Understanding the Value of Patents
By Mark Nowotarski, President, Markets, Patents & Alliances LLC
Patents are becoming increasingly important to the high tech industry. The number of patents in high technology is growing by more than 40 percent per year.1 Both startup and Fortune 500 companies are aggressively asserting their patent rights, and the patent laws themselves are undergoing significant and rapid transformation.
Benefits of Patents
The new visibility accorded patents is good for our economy. It testifies to the creativity of our engineers, the foresight of our business owners and the impact of market forces driving our innovation. For the benefits of patents to be fully realized, however, both inventors and investors must understand three key facts: (1) patents reveal secrets, (2) patents give owners the right to exclude others from practicing their inventions, and (3) patents are presumed valid.
Patents are a simple exchange between the public and an inventor. An inventor reveals to the public exactly how to practice a new invention. In exchange, the public, through government policy, grants to the inventor the right to exclude others from practicing that invention for a limited period of time. If the inventor assigns or sells their patent to an investor, then the investor obtains the right to exclude others and thus protects their investment in commercializing the invention.
The value of patents to the public is that they completely and accurately disclose new inventions. And patents reveal secrets: An inventor must disclose exactly how to produce the invention in sufficient detail so that anyone, including competitors, can recreate the product, service, or method. This is called "an enabling disclosure." If an invention is public for more than a year before an inventor files a patent application in the U.S., the invention is considered public knowledge and the inventor is not entitled to a patent. Such rules in Japan and Europe are even stricter. There an inventor is not entitled to a patent if their invention has been public for any period of time before the application is filed.
It is a common perception that patents are often issued on inventions that are already widely known. A major reason for this misunderstanding is that many years can pass between the first conception of an invention and the point at which the corresponding patent finally issues. The public, however, is now learning about inventions much more quickly. The recently implemented American Inventor's Protection Act requires that all U.S. patent applications, with some exceptions, be published 18 months after they are filed. This should increase the value of patents to the public by shortening the time between when an invention is made and when it is revealed. It also helps reduce the damage caused by so-called "submarine patents." These are patents that have been kept secret for many years by extended processing in the patent office. By the time they surface, the inventions they claim have become widely adopted. The patent holders can then attempt to demand large license fees. Submarine patents are rare, but their impact can be substantial.
The classic example of a submarine patent is the "Computer on a Chip" patent issued to Gilbert Hyatt.2 The original application was filed in 1970, but the patent didn't issue until 1990. Hyatt then successfully licensed the patent for more than $70 million.3 That kind of money, however, provokes determined opposition. Texas Instruments (TI) challenged the Hyatt patent contending that one of its employees, Gary Boone, invented the computer on a chip first. At last count, the Federal Circuit Court agreed with TI stating that Gary Boone's invention was made before Hyatt's and that the "single chip" part of Hyatt's patent was therefore invalid. Fortunately for Hyatt, another more valuable part of his patent, "microprocessors with interrupts," still stands unchallenged.
The American Inventor's Protection Act seeks to compensate inventors for early publication of their discoveries by granting provisional rights to charge "reasonable" royalties on the inventions claimed in their applications. They are entitled to these royalties as long as the patent that finally issues has claims "substantially identical" to the original application. There is a lot of uncertainty as to what that means, and there are other important conditions, but the net effect of the law is to increase the value of patents for patent owners.
The chief value of a patent to its owner is the right to exclude others from practicing the invention for a limited period of time. In the U.S., this is a fundamental right guaranteed by the Constitution: "The Congress shall have the power ... to promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive rights to their respective writings and discoveries."4
The right to exclude is the most misunderstood aspect of patents. Most people think that a patent gives an inventor the right to practice his invention, but this is not true. No less an inventor than Thomas Edison understood that the right to exclude meant that a third party could prevent him from practicing his own inventions if that party owned a patent that covered his basic ideas. His solution to that dilemma, which is still considered the best approach today, was to conduct a thorough search to identify any patents that covered his intended method, contact the owners of those patents and negotiate a suitable license agreement. When he wanted to develop the light bulb, for example, he secured a license from Henry Woodward and Mathew Evans. Woodward and Evans owned a patent5 that covered the basic approach Edison wanted to take.6 Their patent disclosed an electric light bulb that used a carbon filament, but their filaments burned out quickly and required excessively high currents. Edison solved both problems with a high-resistance carbon filament. He then pursued his own patent7 on the improvements and successfully commercialized his invention. Edison could have been stopped in his tracks if he had not obtained a license from Woodward and Evans first.
U.S. patents are presumed valid by U.S. courts unless proven otherwise. This is a critical point to keep in mind to avoid dismissing a patent because it seems obvious or is otherwise invalid. The light bulbs of Woodward and Evans were not practical, but their patent was valid. Invalid patents do issue, and the American Inventor's Protection Act has given third parties new ways to challenge them. However, these remedies have serious practical limitations. The definitive way to prove that a patent is invalid is to violate it, get sued and argue your point in court. This is an expensive means of proving a point. Edison's approach is better: If you discover a patented invention similar to yours, presume the patent is valid and secure a license early in the development process.
Patents will continue to gain importance as a foundation for our economic recovery. They reveal new inventions. They protect inventors by giving them the right to exclude others from practicing their inventions. They are presumed valid. These are the three most significant facts about patents that both inventors and investors need to understand to fully capitalize on their value.
1. United States Patent and Trademark Office web site, www.upsto.gov.
2. Gilbert Hyatt, "Single Chip Integrated Circuit Computer Architecture," U.S. patent 4,942,516, July 17, 1990.
3. John Markoff, "For Texas Instruments, Some Bragging Rights," New York Times, June 20, 1996.
4. U.S. Constitution, Article I, Section 8.
5. Canadian patent application 3738, 1874.
6. Dr. A. Carty, "History of Canadian Invention," Speech to Canadian Science Writers Association, Ottawa, Ontario, Canada, May 22, 1999.
7. T.A. Edison, "Electric Lamp," U.S. patent 223,989, Jan. 27, 1880.
Based on original article in Advanced Packaging July, 2002
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