Patent law

The Value of a Patent: Determining When it is Worth the Trouble and Expense Melody B. Wirz Douglas J. Sorocco © 2003 Dunlap, Codding, & Rogers, P.C. In a 1859 address, President Abraham Lincoln, a patent holder, stated that the patent system “added the fuel of interest to the fire of genius.” By rewarding inventors for their innovation, we provide inventors the incentive to share their discoveries. In fact, the possible reward often drives Because we reward innovation. Research and development would not occur in the commercial setting without the potential reward of a patent. innovation this way, patents are all around us. patents. What is a patent? A patent is a property right granted by the government to an inventor that permits the inventor to exclude others from making, selling, or using an invention for a limited period of time. A patent does not guarantee that the inventor can himself make, sell, or use the invention (for example, an invention on a nuclear warhead). In order to receive the patent grant, however, the inventor must provide a full and enabling description of how to make and use the invention. Such a “quid pro quo” ensures that the public receives a full disclosure of all the technology and the invention does not remain locked away as a trade secret. As such, patents play a key role in promoting innovation and encouraging public disclosure and rewarding the inventor. Once the owner of an invention has been granted a patent in any particular country, he has the legal authority to exclude others from making, using, or selling the claimed invention in that country, for a fixed period of time. In this way, inventors may prevent others from benefiting from their ingenuity and, ultimately usurping financial rewards due the inventor. In return for ownership rights (i.e. exclusionary rights), the inventor must disclose to the public all details of the invention sought to be patented. In particular, the inventor must disclose and enable background information (what is called the “state of the art”), the nature of any technical problems Knowing how to properly manage intellectual property rights is crucial in any endeavor involving solved by the invention, a detailed description of the invention and how it works, and illustrations of the invention where necessary for a full and A patent granted in one complete understanding of the invention. Patent protection is geographically limited. given country does not extend its ability to exclude to other countries. In order to obtain foreign protection, inventors must file an application in each country where they desire exclusionary rights. To maintain the enforceability of a patent, the owner must also pay maintenance fees in each jurisdiction . Failure to do so will cause the patent to become abandoned and the exclusionary rights to lapse. Many countries also require that the patent be “worked”—i.e. the invention covered by a patent must be put to a commercial use within a specified period of time. The United States, The however, does not have a “working” requirement, and an inventor is free to simply exclude others from making, using, or selling the invention. inventor, in the U.S., does not have to make their invention. The inventor may simply exclude others from making, using and selling the patented invention. What is the history of patents? The word patent comes from the Latin term “litterae patentes” meaning an open letter. Such letters were used by medieval monarchs to confer exclusionary rights and privileges. With the royal seal, the letters served as proof of exclusionary rights for all to see. While the first system for patenting inventions cannot be attributed to any specific country, it is generally acknowledged that the first informal system was developed in Italy during the Renaissance. This system was introduced into the rest of Europe by emigre Venetian glassblowers who wished to protect their skills and product designs from being copied and used by local workers. The first recorded patent of invention was granted to John of Utynam. In 1449, he was awarded a 20-year monopoly for a glass-making process previously unknown in England (subsequently, he supplied glass for the windows of Eton College Chapel, UK). In return for this monopoly, John of Utynam was required to teach his process to native Englishmen. Such a “teaching” requirement is at the heart of all modern patent systems. Once again, the quid pro quo is fulfilled. The inventor receives the exclusionary right and the patent document must teach the public how to make and use the invention. Of course, the public may not actually “use” the invention disclosed until the patent expires. In North America the colonies adopted a similar system of limited patent monopolies. Following the American revolution, Article I, section 8 of the Constitution was ratified in 1788 to read: “The Congress shall have 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 writing and discoveries.” Authors are granted copyrights and inventors are granted patents. During the 1980s, supra-national patent-issuing authorities such as the European Patent Office and World Intellectual Property Office (WIPO) developed. These supra-national patent offices enable an inventor to file simultaneous patent applications in member countries. In 1995, US patent law was modified following the General Agreement on Tarriffs and Trade ( GATT) to more closely harmonize the United States Patent and Trademark Office (USPTO) practice with the patent systems found in numerous other countries. One major difference remains, however. U.S. patent law grants the patent to the first person to invent while most foreign countries grant the patent to the first person to file the patent application. This difference in patent systems oftentimes leads to complex and unforeseeable outcomes— i.e. one person may have the patent in the U.S. and another in a foreign country. Where can the law governing patents be found? The current law governing patents in the United States can be found at Title 35 of the United States Code, §§ 1-376. What does a patent do? A patent gives its owner the right to exclude others from making, using, or selling the claimed invention. Patent owners use this right to prevent competitors from copying their invention. If someone does copy the invention, the patent owner may sue for infringement. There is not a requirement to “police” the patent, however, and a patent owner may elect to sue all, sue none, or pick and choose who to sue for patent infringement. Patent owners often license their patents to others in exchange for some consideration, such as a license fee and royalties. License fees may be substantial, while royalties usually range from 3 to 5 percent of total gross sales of the item. U.S. universities, for example, collect more than a billion dollars a year in license fees. Patents can also be powerful marketing tools. By claiming ownership of patents in a particular area, the organization is established as an authority in the field. Such dominance in a particular filed may be used to keep competitors out of a particular market or the dominance may increase the possibility of partnerships or commercial development. Why get a patent? In a modern society, patents are a valuable and indispensable property for inventors and corporate entities. competitive advantage can be patented in Anything that provides a some form or another. Accordingly, if market research indicates that profit can be increased by selling, licensing or using an invention, then the costs of obtaining patent protection are substantially less than the lost opportunity costs. It may also be worth obtaining a patent on an invention simply to keep others from using it. For example, an oil company develops a car that runs on water. The oil company would certainly want to keep others from making the invention, yet it may not find the car as profitable as the oil business. Therefore, the oil company would obtain a patent for the sole purpose of keeping the invention from ever appearing in the marketplace. In summation, if an inventor or company believes that they have an idea that gives them a competitive advantage over their competitors and desires the right to exclude others from making, using, selling, renting or importing their invention, for any reason, then they need a patent! What can and cannot be patented? According to 35 U.S.C. § 101, any person who “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.” The term “process” means an act or method and primarily includes industrial or technical processes such as an oil refinement method. “Machine” as used in the statute is given its ordinary and plain dictionary meaning. The term “manufacture” refers to any article such as a flower pot, watch, or eyeglass lens. Finally, the term “composition of matter” relates to chemical These classes of subject matter taken together compositions and may include mixtures of ingredients as well as new chemical compounds. include practically everything under the sun which is made by the hand of man and the processes for making the products. There are some limitations on what may be granted a patent, however. The Atomic Energy Act of 1954 excludes the patenting of inventions useful solely in the utilization of special nuclear material or atomic energy for atomic weapons. Abstract ideas or mathematical formulas cannot be patented. Machines or processes that use such formulas (such as E=mc2) may be patented. In general a patent will be granted on an invention so long as it is (1) patentable subject matter (a process, machine, manufacture, or composition of matter); (2) new or “novel” (it has not been invented before); (3) not subject to a statutory bar (it has not been made public in any way, anywhere, prior to one year before filing); (4) useful (i.e. it has “utility”); and (5) nonobvious. The invention must be “useful” in order to be eligible for patent protection. In order to be deemed “useful,” the invention must have a A perpetual substantial and credible use. It must also have a credible “operativeness,” that is, it must operate to perform the intended purpose. therefore, non-useful and barred from patent protection. requirement is not difficult to meet. found useful as entertainment. The non-obvious standard requires that in order to obtain a patent, the invention must not be obvious to others of ordinary skill in the art or field of subject matter to which the invention pertains. Notably, a patent that combines two or more previously known or patented inventions may be patentable itself, as long as it would not be obvious to one of ordinary skill in the art to make the combination. For example, a combination of a plow and a gun would not be obvious. What are the types of patents? There are three types of patents: plant patents, design patents, and utility patents. Plant patents are granted to anyone who invents or discovers an asexually reproduces any distinct and new variety of plant. Design patents are granted to anyone who invents a new, original, and ornamental design for an article of manufacture. when the generic term “patent” is used. Utility patents are the most common type of patent and the type of patent generally referred to Utility patents are granted to anyone who invents or discovers any new and useful process, machine, article of manufacture, or composition of matter, or any new useful improvement thereof. How long do patent rights last? motion machine cannot operate to perform the intended purpose and is, The usefulness For example, the Pet Rock must be Utility and plant patents are granted for a term that begins on the date of the grant and ends 20 years from the date the patent application was first filed. Design patents last for a term of 14 years from the date of the grant. A patent holder loses exclusive rights to the invention when the term expires or when periodic maintenance fees are not paid. It should be noted that the length of protection changed in 1995, so patents granted before then (those that are now expiring) are subject to a grandfather clause and may have a different term—i.e. 17 years from issuance or 20 years from the date the application was first filed, whichever is longer. What is a business method (business process) patent? Simply, a business-method patent is the same as any other patent, except that the subject matter relates in some way to a method of doing business. Generally speaking, there is no concrete definition of a businessmethod patent, just as it's difficult to categorize inventions in many other fields. Notable examples of business method patents include the following: (1) Priceline’s “Reverse Auction” Patent (U.S. Patent No. 5,794,207), for a “method and apparatus for a cryptographically assisted commercial network system designed to facilitate buyer-driven conditional purchase offers”; (2) DoubleClick’s Banner Ad Patent (U.S. Patent No. 5,948,061), for a “method of delivery, targeting, and measuring advertising over networks”; and (3) Open Market’s Electronic Shopping Cart Patent (U.S. Patent No. 5,715,314) for a “network sales system.” Is software patentable? Yes, software may be patented in addition to being copyrighted. The primary benefit of protecting computer software through the patent system is the strength of protection provided by the patent laws. An issued patent covering software will usually prevent others from utilizing a certain algorithm without permission from the inventor, or may prevent others from creating software programs that perform the function of the software. By contrast, copyright law only prevents the specified copying of a particular expression of an idea—i.e. the specific software code. Copyright does not protect the functional aspects of the code. Copyrights are useful for software since they can be used to prevent the total duplication of a software program as well as the copying of a portion of the software code. Copyright also provides a degree of non-exact copying or protection against infringement, such as the near duplication of screen displays or the creation of “cloned” software. Courts have recently been reluctant, however, to In interpret and broaden the scope of copyright protection as needed. the expression of an idea, and not the idea itself. addition, the basic tenet of copyright law is that copyright will only protect Consequently, a registered copyright will not prevent the creation of a competing program that utilizes the same ideas as an existing program. A patent will, however, protect such functional utilitarian ideas. As a result, software patents provide much greater protection to software developers than a copyright registration. The benefits of obtaining patent protection can be extraordinary, as shown by Stac Electronics’ recent $120 million patent infringement award against Microsoft based on a data compression patent. As developers have begun to comprehend the Currently, thousands of enormous potential of software patents, patent applications based on software inventions have increased exponentially. “software patents” are issued every year, covering such diverse areas as business software, expert systems, compiling functions, operating system techniques, and editing functions. Who can get a patent? In the U.S., only individuals may apply for a patent. This does not, In order to however, mean that the companies employing the inventor are unable to own, use or profit from the invention covered by the patent. claim ownership rights, the company must have a clause in their employment contracts stating that the employee assigns all patent rights to the company and have the inventor explicitly execute an assignment document for each application filed. The filing of the patent is still done on behalf of the employee, but the rights are assigned to the company and this assignment is indicated on the front of the issued patent. Assignment records are also searchable at the U.S. Patent and Trademark Office. Some foreign countries allow the company to file the patent application in its own name as “applicant.” Who can file a patent application? There are three categories of individuals who may file a patent application and related documents: patent attorneys, patent agents, and individual inventors filing pro se. Patent attorneys and agents must have a technical degree and represent clients (inventors, corporations, etc.) by filing and prosecuting patent applications. office. Patent agents are non-lawyers and are capable of representing clients on all matters before the patent Patent agents cannot represent clients in court, draft contracts or other legal documents, and other “legal type” activities. Any inventor can file a patent, without regard to age, nationality, mental competency, incarceration or any other characteristic, as long as he is the true inventor. Dead and insane persons may even apply for a patent, through a representative. Where are patent applications filed? Patent applications are filed in the USPTO (United States Patent and Trademark Office). The office is located in Alexandria, Virginia. Patent applications can be “filed” with the USPTO by depositing the application in the U.S. Mail via “express mail”. Virginia. When should a patent application be filed? What if the invention is still experimental? Thus, an applicant and/or their attorney does not have to actually file the patent application with the USPTO in Generally speaking, the first inventor of a claimed invention has the sole right to file for and receive a patent in the United States. However, there are certain deadlines an inventor must meet in order to avoid the loss of their right to obtain patent protection. In order to preserve their rights, the inventor must file a patent application with the USPTO within one year of the first date on which the invention was in public use or on sale. The interpretation of the terms “public use” and “on sale” encompass an infinite variety of factual situations and are difficult to generalize here. However, to be on the safe side, the inventor should consider that any time an invention is disclosed to another party or used by the inventor for purposes other than strictly experimentation, the statutory period of one year has likely begun to run. An application must be filed within that one year period of time. In most foreign countries, the patent application must be filed prior to any public use or sale. It is said, therefore, that foreign countries have an “absolute novelty” requirement—i.e. if the invention was used or sold publicly the day before an application was filed, the inventor is barred from obtaining a patent on their invention. As such, the U.S. and foreign patent systems are at odds with one another: the U.S. patent laws provide for a one year grace period while foreign patent laws institute a draconian absolute novelty standard. In light of such discrepancies, if the inventor or corporation anticipates that they desire foreign protection an application must be “on file” with either the USPTO, or under some circumstances, one or more foreign countries before the invention is sold or publicly used. The U.S. grants patents to the first person who invents while most foreign countries grant the patent to the first person who files the patent application. Since it is the first inventor who is solely entitled to a patent in the United States, it is very important that each inventor maintain clear documentation evidencing the dates of creation of each aspect, step, or embodiment of the invention. While maintaining confidentiality, it is good to have drawings, descriptions, inventive ideas and new thoughts put on paper, preferably in a bound sequentially dated notebook. These tangible drawings and writings should be dated, witnessed, notarized and/or preserved. Can an invention be protected without a patent? What about trade secrets? Interestingly enough, the answer is “yes.” While no patent protection exists in the United States unless and until a patent issues (i.e. rights accrue and flow from the patent being granted), a trade secret (whose rights accrue immediately upon conception and continue indefinitely so long as steps are taken to guard the secret) is another way to protect an invention. Generally, patents grant a limited monopoly in exchange for public disclosure—a quid pro quo. Trade secrets are the opposite. No protection is granted by the government and no disclosure is required. secret protection is lost completely if a disclosure is made. In fact, trade The invention sought to be protected must be kept “secret”—if it is publicly disclosed, it is no longer secret. Patents are preferred over trade secrets for any item that may be reverse engineered since trade secret protection does not include reverse engineering. How much does a patent cost? The costs associated with filing, prosecuting, obtaining an issued patent include legal fees, filing fees, prosecution fees, translation costs and maintenance fees. Generally, the cost to file a patent application (including all legal fees and filing fees) is between $6,000 and $8,000 for a mechanical invention and $7,000 to $15,000 for a complex electrical, chemical, or biotech invention. Additionally, maintenance fees payable over the life of the patent are currently between $3,000 and $6,500. How long does it take to get a patent? Currently, it takes two to five years from the filing of the application to get a patent in the United States. During this period of time, the inventor or company may make its products with the “patent pending” designation. Is a prior art search necessary? How much does it cost? A prior art search is the first step in determining whether an invention is patentable. If the invention is not new or if it is obvious to someone familiar with the technology, it cannot be patented. A prior search attempts to answer these two questions prior to expending the cost and effort of filing a patent application. Patent searches range in price from a few hundred dollars (simple computer keyword search) to a few thousand dollars (full search by patent attorney at USPTO). While this may appear at first blush costly, a search may reduce or eliminate other costs (such as filing) if the search determines that the inventor is not the first person to develop the invention. The patent office does not require a prior art search, however. At one end of the spectrum, the inventor may file a patent (and pay the filing fees) only to find out that his invention is not patentable based on the search conducted by the patent office. At the other end of the spectrum, the inventor may obtain a patent, market the invention, and later find out that the patent is invalid due to a previously unknown invention of a third party. A patent search is not a 100% guarantee: rather, it is a tool for information that can be used by an inventor to weigh the risks and benefits of going forward with obtaining a patent. What is a provisional patent application? When should it be used? A provisional patent application is a procedural tool that inventors may use to quickly file patent applications. The provisional patent application Provisional must only describe how to make and use the invention. applications are less expensive to prepare than a full patent application and provide the inventor or company a year of “pendency” which allows for an in-depth assessment of the provisional application and also “saves” foreign rights—if a provisional application is on file prior to the sale or disclosure of the invention, the inventor has a one year period of time (from the filing date of the provisional application) in which to file foreign patent applications. Another benefit of filing a provisional patent application is that it also allows the inventor to mark his invention as “patent pending.” Provisional applications do not, however, give the inventor the right to exclude others from making, using or selling the invention. The provisional application must be “converted” into a regular, “nonprovisional” patent application within one year of the filing date of the provisional patent application. The regular application will then be examined by the patent office and, if the claims are in a condition for allowance, will mature into an issued patent. What international considerations should be addressed? There is no such thing as an international patent. The limits of patent protection only extend as far as the borders of the country granting the patent. Therefore, if the product will be made, used, or sold in multiple countries, separate patent applications must be filed in each country where protection is desired. The cost and filing requirements of patent applications in foreign countries varies widely, depending on the country or countries in which protection is sought. The greatest expense in filing applications in foreign countries is the cost of translations with the average cost of twentyfive thousand U.S. dollars for filing a 100-page application in Japan, for example, with the translation cost making up approximately twenty thousand of that amount. How much is a patent worth? In short, whatever someone is willing to pay for the patent or whatever it is worth to keep your competitor(s) from making, using or selling your invention. For a thorough discussion of patent valuation, see “Patent Valuation: Impacts on Damages,” by Mohammad S. Rahman (6 U. Balt. Intell. Prop. J. 145). There are a number of general factors useful in determining or setting the value of a patent. Valuing an invention prior to patenting efforts or activities is important to consider in the initial determination of whether to go forward with patenting the invention at all. Business sense dictates that it is not worthwhile to obtain a patent on something that will not return a suitable profit. Valuation of an existing patent is important to considerations or transactions involving: acquisitions and mergers, dissolution of a business, bankruptcy, and infringement analysis. Since patents are an intangible asset, it is often difficult to assign a monetary value to them. The method of determining the worth of a patent depends on what information is available. There are two general ways to value a patent: accounting analysis and economic analysis. Accounting analysis is the simpler of the two. An accounting only works, however, if there are balance sheets that reflect the historical cost of the patents. The historical costs are usually the costs in obtaining the patent, but these costs may also include the cost of the patent as it relates to a licensing agreement or a merger and acquisition of assets. The problem with using an accounting analysis for valuation is that this method provides a cost, but does not accurately capture or reflect the value of the patent. The value of a patent may be very different from the actual cost to obtain it. An economic analysis looks to three primary methods for valuing a patent. The cost approach, the income approach, and the market approach. The cost approach seeks to determine value by asking what the replacement cost would be. Under this theory, fair market value is equal to the cost of reproduction or replacement less the physical depreciation, the functional obsolescence, and the economic obsolescence of the patented technology. The cost approach may also be a poor choice of test method as it does not take into account the fact that a product may be inexpensive to develop yet yield large profits. The income approach is considered the most accurate method for patent valuation. valuation. This method looks to future cash flows in determining Although the income approach involves future assessments of economic benefits, this method is not generally thought of as being overly speculative. It is a common finance practice to discount future values to Several factors present values in order to determine the current value. should be considered in estimating future cash flow: the health of the economy, profitability of the product, competition in the field, and capital requirements. The final method of valuing a patent is the market approach. This methodology involves determining what a willing buyer would pay for similar property. For this, four assumptions are inherent: (1) the existence of an active market; (2) past transactions of comparable property; (3) free and open access to pricing information; and (4) an arm’s length transaction. It is usually difficult to find a similar product that is still distinct enough not to infringe, which makes comparability a big obstacle. Factors to consider when looking for a comparable product include the following: (A) similar industry characteristics, (B) similar profit histories, (C) comparable market share or market share potential, (D) similar responses to new technology, (E) similar barriers to entry, and (F) similar growth prospects. If the difficulty in finding a comparable product can be overcome, the market approach is generally a very accurate method of determining patent value. How can profitability be determined? Is it worth filing a patent? There are typically two major factors to look to for determining whether an invention will be profitable enough to justify the expense of patent protection: marketability and competition. In order to determine marketability, one should look to four basic questions: (1) what are consumers looking for ; (2) does the product meet their needs ; (3) is the price reasonable in light of those needs that are met ; and (4) are these things true for many or only a few people. It is essential that these questions be answered objectively, without dreams of riches and glory—i.e. “yellow pad money.” The marketable lifetime of the patent should also be considered. Markets can change quickly because of new technology or fleeting public interest in the product. Potential competition is also very important in determining the benefits versus cost of obtaining patent protection. Unless the invention is truly innovative, meeting a completely new need, competition is inevitable. The full range of advantages enjoyed by present and potential competitors must be considered. scale. Things to weigh include goodwill, skilled personnel, wellestablished distribution channels, access to raw materials and economies of If a new invention competes with a product everyone knows and loves, the new product has little chance of commercial success. What are the parts of a patent, and what part of the patent really matters? A complete patent application is made up of several elements. A utility patent application includes a specification, often supplemented by drawings, which describes and enables (i.e. teaches) the invention’s different embodiments in enough detail to allow a person of ordinary skill in the art to understand and practice the invention without undertaking undue experimentation. The specification must include a description of the best If the application is a complete mode, which is what the inventor(s) considers to be the best current version of making and using the invention. application (not a provisional application) it will also include an abstract (a brief summary of the invention) and will conclude with one or more claims, which are the legal description of the invention. The claims are drafted to provide the broadest possible coverage of the invention. The claims form the legal basis for protection. The inventor can (and probably should) have several claims for each patent. The aim or goal of the claims is to ensure that the inventor covers all aspects of his invention—i.e. methods of making it, methods of using it, as well as the objects/items made by it. While some of the claims will cover individual features of the invention, others will cover broader elements. In litigation, and in patent drafting, the claims are absolutely the most important component of the patent. They are what legally defines the subject matter that is protected, and what is in dispute almost every time a dispute arises. Simply, the claims are like the metes and bounds found in a real property deed— anything that falls within the claims (i.e. metes and bounds) is owned by the inventor who may keep others from making, using or selling the patented invention. What constitutes infringement? Is there a presumption that an invention cannot infringe, when a patent is granted? Infringement is generally defined as making, using, selling, or offering to sell an invention patented by another, without the inventor’s authorization. The following may also give rise to infringement liability in the U.S.: (1) directly infringing a patent; (2) inducing another to directly infringe a patent; (3) contributorially infringing a patent; (4) importing, selling, offering to sell, or using a product made abroad through a process protected by a U.S. process patent; or (5) manufacturing or selling certain components of a patented invention to be assembled abroad. presumption can be rebutted. While the granting of a patent does give rise to a presumption of validity, this It should be noted that a product can be Such a Subservient granted a patent by the USPTO, yet still infringe another patent. patent is subservient to the dominant patent in the field. technology. What if someone infringes? Where can a patent suit be filed? Because federal law creates patent rights, patents necessarily invoke federal question jurisdiction of the federal courts. The appropriate trial court to hear federal questions is the federal district court. cases must be brought in a federal district court. court. Therefore, patent As long as personal patents generally occur when the invention is an improvement to existing jurisdiction can be obtained, a patent suit can be filed in any federal district Because patent suits are generally complex, lengthy and costly, certain district courts may be preferred. For example, the Western District of Wisconsin, among others, is known as a patent litigation “rocket docket.” As a result of this, many patent cases are filed there, giving the court a good working knowledge of patent cases, which makes it even more attractive for patent suits. What about assignment and licensing of inventions? Are there any special considerations? In the United States, patents may only be filed in the name of the inventor. This does not mean that the inventor cannot assign or license In fact, he can do so For an some or all of his interest in the invention. contemporaneously with the filing of his application in the USPTO. assignment to be fully effective, it must be recorded in the USPTO. Licenses and security interests are not required to be filed in the USPTO. However, the USPTO will accept and record such documents in order to give third parties notification of equitable interests or other matters relevant to the ownership of a patent or application. Generally, a patent license is like any other license, and all the same considerations apply to drafting. There is one major additional If consideration, however, when drafting a patent licensing agreement. incorrectly drafted, the license agreement may establish patent misuse and render the patent invalid and/or place the licensor in a position of violating federal antitrust guidelines. What constitutes patent misuse? In general, patent misuse exists when the inventor has either engaged in conduct involving the patent that amounts to a violation of the antitrust laws or improperly sought to expand the scope of the patent (either in a physical or temporal sense). Antitrust violations involving patents include: (1) controlling the resale price of a patented product; and (2) the use of a patent on one product as a means to coerce the sale of another product or the sale or license of another patent. While violations of the antitrust laws involving patents is generally the largest category of patent misuse offenses, patent misuse can also arise without violating antitrust laws. If an inventor or company improperly attempts to expand the physical or temporal scope of a patent, the requirements of antitrust laws (e.g., anti competitive effect of the conduct and individual harm) need not be proven. payments on unpatented For example, coercing someone to sign a license agreement that calls for royalty products or royalty payments beyond the expiration of the patent in exchange for rights in and to the patented invention would be patent misuse. While the expression “patent monopoly” is frequently used, a patent does not actually provide a monopoly; rather, it provides a right to keep others from making, using, and selling the patented invention. antitrust laws or otherwise engage in patent misuse. How are damages determined in patent litigation? The owner of a U.S. patent has the right to prevent others from making, using, or selling the claimed invention. If the inventor cannot obtain voluntary termination of an infringing activity or settle the dispute through means of a license agreement, he may seek redress by initiating litigation in a federal district court. One of the remedies generally sought in such litigation is an injunction. The injunction may be a preliminary injunction pending the outcome of litigation and ultimately a permanent injunction prohibiting infringement of the patent. The value of an injunction is that the refusal to obey its terms opens the party to penalties for contempt of court. As the inventor has no rights until the date the patent is granted, generally there can be no award of damages for activities prior to the issuance of the patent (some pre-issuance damage may be recoverable if the patent application was published and the accused infringer had actual notice of the published patent application. After issuance, the inventor is entitled to collect damages from the date that the patented product is marked with the actual U.S. patent number. Failure to mark the product will These exclusionary rights exist so long as the inventor does not violate the result in damages not being available until the infringer receives actual notice of the patent. By statute, the inventor, may be awarded 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, together with interest and costs as fixed by the court. The court may also award interest from a time prior to entry of the judgment and it also has the power to increase the damages up to three times the amount found (i.e. trebling the damages). Trebling is generally considered and awarded when the infringement has been deemed willful—e.g. the accused infringer knew of the patent and continued to sell the product anyway. In exceptional cases, the court may award reasonable attorneys’ fees to the prevailing party. There can be no recovery for infringement committed more than six years prior to the filing date of the complaint. Thus, it is very important to “police” competitors’ activities such that infringement litigation can be commenced promptly. According to statute, damages must be adequate to compensate the claimant for the infringement and the absolute minimum must be no less than a reasonable royalty. Proof of such damages and what constitutes a reasonable royalty, however, can be very difficult to ascertain. It is common to employ expert testimony by a financial or patent expert in order to define appropriate compensation. As a general starting point, one looks at sales that the defendant made from the infringing activity. Specifically, one must determine which profits would have been the plaintiff's profits but for the infringement by the defendant. The inventor must also prove that there was a demand for the patented product during the period of infringing sales, that there was an absence of acceptable non infringing substitutes, and that the inventor had the ability to meet the demand for the products covered by the patent. The inventor must then provide a detailed computation of the amount of profits he would have made had he made the sales actually made by defendant. As previously mentioned, In order to minimize the likelihood of the infringer going unpenalized, patent law provides for compensation to the inventor of not less than a reasonable royalty. For example, there may be situations where the inventor is not in the business of marketing the product or he is unable to prove the profitability of selling or using the patented product. If the inventor has an existing license with a third party, the royalty rate paid under the existing license would certainly be relevant in establishing a ‘reasonable royalty.’ Extenuating circumstances would also contribute to determining the maximum. For example, the existence of the infringing activity could have reduced the inventor’s ability to exact a higher royalty from the licensee. Also, the infringing activity may have resulted in competition that produced price cutting. Another compensation. issue that arises occasionally with respect to patent infringement damages is whether the entire product should form the basis of Generally, the basis for compensation will be the entire product only where the patent was granted for the entire product or the patented component gave the article substantially its whole commercial value. Otherwise, the inventor has the burden of proving a basis of proportioning profits between the patented and unpatented portions of the product sold. The law does not permit recovery of indirect consequential damages resulting from patent infringement. For example, the fact that the inventor may have suffered competition and loss of business outside of the infringing item or been required to borrow money at a higher interest rate is not generally considered proper grounds for compensation. It is important to remember that the amount of damages recovered by the prevailing inventor is directly related to their ability to prove lost profits or a reasonable royalty. Thoroughness in maintaining records, discovering information from the infringer, and having proper guidance by experts significantly contributes to enhanced damages recovery. How are reasonable royalties calculated? With respect to patent holders, the patent statute 35 U.S.C.§ 284 provides that, “Upon a finding for the claimant 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 of the invention made by the infringer, together with interest and costs fixed by the court.” While royalties are recognized as economic compensation for the injured party, the royalty determination does not have one standard analytical framework to give fact-finders a consistent basis for making damage awards. Many accepted principles have emanated from case rulings. For example, Georgia-Pacific v. United States Plywood Corp. represented a significant advancement in determining a reasonable royalty by providing 15 factors to consider when calculating an amount to compensate an inventor. With an emphasis on economics, the Court recognized the importance of the profits to be gained and those to be lost in the bargaining for a license as well as comparable rates as a useful benchmark or starting point. GeorgiaPacific stands overall for the principle that royalties be determined as a result of a hypothetical negotiation at the time of infringement between a willing licensor and a willing licensee. The 1978 Panduit Corp. v. Stahlin Bros. Fibre Works, Inc. case promulgated the concept that the willingness of the parties involved in the negotiations was not relevant but rather the most important factor was the relative bargaining positions and profit expectations of the parties at the time of infringement. In Bio Rad Laboratories, Inc. v. Nicolet Instrument Corp., the Court ruled “though established (industry) royalty rates are normally applicable...they do not necessarily establish a ceiling for the royalty that may be assessed” For example, the reasonable royalty determined by the District Court in Rite-Hite Corp., et al. v. Kelley Co., Inc. was a royalty that equated to 50 percent of the patent owner's lost profits. This reasonable royalty was heavily based upon the unwillingness of the intellectual property owner to enter into the hypothetical licensing negotiation. Analyzing the negotiations from both parties’ perspective was emphasized in the recent decision in Grain Processing Corporation v. American Maize-Products Company that placed importance upon the non-infringing alternative that may not have been, but could have been, available to the licensee at the time of the hypothetical dealings. to negotiate. The several approaches and accepted methodologies for the determination of reasonable royalties that have grown out of the patent area have also been used for damage awards in trademark, trade secret and copyright cases. Overall, in any type of case, a reasonable royalty determination must take into account both parties’ licensing perspectives. Evaluation of the economic and market factors coupled with a sound analytical model to calculate the royalty provides a sound alternative economic remedy. Summary Because inventions can be very valuable assets, it is necessary for the inventor to carefully consider whether to get a patent. The first consideration in this decision is whether the invention is even patentable. If the invention is patentable, the next consideration is whether a patent is the preferred method of protection. While patents offer a high degree of There is also fairly substantial The inventor should weigh these marketing as well as protection, the coverage is limited in time. cost associated with obtaining a patent. The differential in costs or profitability impact was determined to be what the infringer would have been willing and most likely factors against the potential value of the patent. To determine the value of the patent, the inventor must look at potential competition. The inventor may also assign value to potential assignment After weighing all the necessary and/or licensing. Additionally, he must consider the limitations on filing suit if someone does infringe his patent. to obtaining a patent. Once an inventor has decided to get a patent, he has three options for filing. He can get a patent attorney, get a patent agent, or file it himself. In all three instances, there are a number of considerations surrounding the filing. The inventor must make decisions regarding international filing, If provisional applications, and prior art searches. He must also be sure that his invention meets the statutory requirements for patentability. everything goes well, the inventor will eventually obtain a patent. After getting a patent, the inventor can do anything he wants with it. He can sell the invented product, he can give the product away, he can do nothing with the patent, he can sell the patent itself, he can give the patent away, or he can license the product. drafting can cause loss of patent rights. While patents offer broad protection, one must consider a number of issues throughout the patent process. Issues arise in considering a patent, obtaining a patent, and using a patent. While each option has some ramifications, licensing agreements require special consideration as poor factors, the inventor is equipped to make an informed decision with regard