PatentsPatents

OverviewOverviewFirms must decide whether and how to protect their technological innovations.

Protecting innovation helps a firm retain control over it and appropriate the rents from it.

However, sometimes not protecting a technology is to the firm’s advantage – it may encourage others to support the technology and increase its likelihood of becoming dominant.

AppropriabilityAppropriabilityAppropriability: The degree to which a firm is able to capture the rents from its innovation.◦Appropriability is determined by how easily or quickly competitors can copy the innovation. Some innovations are inherently difficult

to copy (tacit, socially complex, etc.) Firms may also attempt to protect

innovations through patents, trademarks, copyrights or trade secrets.

Why You Need Intellectual Property Why You Need Intellectual Property ProtectionProtectionHelps to deter imitation by

competitors which will undermine your profits from innovation

Competitors can imitate one’s products by:◦Reverse engineering them◦Hiring one’s employees◦Working on similar projects◦Reading one’s publications and

patent disclosures

The Amount of Time It Takes to The Amount of Time It Takes to Imitate New Products Imitate New Products

What Is Patentable? What Is Patentable? A patent is a government-

granted monopoly that prevents others from using an invention for a specified period of time in return for the inventor’s disclosure about how the invention works

What Can Be Patented? What Can Be Patented? Patents cannot be obtained on

natural substances or ideas Patents can be obtained only on:

◦ A working process◦ Machine◦ Manufacture◦ Composition of matter

Novel, Non-Obvious and Novel, Non-Obvious and UsefulUsefulPatents are only granted for

inventions that the patent office determines are:•Novel: if it has not been previously

invented •Obvious: if it is a clear next step in

technological development to a person who is an expert in the field

•Useful: it has to work, have a use, and be functional

A United States PatentA United States Patent

First to InventFirst to InventThe U.S. patent system differs

from the patent systems in all other countries (except the Philippines) because the United States awards patents to the first party to invent something, not to the first inventor to file for a patent

NondisclosureNondisclosureIn the United States, patents are

only awarded for inventions that have not been offered for sale, and have not been publicly disclosed, either in an open forum or in print, more than one year earlier

Expansion of What Is Expansion of What Is PatentablePatentableIn recent years, the variety of things

that can be patented has increased and now includes:◦ Genetically-engineered organisms◦ Computer software◦ Business methods

Raised issues:◦ Backlogs in the patent office◦ More patent disputes◦ Innovation hindered by property rights◦ Blocking follow-on research

Forms of PatentsForms of Patents

◦Patents: rights granted by the government that excludes others from producing, using, or selling an invention.

◦Must be useful, novel, and not be obvious. Utility patents protect new and useful

processes, machines, manufactured items or combination of materials.

Design patents protect original and ornamental designs for manufactured items.

Plant patents protect distinct new varieties of plants.

◦ In 1998, many software algorithms became eligible for patent protection.

Growth in Number of Growth in Number of Utility Patents IssuedUtility Patents Issued

Design and Plant PatentsDesign and Plant PatentsThere are two additional types of

patents other than utility patents:◦Design patents: given for the

appearance of products ◦Plant patents: given only for

engineered plants that are reproduced asexually

Patent CostsPatent CostsThe patent process can take 2-5 years, and involves a

number of costs.

Fee Types ($US) Regular Fee Small Entity Fee Patent Filing Fees   Basic patent filing fee—utility 1000 500   Design patent filing fee 430

215   Plant patent filing fee 660 330  Patent Issuance Fees (paid after Patent Office approves patent)   Utility patent issue fee 1,400 700   Design patent issue fee 800

400   Plant patent issue fee 1100 550 Publication fee 300 300 Patent Maintenance Fees (to keep patent in force)   Due at 3.5 years after issuance of patent 900

450   Due at 7.5 years after issuance of patent 2,300

1,150   Due at 11.5 years after issuance of patent 3,800

1,900

The Parts of a PatentThe Parts of a PatentTwo key parts:

◦ Specification: how the invention works, and may include accompanying illustrations. The specification is what the inventor must trade-off in return for the monopoly right that they receive

◦ Claims: identify a particular feature or combination of features that are protected by the patent. The claims are what indicate whether another patent infringes on the patent

Number of ClaimsNumber of Claims

Pioneering patents Pioneering patents A special case of patents with strong

claims, which the control of these patents is important because they can be used to extract royalty payments from a large number of users

Pioneering patents and patents with broad claims are especially important if starting a company

The more pioneering the patent, and the broader its scope, the more competitor firms one can deter from imitating the new product or service

Defining the ClaimsDefining the ClaimsThe claims that are allowed to make

are limited by what previous inventors, whose patents have already been granted, have claimed

To determine what claims should be granted, the inventor has a duty to provide citations to previous patents whose technical art is built upon in creating the inventions

Who Can Apply?Who Can Apply?Only inventors can apply for, and

be awarded, patents, which they do by applying to the USPTO

Picket Fences and Picket Fences and BracketsBracketsEffective patenting strategy often

involves the creation of a picket fence of patents around a core invention and bracketing, keeping an inventor from using the invention by patenting around it

Patent LitigationPatent Litigation Patents provide the right to sue others if they infringe on

the patent by making, using, selling or importing something covered by the claims of the patent

If a company wins a patent infringement lawsuit, it can obtain:◦ An injunction prohibiting the infringing activity ◦ Lost profits or imputed royalties are common penalties when

infringement is accidental◦ As much as triple damages for willful infringement

Because patents that are invalid cannot be infringed, a common defense against infringement is to invalidate the patent by demonstrating that the inventor had disclosed the invention prior to filing for the patent, or that the invention is obvious to a person trained in the art

Because small and new firms must spend a large portion of their revenues and senior management time to enforce their patent rights, large, established firms sometimes willfully infringe their patents, believing that they do not have the money or energy to fight back

Patent TrollsPatent TrollsPatent trolls are companies

whose purpose is to buy up patents and enforce their claims through litigation or threat of litigation

Patent Laws Around the Patent Laws Around the World World ◦Countries have their own laws regarding patent

protection. Some treaties seek to harmonize these laws.

Paris Convention for the Protection of Industrial Property Foreign nationals can apply for the same patent rights in

each member country as that country’s own citizens. Provides right of “priority” – once inventor has applied for

protection in one member country, they can (within certain time period) apply for protection in others and be treated as if they had applied on same date as first application.

Patent Cooperation Treaty (PCT) Inventor can apply for patent in a single PCT receiving

office and reserve right to apply in more than 100 countries for up to 2 ½ years. Establishes date of application in all member countries simultaneously. Also makes results of patent process more uniform.

Patents, Trademarks and Patents, Trademarks and CopyrightsCopyrights

Advantages of PatentingAdvantages of PatentingPatents can:

◦Slow imitation◦Facilitate legal protection of

intellectual property◦Enhance value chain leverage◦Make markets for knowledge

possible◦Help new firms to raise money

Why Companies Say That They Why Companies Say That They PatentPatent

Barrier to ImitationBarrier to ImitationPatents can be an important

barrier to imitation, and a powerful mechanism to capture the returns on innovation

Legal Protection Legal Protection Patents also help companies to

use the legal system to protect their intellectual property

Value Chain LeverageValue Chain LeveragePatents also give companies

control over other firms in their value chain

By owning patents that are used by customers or suppliers, companies can more easily influence their behavior, and make them act more favorably towards them

Markets for KnowledgeMarkets for KnowledgeHaving a patent facilitates the

sale of technology to other firmsPatented technologies can be

sold to others; technologies protected by secrecy cannot

To license a technology to another company, one needs to obtain a patent on it

FundraisingFundraisingPatents help new companies

raise money because they provide a verifiable source of competitive advantage. Investors can see the mechanism through which the new venture will deter imitation, reducing their uncertainty about the value of the venture

Disadvantages of Disadvantages of PatentingPatentingNot always effective at deterring

imitationGain may be greater by keeping

it a secretPace of change may make patent

irrelevantDifficulty proving infringement

Effectiveness at Deterring Effectiveness at Deterring ImitationImitationPatents are not always effective at

deterring imitationOther firms occasionally can invent

around patents, the process of coming up with something that accomplishes the same goal as the patented invention without violating the claims of the patent

By inventing around patents, other companies can use the invention without having to:◦ Pay royalties that reduce their profit margins◦ Incur the high costs of developing the

invention

Benefits of NondisclosureBenefits of NondisclosurePatenting is disadvantageous

when a company will gain more from non-disclosure than from a government-granted monopoly

A patent gives a 20-year control on the invention, but secrecy might allow that control to last longer

Pace of ChangePace of ChangeWhen technological change is

very rapid, the invention that a patent protects will quickly become irrelevant. Given the time it takes to obtain a patent, and the cost of patenting, one probably won’t be able to earn sufficient payback to justify the investment in it

Difficulty Proving Difficulty Proving InfringementInfringementIf evidence cannot be gathered

to prove that infringement actually occurred, or the fixed costs of defending a patent are so high that it does not pay to protect it through the court system, then the returns on the investment in a patent do not justify the cost

The Effectiveness and Use of The Effectiveness and Use of Protection MechanismsProtection MechanismsIn some industries, legal protection

mechanisms are more effective than others◦E.g., in pharmaceutical patents are powerful; in

electronics they might be easily invented around.It is notoriously difficult to protect

manufacturing processes and techniques.In some situations, diffusing a technology

may be more valuable than protecting it. However, once control is relinquished it is

difficult to reclaim.

The Advantages and The Advantages and Disadvantages of PatentingDisadvantages of Patenting

The Effectiveness and Use of The Effectiveness and Use of Protection MechanismsProtection Mechanisms◦Advantages of Protection

Proprietary systems offer greater rent appropriability.

Rents can be used to invest in further development, promotion, and distribution.

Give the firm control over the evolution of the technology and complements

◦Advantages of Diffusion May accrue more rapid adoptions if produced

and promoted by multiple firms Technology might be improved by other

firms (though external development poses its own risks).

The Effectiveness and Use of The Effectiveness and Use of Protection MechanismsProtection Mechanisms

Production Capabilities, Marketing Capabilities, and Capital

◦ Factors influencing benefits of protection vs. diffusion 1. Can firm produce the technology at sufficient volume or

quality levels? 2. Are complements important? Are they available in

sufficient range and quality? Can the firm afford to develop and produce them itself?

3. Is there industry opposition against sole source technology?

4. Can the firm improve the technology well enough and fast enough to compete with others?

5. How important is it to prevent the technology from being altered in ways that fragment it as a standard?

6. How valuable is architectural control to the firm? Does it have a major stake in complements for the technology?

Effectiveness of Patents in the Effectiveness of Patents in the IndustryIndustryPatent effectiveness varies

substantially across industries because of differences in the nature of technology, and these industry differences affect several aspects of technology strategy

Effectiveness of Product Patents Effectiveness of Product Patents by Industryby Industry

Theory In ActionTheory In Action

IBM and the Attack of the ClonesIn 1980, IBM was in a hurry to introduce a personal

computer (PC). It used off-the-shelf components such as Intel microprocessors an operating system from Microsoft, MS DOS.

It believed that its proprietary basic input/output system (BIOS) would protect the computer from being copied.

However, Compaq reverse engineered the BIOS in a matter of months without violating the copyright, and quickly introduced a computer that behaved like an IBM computer in every way. Compaq sold a record-breaking 47,000 IBM-compatible computers its first year, and other clones were quick to follow.

The Effectiveness and Use of The Effectiveness and Use of Protection MechanismsProtection Mechanisms

Wholly Proprietary Systems vs. Wholly Open Systems◦ Wholly proprietary systems may be legally produced or augmented only

by their developers.

◦ Wholly open system may be freely accessed, augmented and distributed by anyone.

◦ Many technologies lie somewhere between these extremes.

Theory in ActionTheory in Action

Sun Microsystems and Java In 1995, Sun developed a software programming language

called Java that enabled programs to be run on any operating system (e.g., Windows, Macintosh). This would lessen pressure for one operating system to be dominant.

Members of the software community felt that Sun should make Java completely “open” – they argued that “Java is bigger than any one company.”

However, Sun was afraid that if Java were completely open, companies would begin to customize it in ways that would fragment it as a standard.

Sun decided to distribute Java under a “community source” program: no license fees, but all modifications to Java required compatibility tests performed by Java’s own standards body.