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Patent Strategies for Licensors: The Dividends from Filing Early

Monday, May 02, 2011

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Small businesses understand the importance of obtaining patents to protect the rights to inventions they manufacture. An issued patent provides the business recourse against infringing parties making, using, selling or importing the invention. Even so, some small businesses may not realize the importance of patenting inventions they seek to license rather than produce. Yet a licensor's nominal investment in a patent application can pay off handsomely down the road.

There are many reasons a business may decide to license a technology rather than directly bringing an end product to market. Some small businesses may lack the internal capacity or know-how to produce, market and distribute inventions they have developed. Other businesses may be set up as innovation houses, focusing entirely on research and development while leaving the marketing, producing and distributing to third parties. Sometimes a company just comes up with an oddball invention that, while viable, is outside that company's business model. In each of the above scenarios, such businesses can produce revenue by licensing or assigning their inventions to third parties. But should a small business patent the invention before seeking to license it?

A patent is a defensive right. It gives the patent holder the right to prevent others from making, using, selling, offering to sell, or importing the patented invention within the United States during the patent term. The patent holder may extend the right to engage in some or all of these actions to third parties by granting licenses. At a bare minimum, a patent license is the patent holder's promise not to sue the licensee for making, using, selling, offering to sell, or importing the invention. In exchange, the licensee provides consideration to the patent holder, usually in the form of fees or royalties. So a patent or patent application is the heart of the licensor's bargaining power with potential licensees. After all, a promise not to sue carries little weight if the licensor doesn't actually have the right to sue.

Inventors looking to license an invention have many choices to make. Do they wish to offer an exclusive license to a single licensee? A licensor can generally negotiate a higher royalty rate for an exclusive license. On the other hand, offering non-exclusive licenses to multiple licensees may provide better revenue potential to the licensor, by not tying the licensor to the royalty stream of a single licensee. The licensor may choose to divide license rights into geographic regions. Or the licensor may choose to offer exclusive licenses for limited time durations. The licensor may request an up-front lump sum payment, a royalty percentage of products sold, or a combination of lump sum and a royalty.

Regardless of the licensing decision, the licensor's negotiating position is considerably stronger if the invention has been patented or is patent pending. When marketing an invention to potential licensees, the licensor must convince the licensee that the invention is a good investment. This involves demonstrating market potential for the invention and minimizing downside risks. The patent or published patent application itself can be a useful marketing tool for the licensor. A well drafted patent describes the problems solved by the invention. The patent both distinguishes and describes the advantages of the invention over the prior art. The claim language clearly delineates the scope of the invention, and therefore, the scope of the rights being licensed. Likewise, the patent application itself is reassuring to an investor that he is likely to be able to exercise the rights he is licensing. For this reason, some venture capital firms require a patent application for the invention before investing.

While there are many ways for a licensor to provide assurances to the licensee against risks, such as indemnifying the licensee against third party claims of infringement, filing a patent application is fundamental. Most licensees will require the protections and assurances provided by a patent before marketing the licensed product. Without the patent, what is to stop copycat producers from entering the market if the product becomes successful? How much money will an investor sink into a technology with uncertain ownership? A licensor who can provide greater assurances is in a better position to negotiate a higher royalty rate. The earlier an inventor puts a patent application in the pipeline, the shorter the wait for enforceable rights in the invention.

If an inventor has a large number of related inventions based on a new core technology, patenting all of them can be expensive. Yet even under these circumstances there are ways for the inventor to protect his intellectual property without the costs associated with simultaneously prosecuting multiple patents. For example, filing a single broad patent on the core invention can establish basic rights and an initial priority date for the invention. This approach gives the inventor the option to file follow-on applications for specific features or improvements that might be offered to a particular licensee. Such follow-on applications can include continuation, divisional or continuation-in-part applications, and may be filed on offshoots or variants of the initial application when potential licensees are identified.

A small business may be tempted to defer costs by waiting to file a patent application until after identifying a potential licensee. But there are important reasons for a potential licensor to file a patent application before entering licensing negotiations based on patent law itself. In the United States, under the Patent Act, any publication, public use, sale or offer for sale of the invention triggers a one year timer, called a "statutory bar." Once a statutory bar is triggered, the inventor has only one year to file a patent application with the United States Patent and Trademark Office (USPTO). By timely filing a patent application before attempting to license the invention, the licensor is assuring the licensee that time has not run out on any statutory bars. The inventor is further protecting himself from a scenario where a licensee triggers a statutory bar by offering the product for sale without the inventor knowing. It is worth noting that most countries outside the United States use an "absolute novelty" standard for patents, meaning a grace period is not provided for statutory bars. Other countries have conditional grace periods, or a grace period shorter than one year.

The USPTO grants patent rights to the original inventor (although this rule may change based upon currently proposed federal patent reform legislation). However, the rest of the world only grants patents to the first inventor to file a patent application. Even in the United States, patenting affords the patent holder the advantage of a presumption of validity against challengers claiming prior inventorship. Filing a patent application demonstrates a good faith belief by the licensor that he is the actual inventor. It shows that the inventor has found the invention to be worthy of his own investment in a patent application. An inventor without a patent may face a tough sell convincing a potential licensee to invest in an invention the inventor did not see fit to patent.

While an issued patent is ultimately necessary to defend invention ownership, a licensor need not wait for a patent to issue before shopping his invention to potential licensees. Indeed, filing a patent application can buy an inventor valuable time to market his invention. The amount of time an inventor needs to develop and market his invention can play an important role in the type of patent protection he chooses. Once the inventor files a patent application, he establishes a priority date for the invention. While a third party may still claim to have rights to the invention that predate the priority date, ownership of a patent shifts the burden to the third party to prove this claim. Filing a provisional application is a low cost way to secure a priority date. It gives the applicant a full year to market his invention with the added value of being able to label the invention as "patent pending," giving infringers notice of the patent holder's right to retroactively demand reasonable interim royalties between the notice and issue dates. If even more time is needed, filing an international patent application, or PCT application, gives the inventor up to 30 months to market the invention to potential licensees around the world before having to commit to filing a national stage application in one or more specific countries (including the United States).

Businesses looking to license their inventions rather than producing and marketing them have many decisions regarding how to profit from and protect their investments. All businesses and small businesses in particular, must pay close attention to the bottom line. Patenting an invention represents a considerable investment of time and resources. Even so, judicious management of a patent portfolio can both control short term costs and provide better long term returns, while creating security for investments in research and development. Making the right patenting choices from the get-go can be a key factor in a business' success.

This article is intended to serve as a summary of the issues outlined herein. While it may include some general guidance, it is not intended as, nor is it a substitute for, legal advice. Your receipt of Good Company or any of its individual articles does not create an attorney-client relationship between you and Sheehan Phinney Bass + Green or the Sheehan Phinney Capitol Group. The opinions expressed in Good Company are those of the authors of the specific articles.