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PENNSYLVANIA BAR INSTITUTE 14th Annual BUSINESS LAWYERS’ INSTITUTE November 12, 13, 2008 TOP 10 EXCUSES FOR FAILING TO FILE FOR PATENTS (AND WHY THEY SHOULD BE QUESTIONED) By: Clark A. Jablon, Esquire Partner Panitch Schwarze Belisario & Nadel LLP Contact information: [email protected] Tel. 215-965-1293 The opinions expressed herein are those of the author and not necessarily those of Panitch Schwarze Belisario & Nadel LLP. © Copyright 2008 Panitch Schwarze Belisario & Nadel LLP 1 TABLE OF CONTENTS USPTO Patent Statistics……………………………………………………………………….. 3 Patent Licensing Statistics…………………………………………………………………….. 4 Patent Litigation Statistics…………………………………………………………………….. 4 Patent Procurement Costs……………………………………………………………………… 5 Intellectual Property – Company Market Valuation…………………………………………… 6 Intellectual Property Landscape: Patents vs. Trade Secret…………………………………….. 6 EXCUSE #1: We’re not doing anything that is potentially patentable………………………... 8 EXCUSE #2: Our energies are better spent on marketing and rollout of products and service.. 10 EXCUSE #3: Getting patents costs too much…………………………………………………. 12 EXCUSE #4: It takes too long to get a patent…………………………………………………. 14 EXCUSE #5: Patents are not worth much anymore, even if you can get them……………….. 16 EXCUSE #6: Our company does not have the internal resources to work on getting patents… 17 EXCUSE #7: The Patent Office rejects most patent applications nowadays………………….. 18 EXCUSE #8: Our law firm told us that there was nothing to patent…………………………… 18 EXCUSE #9: Our technology is too old to patent……………………………………………… 19 EXCUSE #10: It’s not our technology, and thus we can’t patent it……………………………. 20 2 USPTO PATENT STATISTICS First, let’s look at the overall patent landscape today. Here are the statistics for the past fifteen years. Year of Total filed Total Application Non-Provisional Patents Or Grant Patent Applications Granted 2007 484,955 182,901 2006 452,633 196,404 2005 417,508 157,717 2004 382,139 181,302 2003 366,043 187,015 2002 356,493 184,376 2001 345,732 183,972 2000 315,015 175,979 1999 288,811 169,086 1998 260,889 163,144 1997 232,424 124,069 1996 211,013 121,696 1995 228,238 113,834 1994 206,090 113,587 1993 188,739 109,746 1992 186,507 107,394 Source: http://www.uspto.gov/web/offices/ac/ido/oeip/taf/us_stat.htm Between 1992 and 2007, the number of issued patents increased by 70% and the number of filed applications increased by 160%. In this same time frame, the percentage of patent applications filed by entities of foreign origin has remained fairly steady in the mid-to-high 40’s. Thus, there has been a tremendous increase in domestic patent activity in the past 15 years that shows no sign of tailing off. The most notable trend today is that while the number of applications continues to increase, the number of issued patents is rising at a much slower rate than the increase in applications. This trend has two explanations. First, the backlog of unexamined applications is increasing. More importantly, though, the percentage of applications that result in an issued patent, often referred to as the “allowance rate,” has decreased significantly in the past few years, from a historical range in the 70’s percentage-wise, to a current range of the mid-40’s percentage-wise. The plummeting allowance rate is attributable to 3 many factors, including more rigorous examinations, less willingness by Applicants to narrow the scope of claims to obtain an allowance, and more Office Actions issued per case by inexperienced Examiners. All of these factors increase the ultimate cost of obtaining patents. Since most Applicants have fixed budgets in which to prosecute applications, more applications must go abandoned to stay within budget limits. PATENT LICENSING STATISTICS Year Worldwide revenue (in billions) 1990 $15 2000 $110 2015 (estimated) $500 Most of these license deals include one or more U.S. patent properties. Also, the vast majority of these license deals do not involve any litigation activity. Fewer than 3% of patents generate royalty income. This number has remained fairly steady over the years. However, since the number of patents issuing is increasing at a far slower rate than the increase in worldwide license revenues, the average annual licensing value per licensed patent is skyrocketing. The statistics above also do not factor in cross-licensing arrangements where no license revenue changes hands. Such arrangements are fairly common, especially among very large technology companies. PATENT LITIGATION STATISTICS 1. Lawsuits filed Year Patent lawsuits Issued patents Lawsuits as a percentage of patents granted 1993 1,553 109,746 1.4 1996 1,840 121,696 1.5 4 1999 2,318 169,086 1.4 2006 2,830 196,404 1.4 2007 2,772 182,901 1.5 In the past 15 years, patent lawsuits as a percentage of patents granted has remained constant at about 1.5%. (Source: Federal Judicial Statistics as quoted in the report: The Patent Reform Act of 2007: Responding to Legitimate Needs or Special Interests? Oct 30, 2007 - The 'Patent Fairness' Issue - An Analysis by Pat Choate.) From these statistics, Choate concludes that with an expanding economy and more innovation, the absolute number of patent applications filed and patents issued has increased, but there has been no abnormal surge of patent litigation. From the statistics above, the simple fact is that the vast majority of patent owners in the U.S. do not litigate their patents. 2. Cost of patent litigation Year Average Cost for all parties (millions) 2001 3.0 2003 4.0 2005 4.5 2007 5.0 Source: American Intellectual Property Law Association (AIPLA) bi-annual economic survey PATENT PROCUREMENT COSTS The lifetime external costs of preparing, prosecuting and maintaining a typical U.S. patent in the electrical/computer arts is about $22-$34,000 today, breaking down approximately as follows: $12-14K to prepare the application, $5-10K for prosecution costs and issue fee payment, $5-10K maintenance fees over the life of the patent, depending upon whether the company is a large or small entity. Internal costs must be added to that number as well. If foreign protection is desired in a small handful of industrialized countries, that number may go up by a factor of 10. 5 INTELLECTUAL PROPERTY – COMPANY MARKET VALUATION According to some experts, over 85% of the market valuation of the S&P 500 is represented by intangible assets, including intellectual property. This percentage is probably even higher for newer S&P companies such as GOOGLE and Akamai Technologies Inc. INTELLECTUAL PROPERTY LANDSCAPE There are only a limited number of ways to protect intellectual property, assuming that it is even protectable. These include patents, trademarks/trade names/trade dress, copyrights and trade secret. A. Trade secrets: Two fundamental concepts of trade secrets are as follows: 1. Trade secret must be something that is used in business and which gives the owner a competitive advantage and is capable of remaining a secret. 2. The owner of a trade secret must take reasonable measures to maintain its secrecy, such as limiting access to the information deemed to be a trade secret, or providing such information to others on a “need-to-know” basis only, and having contractual clauses which prevent the employees from divulging the information. Trade secrets are most often used to protect proprietary portions of technology, such as formulas, manufacturing processes, business strategies, business management information, customer lists, and design concepts. There is the Uniform Trade Secret Act, but trade secret laws vary by state. B. Trade secret vs. patent Trade secret Patent Potentially indefinite Limited lifetime Not registered or disclosed. Rights are not Granted by the USPTO. Rights are available available for public inspection for public inspection. Can be separately discovered and all rights end Provides protection in exchange for disclosure and provides the rights to exclude others. Provides protection from separate discovery Remedies only if the secret is illegally Remedies for infringement whether appropriated deliberately or inadvertently appropriated Generally less expensive Generally more expensive Generally not available for cross-licensing Potentially useful for cross-licensing 6 Source: (partial) http://www.uspto.gov/web/offices/dcom/olia/ip_mrkt_place/03patents_nashville.ppt. When deciding whether to pursue patent protection for an invention that is likely to be patentable but could also be held as a trade secret, the most important consideration is whether a competitor can reverse engineer the invention. It is generally not illegal to try to reverse engineer a company’s product for the purpose of understanding how it is made and how it works. Industrial processes (e.g., chemical manufacturing, recipes) are often good candidates for trade secret protection because of their difficulty in reverse engineering. While there is plenty of empirical data on the outcome of patent litigation, there is very little empirical data regarding how companies fare when forced to litigate trade secret theft. One recent study by Lerner devoted a good part of his paper just to the difficulties of performing the study and gives the following overview of the outcome of the studied cases (underlining added for emphasis): In a little less than two-fifths of the cases, the trade secret was found to have been violated. Only 9% of the cases, however, record the damages awarded in the case. This limited coverage reflects the fact that in some cases, the court’s decision focused on whether the verdict was correctly determined, referring the question of appropriate damages to another (typically lower) court to determine. (Of course, in some cases, the trade secret could have been found to have been stolen but no damages awarded the aggrieved party.) In those cases where the damages were determined, they averaged $1.5 million in 2004 dollars. This is less than one-third the mean level of damages in the patent cases examined by Moore [2000].