By Business & Finance With patent reform exercising the minds of legislators in Europe, the US and Australia, it is more important than ever for inventors to take the right approach to protecting their intellectual property, writes Paul Golden.
Companies obtain patents for many reasons. Usually they intend to develop the product, but patents are also used defensively (you sue me, so I look at my patent portfolio to see if I can counter-sue you, or we settle with a cross licence).
Another defensive measure companies will take is to publish ideas they don’t intend to develop further. By putting the idea in the public domain, nobody can subsequently patent it, explains David Brophy, partner at patent and trademark attorneys FRKelly. “IBM was for many years the most successful patent applicant in terms of the numbers acquired, but at the same time it also published its own bulletin with details of research it did not want to patent, purely as a defensive measure.”
However, there are also some notorious examples of companies being formed with the sole intention of acquiring patents purely to litigate them. These companies may be described as non-practising entities (NPEs) or less neutrally as ‘patent trolls’.
Brophy says this phenomenon has been most commonplace in the US. While admitting that it is not quite hoarding, technology entrepreneur Pearse Coyle agrees there is a new trend towards defensive patenting in the US software industry in particular, whereby software is patented to show clients that the company is in good shape to fight intellectual property (IP) infringement actions that other software vendors might take against it.
There is also a fear that other that firms will consider launching malicious patent actions against firms that do not have a good patent portfolio.
When asked what could be done to encourage greater exploitation of patent-protected ideas, Alistair Payne, head of the intellectual property group at Matheson Ormsby Prentice, referred to a number of organisations that run patent auctions. These include ICAP Ocean Tomo, which says it has handled more than US$150 million of patent sales in the last five years.
He is also optimistic that proposed changes to the US patent system (see sidebar) will produce a process that is potentially cheaper, easier and cleaner. “Critics say ‘first to file’ favours large companies, but inventors can phase payments for patents while they work out whether it is worth patenting their invention in all major markets.”
US patent system
Patent applications in the US are about four times higher per capita than in Europe. But it has been suggested that such high levels of patents can act as a deterrent to researchers who wish to work in areas that depend heavily on prior discoveries, for fear of being sued for patent infringement.
There are two ways of looking at this. Many large corporations claim they are pestered by companies who acquire large quantities of obscure patents and subsequently threaten legal action for infringement. The companies who buy up these patents claim that their actions increase the value of patents and therefore encourage innovation. The suggestion that patents are handed out too readily in the US was one of the factors behind efforts to reform its patent office and the process by which patents are issued.
Maureen Daly, head of intellectual property at Beauchamps Solicitors, says inventors should be filing at the earliest opportunity and have the option of filing what is known as a short-term patent (which lasts for ten years and has a less rigorous assessment process) rather than going down the full-term 20-year patent route.
“The other option is to keep the IP confidential until you have investment on board by implementing non-disclosure agreements. Patent might not even be the way you want to go – you could sell the product without selling the patent, as Coca Cola does.”
Exploitation
The patent system has several features that are intended to encourage exploitation, explains Brophy. Annual renewal fees are payable in each country in Europe where the holder wants to keep a patent in force, and many countries also provide a system of compulsory licensing so that if a patent owner refuses to supply a market demand and refuses to grant a licence on reasonable terms, they can have a licence forced upon them.
“The problem with simply increasing renewal fees is that the rewards for a successful litigant will dwarf the renewal fee cost, so raising renewal fees will probably hurt SMEs without solving the problem and compulsory licences still result in companies having to reach a settlement and pay a royalty, just as they would if sued for infringement.”
Forcing auctions of patents after a period is unlikely to be the solution for two reasons, he adds. “Firstly, it could deprive deserving companies of patents for technology that is still being developed. It can take 15 years to pass all the regulatory hurdles to bring a drug to market and if a pharmaceutical company were at risk of losing patent rights because of this delay, it would reduce its incentive to do the basic R&D.
“Secondly, Nortel auctioned 6,000 telecom patents recently for a staggering US$5.4 billion, which means that when patents are auctioned their value is calculated with an eye on future litigation. You are at risk of simply forcing a sale that enriches the original owner and results in someone else holding the patents but not necessarily doing any different than the original owner in terms of litigation.”
Tax exemption
Coyle says there has not yet been any obvious indication of the impact of the removal of tax exemption on patent royalties “except that it removes the need to carefully implement corporate structures – for example, with a single class of shares – that were necessary to allow all shareholders to benefit from the exemption. For inventor entrepreneurs the real aim has always been to grow the capital value of the venture that is exploiting the patent, not to live off tax-free royalties.”
Neither has Payne noticed any significant changes, although he suspects the removal of the exemption may have impacted on some small inventors.
However, Brophy says that in a number of cases where an inventor or small Irish company was considering whether or not to seek protection, the removal of this exemption resulted in them not securing protection for their ideas. “It has also made it more difficult to sell Ireland as a centre of R&D and as a place to locate IP-owning companies, particularly as just as we abolished our exemption the UK introduced a very similar one, and other countries like the Netherlands and Belgium have similar schemes in place which they use to attract the famous ‘knowledge economy’ across their borders.”
*This article was originally published in the Life Sciences Review in January 2012.
