Guest Blog: All About Patents

PATENT STRATEGIES FOR ENTREPRENEURS

 

BACKGROUND ON PATENTS

 

This analysis explores some recent globalization trends and historic changes in US patent law with special attention to possible impacts of these trends and changes upon independent inventors who may wish to consider getting a US patent. The United States Patent Office (USPTO) issues three types of patent grants: a utility patent covering a composition, item of manufacture or a process which is useful, a design patent covering the external appearance of an item and a plant patent covering a new hybrid species (typically, ornamental flowers).

 

The USPTO is a large branch of the Commerce Dept. located in Arlington, VA operating with an annual budget in excess of $970 million. The staff includes rougly 5,000 patent examiners who process applications which result in approximately 3,500 grants published each week. The average allowance rate (application to a grant with “at least some claims”) has been estimated to be in the range of 50 to 70% of all cases filed.

 

Over the last 10 years, a number of major industrial countries have put increasing pressure upon the US to conform its Jefferson-era patent rules to conform with current international patent practice. In contrast to the US procedures, the international process of examination of patent applications permits: (a) early publication of all applications, (b) the possibility of opposition(s) by any party immediately after a grant is published and (c) the “first-to-file” is entitled to the patent even if he is not the actual first to invent. In the US, the public -- especially those with expertise in the subject matter -- may submit written evidence (Citation of Prior Art) against the novelty and obviousness of the invention as described and claimed in the application. In some cases such Citations may be received before the examination process is closed. If such a citation is to be filed prior to USPTO publication of the application(s) or grant(s), at least the application number must be known – perhaps from a friend or colleague exempt from typical corporate non-disclosure restrictions. Opposition is a low- cost, post-issue legal procedure -- carried out within the relevant international granting office -- to challenge the decisions made by the examining staff. Post-issue opposition of a US grant is not yet allowed by USPTO rules.

 

The latest USPTO rule changes go into effect on November 1, 2007. Recent announcements of the sweeping new patent rules include: a 128-page notice in Federal Register (dated August 21, 2007), a 2-hour webcast accompanied by a 113-page presentation (dated August 23, 2007), and a 63-page list of FAQs (frequently asked questions).

 

These new rules impose limits on the number of sequential or related applications, i.e., long-established continuation and restriction procedures. Additionally, the numbers of both independent / total claims in the application is limited to 5 / 25. There are also new procedural limitations on the number / timing of extension applications, i.e., continued- examination, continuations-CIPs, divisions along with the new requirement for submitting an examination support document (ESD) before the first office action.

 

Responding to complaints regarding the new rules, USPTO officials apparently suspect that some patent attorneys are routinely guilty of incompetence, malfeasance, or misfeasance in representing their clients.

Entrepreneurs aspiring to form a business to produce and sell one or more products they have recently invented need to consider the “pay-back” question. What is the probability that their new ideas might actually become a profitable business -- taking into consideration the amount of start-up capital available and the market profile of competitive or substitute products. Provided the “new ideas” have not been disclosed publicly nor offered for sale and are still under active development, it may be possible to obtain a US utility patent. A patented product should have a significant market advantage related to its improved performance and desirable new features.

 

A US patent grant conveys the right to exclude others from making, using or selling claimed products or services in USA; however, this protection is strictly limited to the allowed claims. Analogous to real property, the grant claims define the exact- precise “metes and bounds” of the invention which the owner can protect. In a sense, a patent can give its owner a monopoly position relative to his invention for a definite time period. If all maintenance fees are paid, the term of a US patent is 20 years from the application filing date. In general, having strong patent protection is required for obtaining investments from sophisticated professionals, i.e., angel investors or venture capital firms.

 

Patents and other intellectual property (IP) -- such as secret / workshop know-how -- is typically ranked as the most complex field of law because it frequently extends from law and into state-of-the-art mathematics and engineering as well as all the natural sciences. Assuming the inventor has actually conceived a new and non-obvious invention, getting a US utility patent may be desirable for certain manufactured products. If a manufactured product is new and may become widely accepted in a large market, obtaining a utility patent on the basic apparatus may be indicated. Chemical process, product-by-process, business- method patents and design patents will not be considered in this discussion.

 

The process of getting a US utility patent is expensive and lengthy: from filing of application to grant publication may typically be 3-5 years. It also frequently involves an initial investment of $7,000 to $25,000 for various expert services to advise the inventor during the final stages of his reduction to practice and to prepare and file one or two original domestic patent applications. Therefore, it is extremely important for the independent inventor to “understand the territory”, i.e., have a realistic business plan for his particular marketplace neighborhood (competitive products and existing relationships). Further, the inventor must understand and protect himself against the risks of patent problems (invalidity and infringement) with a new, untested USA patent grant.

 

This discussion will consider two selected potential problems common to all new US grants: validity and value. Even if an invention is novel and non-obvious to one of ordinary skill, it may not entitle a patent grant with an array of strong claims which are also broad enough to support a new market segment. From past experience, the USPTO is by no means infallible relative to citing non-patent publications of prior art, overbroad claim language that should not have been allowed and entire grants that should not have been considered at all. Because entrenched competitors will not willingly surrender market share, it behooves the inventor to get some reliable initial readings of the long-term value of investments into patents and enforcement strategies, especially against “reverse engineering work- arounds” and possible infringement. Such information includes reliable data on terms of comparable technology license agreements, litigation budgets and infringement settlements in relevant marketplaces. Before starting serious work on any invention, it is important to do careful prior- art searching of selected published patent applications and current research reports / papers.


 

This critical diligence will reveal historic trends within the industry and current intelligence on significant technologies in particular market segments of interest. A budding entrepreneur should also be familiar with competitive patent portfolios, research trends and product positioning -- as well as past / pending litigation between the major firms.

 

BACKGROUND ON PATENT VALIDITY

 

Presumption of Validity. According to US statute (35 USC 282), “A patent is presumed valid.” However, “presumption” is merely a part of US legal tradition, and does not confer an explicit “legal validity”. In sum, unless and until a challenger proves “invalidity” by clear and convincing evidence before a legal tribunal, a patent is “obviously valid”. A US patent grant allows the owner to exclude others from making, using or selling the disclosed invention in USA during its lifetime.

 

Prosecution of a USA Application. To determine patentability, examiners in the USPTO measure novelty, utility and non-obviousness (or inventive step) of an invention as disclosed by the inventor in the original application. For a typical USA utility- patent application, the examination process is ex parte -- or secret between the inventor / owner and the USPTO -- until claims are allowed and a grant is issued / published. By means of “continuation” applications and various time-extension procedures during prosecution, the “pendency” of a domestic application remains hidden within the USPTO -- sometimes for many years.

 

International Application Examination Processes. If the inventor is interested in international patents to protect markets in other countries, other strategic legal questions must be investigated. Generally, the full text of an international patent application – under the Patent Cooperation Treaty -- is published within a few months after filing. For example, the title and abstract of a PCT patent application is also published -- in English, French and German -- within 18 months along with certain “front-page” data, including the specific “designated” countries where a patent is being sought. This advance public notice allows any party with an interest in the particular field to collect evidence which can be used against claims which may later be allowed from the application. In some countries the time period between filing an application and demanding examination of the specification and claims may be as long as 3-7 years.

 

While many national patent offices may allow a grant to issue with minimal review against other printed patent publications, the “as-issued” claims may then be subsequently challenged in a transparent, public “opposition” procedure which must be initiated shortly after grant publication. Such a transparent procedure assures that persons with the greatest skill in the related art –- sometimes those with conflicting / opposing financial interests -- can present relevant evidence against the applicant's original specification and resulting allowed claims. Such a low- budget post-issue procedure initiated within the original granting office stands in sharp contrast to the limited and costly practices in the USPTO, i.e., an ex parte “protest” or undertaking a lengthy / complex “interference” procedure (typically by filing a new application which copies all disputed claims). New laws which provide for post-grant opposition are being considered in the US Congress; the USPTO is now actively considering how rules for such processes should be formulated.

 

US Examination Statistics. Each application pending within the USPTO is traced by the PALM system; this database contains a detailed record of all dates and hours spent by staff; according to recent surveys, 8-30 hours of examination time may be typical billing for a single case. Considering that a typical healthcare application represents years of scientific and clinical research (perhaps a $20 million budget) and many months of specialist effort to prepare the patent application (~ 90 pages of dense technical specification including approx. 60 as-filed claims) it amazing that the examiner could read and understand the application and other related submissions on related art within 30 hours.

 

PTO Problems. There have also been worrisome examination delays due to applications being misdirected, i.e., assigned to the wrong art group for examination as a result of using the new electronic Application Routing Tool (ART). For example, the Oct 2007 Government Accountability Office (GAO) report titled "Hiring Efforts are not Sufficient to Reduce Patent Application Backlog", examines the problems of having a major portion of the world's technology patents threaded through the needle- eye of the USPTO. Because the USPTO examines applications covering so many old and new fields, it frequently gets criticism for publishing grants on unusual products and processes – even though the global market may not involve more than a few dozen people or the subject and prior art may extend back more than a thousand years into history. One such grant is US6004596, "Sealed crustless sandwich" (issued in 1999 to Smucker's), which claims a sandwich with crimped edges.

 

Conclusions on Patent Validity. Ultimately, the validity of a US patent grant is established only by litigation which challenges every phase from conception to issue. Many first- time inventors assume that when their new grant, including a few limited (and sometimes “token”) claims is published, the world will beat a path to their door to sign license agreements. The real experience can be very different. Considering that prosecuting a typical US grant can cost $15,000 in legal services and PTO fees; a handsome, etched- copper replica of the first page of the grant to hang on a wall can actually become more costly than some rare artworks.

 

BACKGROUND ON PATENT VALUATION

 

Claim Word Lexicon. In general, the value of a US patent resides in three components: the power of its technology, the market - desirability of its unique features and its legal invulnerability re enforcement against infringers and “close imitators”. The significance of a specific patent lies within the “metes and bounds” of its claims as enabled by the specification. Accordingly, the precise, explicit meanings of the claim words and phrases to one of “ordinary skill in the particular art” limit the products / processes which are protected. Since the precise significance of a claim word or phrase may change with time due to addition of new foreign words and new technical concepts into the English language, it would be desirable if US patent law required the meaning of claim words to be fixed at the moment of filing the application. Regrettably, our judges and patent courts have no uniform time standard for fixing claim- word definitions and nuances, e.g., at the time of invention / conception, the time of issue or the time of infringement. This situation leads to profound uncertainty re the inherent valuation of specific claims in US patents and estimating the possible future problems of enforcement.

 

Marketing Barriers. Using the traditional strategy for business and competitive marketing, a strong patent should form a sustainable barrier against any competitor offering an identical product / service in USA. Frequently for independent inventors it is desirable to focus upon a limited or niche marketplace which is too small to be of critical interest to a major firm. Specialty food or condiment products are an example of a “niche”; many times there is no direct price competition even on somewhat- similar items. In some cases the only regulatory barrier is the local health code covering the fitness / inspection of food- preparation establishments and content- labeling regulations.

 

An alternative way of looking at sustainable competitive advantage is the resource based view (RBV) which concentrates upon key resources of a venture: basic value, secret or “patent pending” features, and unique advantages provided to the user. The uniqueness or “heterogeneity” of products / services offered by a family- based venture can be a significant advantage in a niche market. Distinctive unique names such as “Smucker's” and “Orville Reddenbacher” are examples of such heterogeneity; in these cases, the names form a very strong brand identity which is also a registered trademark.

 

For certain fields such as drugs, surgical devices- implants and biotechnology, domestic entrepreneurial ventures face two special marketing barriers for success: the regulatory barrier and the patent barrier. In general, the regulatory barrier is much more difficult to overcome; indeed recent studies suggest that the “first-mover” advantage of a large, well- respected “big-pharma” may be more effective in the business plan than a portfolio of complex patents. However, for a sophisticated private inventor to obtain startup funding, investors almost always require some credible lab and animal testing results as well as notices of allowance of some strong patent claims from early filings. One of the recent problems with drugs and devices is the internet availability of counterfeit, pirated, contraband or gray-market items (which may contain little or none of the active agent) being produced and sold into international markets. For some “blockbuster” medical products, the original patent term can be extended to offset USA regulatory delays (which may cover 3-8 years). Patent term extension also precludes FDA release for USA marketing of low- cost generic versions produced by domestic or foreign labs.

 

Estimation of Patent Value. A patent grant which has been used in the marketplace for several years and possibly litigated for validity -- including having the legal meanings of its claims defined by a Markman hearing -- is a known quantity and it should be possible to estimate its intrinsic value using accepted accounting methods such as: income produced, market valuation compared to similar patents and their “replacement cost”.

 

Because every patent grant is unique, it is difficult to define specific benchmarks such as marketplace comparables or exact replacements and to use as a value template. In certain situations, it may be possible to reach a general statistical estimate of income which might be generated by a patent by considering published or model-deduced income production from selected patents assigned by the USPTO into the same class and/ or subclass. This procedure is analogous to valuing a home by estimating the “curb appeal” of the other houses in the neighborhood, which is not highly accurate or reliable since the neither the integrity of critical interior structures / systems nor desirable design features of the target or neighboring homes are visible from the street. The “vicinity- appraisal” of possible future income is further problematic in view of mis-classification of applications in the USPTO by harried staff or experimental computer procedures.

 

“Knowing the territory” in the target class / subclass neighborhood of the new invention can be particularly valuable as an indicator of the risk of future litigation. Recently, it has been estimated that about 1 to 3 percent of grants are challenged in US District Courts. Healthcare, biotech and chemical inventions make up the most frequent cases. Over all the patent classes, approximately 1,500 patents per million issued are litigated during the first 12 months after issue.

 

Conclusions on Patent Value. Large firms with experienced patent law departments can be reasonably certain of getting patent benefits from their company's own research. A patent may become valuable if the application has been prepared and prosecuted by a skilled patent practitioner based upon extended, careful and quantitative inputs from the inventor(s) who “really know the territory”.

 

TAKE - HOME MESSAGES ON PATENT VALIDITY AND VALUE

 

1.0 The preferred way to approach a new venture is to master the territory before committing time and resources to developing a product concept. The inventor's first challenge is to accumulate a database of quantitative, economic and technical details about current and upcoming market needs as well as competition within the target segments. New methodologies for meeting market needs may “obsolete” even an established product in just a short time.

 

2.0 Emerging new technologies, especially those used within the industry underlying the market of interest, should also be studied and cataloged in order to construct a timeline for forecasting when each will probably materialize within specific firms.

 

3.0 If possible, all this preliminary data gathering work should be done discretely under confidential non-disclosure agreements so that no inkling or suggestion of a possible new product can be deduced by any others. These critical steps allow the inventor to confirm whether his idea might fill a significant actual need and to estimate the economic parameters of its market segment. If the prognosis at this stage is sufficiently encouraging, actuating the next steps toward defining related art and tested patent claims may be indicated.

 

4.0 Relative to IP awareness, up-to-date knowledge of published patent applications from international offices and the USPTO is critical. A wise inventor will also prepare a detailed claim- element spreadsheet covering selected grants which will remain enforceable for 2-5 years into the future. Generally, the rows should depict the range of known claim elements pooled from relevant patents and current technical publications while each columns details specific individual claim elements of germane patent applications / grants. A pattern of empty cells (new / novel elements / features) in such a display may suggest “available featurespaces” which might be exploitable by a new invention and related patent application. This display should also illustrate some potential “infringement spaces” -- product features which are already enabled and claimed in patent grants which have previously been litigated or opposed.


 

5.0 Once the areas of “open featurespace” can be distinctly visualized, the market potential and infringement risks of a new product can be estimated. Strongly positive results from this stage may justify concentrated efforts and investments required to invent and file a patent application covering a desirable new product.

 

6.0 Before the patent application is published (as little as six months after filing in some international offices) the actual product(s) should be developed and refined under strict secrecy with a few sophisticated “friendly” users to establish its performance, reliability and acceptability to the larger marketplace. The final forms and embodiments of the product / system should then be protected by additional carefully- drawn claim amendments.

 

ABOUT THE AUTHOR

 

M. Conrad Huffstutler, PE, PhD is an experienced researcher and former university professor in engineering and life sciences who works with independent entrepreneurs and startup firms to develop and patent their inventions. He is registered as a Patent Agent and listed in the USPTO roster of Patent Professionals; Kairos Group holds seminars to train “first-time” inventors in the techniques of “entrepreneurship on a small budget”. He can be reached at Kairos Group; PO Box 389; Liberty Hill, TX 78642; Phone - (512) 515-5151. 

 

Note: for more information on Dr. Huffstutler, see his listing in the VentureNetwork section


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