patent applications that are filed, 45 result in issued patents.  Those are good odds.  Of those 45, 5 end up being quite profitable.  That is 5 out of the 50 that started the process to get a patent, or 10%.  Those are not bad odds, if the return is worth the risk. 

The inventor has a good deal of control over his chances of success, by eliminating as many uncertainties about the project as possible, and developing good intelligence on which projects to pursue.  So if the inventor only pursues projects that have a good potential market, can be made cheaply enough to keep the sale price within what buyers will pay, and that people actually want, they have improved their odds quite a bit.  If they have figured out how to market it, by test marketing, showing at trade shows, getting some good marketing materials, having a nice looking design, they have further increased their odds.

An Inventor's Chance of Success

Sometimes an inventor asks about their chance of success.  If they are using an invention promotion company, I would say their chance of success would be better if they bought lottery tickets.  However, we have noticed some statistics that are useful in this evaluation.

Our usual practice is to do a patent search, then file a patent application.  Then in the years that follow, we help the inventor get trademarks, negotiate license agreements, and possibly file followup patent applications.  Over a period of time, we have observed some general statistics, which of course do not take into account if the product is a good idea, if the invention is at the right time, if it can be built for a price to make its sale price attractive, if the inventor is competent to get it to market, design it, hire the right people at the right time, etc.  Just looking at numbers, here are the numbers: 

100.  Of every 100 inventions we do patent searches on, about 60 percent of them turn out to have patentable subject matter.

50.  Of those 60 searches, about 50 of them go ahead with a patent application.

45.  Of those 50 applications, about 45 of them result in issued patents. 

25.  Of those 45 issued patents, about 25 inventors do nothing with the invention, or are not successful.  They may run out of energy, inspiration, time, dedication, or they may make dumb mistakes about marketing, packaging, designing, unable to find a licensee, or run out of money. 

20.  Out of the 45 issued patents, about 20 inventors do some kind of test marketing. 

5.  Of the 20 that do test marketing, about 5 will fail.  The item may not sell for the price they have to get in order to make a profit, or people may not be interested in the product.

15.  Of the 20 that do test marketing, about 15 are at least marginally successful. 

10.  Of the 15 that experience marginal success, about 10 will quit for lack of interest, resources, dedication, inspiration, changes in circumstance.  Some of these could have been saved if the inventors could learn from purchasers what they really want in this kind of product, and if the inventor can change his product. Most inventors don't realize how long it takes to make a product a success, and don't have the stamina to follow it through.

3 and 2.  Of the 5 that are left of the 20 who did test marketing, about 3 will grow  into successful single product businesses, and 2 will license their product to a larger company.   

More on Invention Promotion Companies

Steve Nipper, a partner in the prestigious intellectual property firm of Dykas, Shaver, and Nipper, LLP, has further information about invention promotion companies, at The Invent Blog.

Invention Promotion Companies

Almost every day I get a call from a client who has been contacted by an invention promotion company.  I tell them that its probably a scam.  "Oh no, these guys sound legit.  They'll pay half of my airplane ticket to talk to them.  They think my invention is great and will sell a lot."  Sure they'll pay half your airplane ticket, because they are going to take you for many thousands of dollars.  Usually, I can check out the names of the company at the U.S. Patent Inventor Fraud Complaint site, and find a few complaints (scroll down to find the complaints).

Then I tell my client to ask them the 10 questions that they are required by law to answer, and get their answer in writing.  These questions are found at the U.S. Patent Office Scam Prevention site.  The 10 questions are:

1. Total number of inventions evaluated for commercial potential in the past five years by the Company and how many of those evaluations were positive and accepted by the Company and how many were negative and rejected by the Company.

[Legitimate firms have fairly low acceptance rates. usually under 5%].

2. Total number of customers, known by the Company, who have received a net financial profit as a direct result of the Company's promotion services and what is the Company's success rate over the past five years [that is, the number of clients who have made more money from their invention than they have paid to the Company].

3. Names and addresses of all previous invention promotion companies with which the Company or its officers have collectively or individually been affiliated in the previous 10 years and what other names has the Company used in this or other states.

4. Total number of customers, known by the Company, to have received license agreements for their inventions as a direct result of the Company's services. [lf the success rate is too low, say less than 2-5%, then think about going elsewhere].

5. How many customers (inventors or their representatives) have contracted with the Company for promotional services in the past 5 years; excluding those who have purchased trade show services research, advertising or other non-marketing service: and excluding those who have defaulted on payment: to the Company.

6. Is there an up-front fee and, if so, how much is it and what are you getting for it? How much will the complete process cost from submission of my invention to obtaining a patent and a licensing agreement? [Reputable firms have relatively small, if any upfront or other fees because they make their real money from successful royalty arrangements for the inventions they accept].

7. Has the Company ever been investigated by or been in trouble with the Federal Trade Commission, Better Business Bureau, any consumer protection agency or Attorney General's Office and if so, when and where?

8. Who selects and pays for the patent attorney or agent to do the patent search, patentability opinion and patent application preparation? [You should be able to select your own, because the attorney or agent represents you, not the Company].

9. Provide you with the names, addresses and phone numbers of five clients of the Company in you geographical area and copies of all contracts and forms to review [Do this before signing or paying any money].

10. Does the Company provide a written opinion of the “marketability” (that is, potential success) of your invention? [If all you get is a market analysis, for example, the number of potential customers, it’s probably not worth much].

The ten questions and seeing a number of complaints about their hero usually cools the deal.  Ripoffreport.com and the Bob Villas Discussion Board have good information, also.  The sales person's name in a google search, with the word "complaint" always yields a few hits, also.  Once, after saving a client $25,000, I sent him a bill for $400 for the time I had spent researching his promotion company, as he had asked me to, and he got irritated about being billed for it.  Well, Excuuuse me!  Anyway, inventors beware.  No one is going to market your invention but you.