Executive Summary
The purpose of the present memorandum was to provide practical recommendations for the management of a medium-size, tech company that considers to expand its research and development (R&D) ventures and patent some of its innovations. The main questions were whether patenting will generate more benefits than disadvantages in terms of legal and strategic management, and what implications may the choice of certain types of patents have. During analysis, it was revealed that the patent law is characterized by some uncertainties related to damage calculation and treatment of willful and unwilful patent infringement cases.
It means that the current law may be insufficiently effective in protecting the rights of patentees, whereas the litigation process may be extremely costly. Nevertheless, intellectual property registration can provide many performance advantages for the company. Thus, it is recommended for the management to patent innovations while taking into account their distinctiveness, usefulness, and potential profitability. Along with this, the company must strictly follow the patent application procedures, such as the announcement of its patent-pending status, and develop organizational and HR policies that would minimize the risk of information breach and technology copying.
- TO: Executive Manager
- FROM: [Your Name], General Counsel
- SUBJECT: Strategic Use of Patents and Business Innovation
- DATE: 2019, March 23
Innovation is the source of major competitive advantage in many contemporary industries and especially those operating in the tech sector. Thus, it is one of the company’s core strategic priorities to invest extensively in research and development (R&D) activities while also striving to increase its overall productivity. Nevertheless, R&D endeavors and processes are often difficult to bring to success because of such “inefficiencies in the innovation-generating pipeline” as the lack of sufficient revenues from new inventions (Shambaugh, Nunn, & Portman, 2017, p. iii).
It can be argued that patenting is an excellent solution to those inefficiencies and can help stimulate greater innovation at the company by helping it gain significant returns from R&D and, in this way, providing an opportunity to invest in research of more complex opportunities for technological progress (Shambaugh, Nunn, & Portman, 2017).
Additionally, intellectual property registration may increase the company’s competitiveness by preventing rivals from developing new products and services derived from a patented technology or process. However, it is important to take into account that patent litigation cases are associated with excessive financial costs, which can eventually lead to counterproductive results in terms of R&D (Shambaugh, Nunn, & Portman, 2017).
Considering this, the present document will aim to evaluate the costs and benefits of patenting, focusing on the area of the utility patent, as well as the patent infringement issues. The main purpose of the analysis is to provide the company’s management with practical recommendations regarding the use of patenting to spur organizational and business innovation and maximize profitability.
Methods and Legal Background
The formulation of strategic recommendations that will be proposed later in the document is based on findings from several professional and scholarly sources. In addition, laws and statutes applicable to the issue of patenting are utilized to explain the background of the identified problem and inform its analysis.
The rights for all forms of intellectual property, including copyright, trademarks, design rights, and patents, are protected by the US Constitution. According to the Patent and Copyright Clause, the Congress has power “to promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries” (Legal Information Institute, n.d.a, para. 1). Even unregistered intellectual property is protected by this clause yet when registered or patented, the legal recognition of the owner’s rights becomes more feasible (Intellectual Property Office, 2013).
In addition, Title 35 of the US Code provides more specific regulations of the patenting process and relevant legal issues. For example, according to 35 U.S.C. § 101, “whoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent” (Legal Information Institute, n.d.b, para. 1). Overall, this section implies that a patentee (the company) has exclusive rights for his or her invention and is subject to all conditions indicated in Title 35, Patents, including those listed in Chapters 28 and 29, Infringement of Patents and Remedies for Infringement of Patents.
However, to increase the chance of obtaining a patent, it is essential to understand the principle of invention usefulness, which is one of the central in the above-mentioned statute. According to Quinn (2015), it primarily implies that an invention is possible to operate and useful to the public at the present moment. Therefore, before filing a patent application, it is important to ensure that the usefulness of the patented technology or process is clear and to support it with enough information in the utility statement.
Issue Analysis
Patenting Process and Patent-Pending Period
To get legal protection for an invention, it should be registered by the United States Patent and Trademark Office (USPTO). When it comes to the patenting of technical solutions, the organization may choose either an invention patent model or a utility patent model. The former type requires to demonstrate that the invention has “prominent substantive features that represent ‘notable progress’ over the prior art” and grants protection for twenty years (Vivien Chan & Co, 2017, para. 4-5).
At the same time, utility patents offer short-term registered rights for inventions “that often lack the same degree of inventive step that patent law requires” (Brack, 2009, p. 2). In other words, while the invention patent covers a technical solution entirely, the utility patent will grant protection of structural and physical features of the company’s products. Considering this, the length, thoroughness, and costs of an invention assessment process by the USPTO will vary substantially based on the management’s choice of a patent type.
The abovementioned issue has legal implications because protection for a patent is not provided until it is approved. It means that the company will not be able to commence an infringement action before the moment when a patent is issued. Nevertheless, 35 U.S.C. § 154 (d) offers pre-grant protection by allowing the patentee to get royalty damages for proven infringing activities that took place during the patent-pending period.
To obtain monetary compensation by this statute, the company will have to demonstrate that infringing activities indeed occurred after the date of the publication of the patent application and that an infringer was officially noticed that the patent application was filed (Legal Information Institute, n.d.c).
Patent Infringement and Litigation
Patents can be costly in many regards, especially for large enterprises that do not get discounts for maintenance fees like small and micro-firms do (Intellectual Property Office, 2013). In addition, significant costs, both in terms of time and financial resources, come from patent litigation cases. At the same time, the amount of financial compensation due to infringement may substantially vary based on the choice of the damage calculation method by the court.
According to 35 U.S.C. § 284, “the court shall award the claimant damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer” (Legal Information Institute, n.d.d, para. 1). Overall, the reasonability of royalty damages is normally calculated hypothetically, considering the Georgia-Pacific factors (commercial profitability of patented technologies, type of invention, relationships between the plaintiff and the defendant, and so forth) (Karshtedt, 2014). In this case, the fact-finder does not rely significantly on facts of damage caused to a patentee.
Considering this, the evidence-based, lost profits method would be preferable for the company since it requires determining “the sales and profits lost to the patentee because of the infringement” (Karshtedt, 2014, p. 931). Nevertheless, this approach is less utilized compared to the reasonable royalty method because the former is linked to some difficulties of proof (Karshtedt, 2014). Noteworthily, as the primary calculation principle proposed by the statute, the reasonable royalty approach is applied to different types of infringement, both direct or willful and indirect, unintentional.
The US Patent Law fails to define the wilfulness of infringement well. At the present moment, the wilfulness of infringement is measured through the Read factors established in reading Corp. v Portec, Inc. 970 F.2d 816 (Fed. Cir. 1992): deliberateness of idea copying, awareness of existing patent protection and its scope, motivation for harm, duration of the unlawful action, and so forth. However, this long list of factors that judges have to consider allows a substantial degree of interpretation and, as a result, it often becomes difficult to prove that defendants’ actions are intentional (Wrzesinski, 2007).
To some degree, this indicates an inadequacy of protections given to the patent owners in the United States. Moreover, it is always important to remember that infringement may indeed occur unintentionally. It is valid to say, that the complexity of a patented invention, the overall extent of its distinctiveness, and difficulty in producing something similar independently define the likelihood of idea copying.
Cost-Benefit Analysis
As the review of the patent application and patent infringement processes makes it clear, patenting may induce massive costs relative to the overall expenses for the company’s R&D and product development endeavors. Moreover, no guarantee that patented products will ever enter the market and become commercially successful. Therefore, it is essential to conduct a thorough, strategic analysis of all risks associated with securing a patent and evaluate them against short-term and long-term values. According to de Wilton (2011), there are four major types of patent-related values that a firm may embrace: defensive, offensive, business, and technology leadership (Table 1).
It is valid to say that, among them all, the ultimate benefit of patients is in their granting of freedom to operate within a certain niche in the market without facing substantial threats of substitutes and competition, while also preventing other firms from patenting similar technologies.
Table 1: Different aspects of patent value (de Wilton, 2011).
Many of the offensive and defensive values of patents described in the table have direct legal implications and some of them were discussed in the previous sections. However, it is worth adding about patent infringement that it is not the only possible way for the company to exercise its exclusive rights for innovation and exclusion of others from certain activities in the market. Besides making services and products distinctive and attractive to consumers and stimulating sales in this way, patents offer many ways to generate profits.
For instance, “there may be an opportunity to license out patents and technology to third parties in exchange for a lump sum, periodic payments, or ongoing royalties” (de Wilton, 2011, p. 7). Considering the issue of excessive costs associated with patent litigations, the management would want to take into account a chance to develop more productive and mutually beneficial relationships with other firms, as well as potential infringers, by sharing the rights to use patented technologies with them.
Strategic Recommendations
It is valid to note that while the possibilities to develop something qualitatively and substantially new exist, they remain limited and normally require massive investments in R&D. Therefore, the utility patent is a more viable and realistic option for the company. Moreover, the utility model is more cost-efficient and time-efficient in terms of patent issuance and maintenance. However, it is recommended for the company to register new technologies and processes considering a few conditions.
Firstly, to ensure greater protection of intellectual property and minimize risks of litigation, the management must evaluate how easy it is to reproduce it unwilfully. Secondly, considering high financial and time costs linked to the patenting process and patent maintenance, it is suggested to register innovations that are characterized by a significant level of usefulness and commercial potential in terms of both direct product sales and licensing.
In addition, since the company will not have a right to sue someone for infringing during the patent-pending period, it needs to announce its pending status to the public to make rivals informed. Consequently, this official announcement may serve as a piece of substantial evidence against an infringer in case the technology would be copied during that time. Lastly, to guarantee better and more successful outcomes in strategic patent use, it is essential to create an organizational environment that would ensure greater protection of intellectual property.
For example, it can be recommended to include clear, effective, and specific clauses on disclosure of information about the company’s innovation activities in contracts of employees, especially those engaged in R&D projects. In this way, it will be possible to ensure that rivals would not become informed, either intentionally or unintentionally, about new technology and product development opportunities and would not capture them before the company.
References
Brack, H. P. (2009). Utility models and their comparison with patents and implications for the us intellectual property law system.
de Wilton, A. (2011). Patent value: A business perspective for technology startups. Technology Innovation Management Review, December 2011, 5-11.
Intellectual Property Office. (2013). Intellectual property rights in the USA.
Karshtedt, D. (2014). Damages for indirect patent infringement. Washington University Law Review, 91(4), 911-978.
Legal Information Institute, n.d.b. 35 U.S. Code § 101 – Inventions patentable. LII.
Legal Information Institute, n.d.c. 35 U.S. Code § 154 – Contents and term of patent; provisional rights. LII.
Legal Information Institute, n.d.d. 35 U.S. Code § 284 – Damages. LII.
Legal Information Institute. n.d.a. Intellectual Property Clause. LII.
Quinn, G. (2015). Understanding the patent law utility requirement. IP Watchdog.
Read Corp. v. Portec, Inc., 970 F.2d 816 ( 1992). Web.
Shambaugh, J., Nunn, R., & Portman, B. (2017). Eleven facts about innovation and patents.
Vivien Chan & Co. (2017). Patenting strategies for R&D companies. Iam Media. Web.
Wrzesinski, E. C. (2007). Breaking the law to break into the black: Patent infringement as a business strategy. Marquette Intellectual Property Law Review, 11(1), 194-211.
Works Consulted
Jones, N. (2018). The five most publicized patent issues today. American Bar Association.
Rooklidge, W. C., Day, J., Gooding, M. K., Johnson, P. S., & Yen, M. (2011). Compensatory damages issues in patent infringement cases: A pocket guide for federal district court judges. Web.