9 Out of 10 Patents are Probably Worthless: Why and How to Prevent this from Happening to You (Part 1 of 4)

If 90% of patents are worthless as business assets, then most patent spends are wasted.
If 90% of patents are worthless as business assets, then most patent spends are wasted.

I decided to start 2010 with a controversial premise:  what if 9 out of 1o patents–or 90 %– issued in the US were worthless?  Believe it or not, but this probably is not too far off the mark.  By “worthless,” I mean that it is likely that only 10% of patents in force today meet each (and every) of the below criteria:

1)  The patent directly or indirectly protects a product or technology that is being sold in the market today;

2)  The patent covers a product or technology where there is or likely will be viable competition in the marketplace such that a patent is needed to legally restrain competition; and

3) The patent owner is ready, willing and able to bring a patent infringement suit against an infringer or it is likely that your competitor believes that it will possibly do so.

Unless each and every criteria stated above are present, it is my strong opinion that the patent (or pending patent application) is effectively worthless as a business asset.

If you are someone who views the world of patents from a business or corporate perspective, you might recognize where my 90 % figure comes from.   For most people with such experience, an objective assessment would likely elicit a frank response that you saw more money wasted on patent filings than was actually seen as creating value for the organization.  But, far too few people enter the patenting process with such a realistic assessment of the actual likely worth of their efforts and, if they did, there would likely be significantly less patents filed every year.

Certainly, my contention will be controversial and, indeed, is intended to be so.  But I speak from deep and relevant experience about the actual value of patents to business (which is to be contrasted with the value of patents from a legal perspective).  As both a law firm equity partner and as a senior corporate IP lawyer for a major multi-national corporation, I was exceedingly well-compensated to obtain patents on behalf of my clients and, because my job description was to do so, I was focused on the end goal of successful completion of the patenting process once it got underway.   As a result, patents didn’t seem to be “worthless” from that vantage-point; to the contrary, I could–and did–come up with any number of rational reasons why patents were critical to protect my clients’ business interests.  And, truth be told, there were a number of patents I obtained and managed over the years that were undoubtedly critical to the business success of a number of my clients.  However, the number of ultimately worthless patents far outweighed the number of valuable patents.

For certain industries, such as pharmaceutical and medical devices, patents are undoubtedly critical to overall business success.  But, patent “normal” for these industries does not mean that all industries must follow the same patent strategies.  Patent specialists who are embedded in the world of patent filings may not objectively recognize the distinctions and, as a result, they may end up providing advice to their clients that is skewed to the “you should file” side of the inquiry.  (Indeed, I never got paid for saying “no you don’t need a patent” when I was a law firm lawyer.)  It is my strong belief that the clear value of patents to a small number of industries or products–which are trumpeted by the media on frequent occasion–skews the picture for the rest of us.

Hindsight is, of course, 20-20.  If my clients had not obtained the few valuable patents over the years that ended up protecting their core products from competition, then those clients would, admittedly, been in a world of hurt.  And, pharmaceutical companies and the like might cease to exist in current form if patent coverage no longer served to allow them to recoup the extensive R&D and clinical costs required to get a new drug to market.   Nonetheless, my 15 or so years of experience in the IP world demonstrates that for most companies it often is good fortune that a patent ends up having value any value whatsoever to its owner.  For deep pocket companies, it may not matter so much that they are wasting money on worthless patents, but for smaller organizations, the money spent on patent protection could mean the difference between getting the product to market or going belly-up.  (But, I also contend that worthless patent protection is value destroying for even those wealthiest organizations because it signals that they are failing to properly manage and maximize their greatest corporate asset–their intangibles.)

So, how does one predict where spending money on patent protection is appropriate?  The easy answer is by embedding IP decisions into the business processes of the organization.  Or, in other words, one must make IP spends a matter for the business team, not the legal or R&D teams.

Think about the way decisions are typically made in the patent and IP space.  The legal team decides from the context of legal relevance:  is an invention patentable and, if so, how broad will the claims be?  The R&D team thinks about the technical merits of an invention:  does this invention show that we are a technically competent organization?  There is nothing wrong with these perspectives; they are merely the point of view the respective parties look at the world.  At the end of the day, however, these perspectives likely reflect little on the business objectives of the organization.

For those organizations where IP is recognized to comprise a significant aspect of corporate value–which is an increasing number of companies today–the question of whether to obtain a patent must be asked from the viewpoint of:

Irrespective of whether this invention is patentable or whether it signifies that we are a technically competent organization, does filing for a patent or pursuing an already-filed patent support the business goals of this company?

To answer this question, business people must be able to state the 3 questions above in the affirmative.  If the answer to any of these is “no,” then the resulting patent must be considered to possibly or even likely comprise a wasted corporate asset.  Either it will end up in the sunk cost category of corporate spends or it could even result in corporate value being destroyed.

In Parts 2-4 of this 4 part series, I will offer a detailed discussion of each of the 3 criteria set forth above that need to be answered in the affirmative in order to validate moving forward with obtaining patent protection.  Hopefully, at the end of this series of posts, readers will have a better understanding of how to create and maximize corporate value from patentable inventions by making more business-focused patenting decisions.

5 thoughts on “9 Out of 10 Patents are Probably Worthless: Why and How to Prevent this from Happening to You (Part 1 of 4)

  1. Hi Jackie, this is a great post.

    My 2010 focus is to better align the legal and technical views on pursuing patent protection for any specific innovation with the business purpose and strategy, so I am eagerly awaiting the next parts in your series on this topic.

    I met you a few years ago at the Corporate IP Institute. I would love to reconnect with you.

    Wishing you much success in 2010 and beyond.

    Best regards,

    Indira Saladi

  2. I agree that many patents are worthless, including the one for a perpetual motion machine I was asked to sell just last summer. But I disagree with your screening criteria.

    My desk is covered with successful inventions which were not in the market when patented. That’s how true innovation differs from incremental improvement. Your first criteria would screen out many valuable inventions.

    Almost by definition, any successful innovation will attract competition in our free market system, so the second criterion is not very useful.

    Lastly, I like to think there are still business people who don’t infringe on other’s patents because it is the right thing to do, and not because of threats of litigation. I do agree that the business case for infringement litigation leaves many patents undefended. However, patents turn innovations into more liquid business assets that can be licensed or sold to large firms with the financial clout to assert the patent and reward the inventor. Just as most tech start-ups these days begin with a short-list of big firms they want to be acquired by (so that their entrepreneur and investors can cash-out), inventors should have to have an acquirer in mind before investing in a patent.

  3. Clyde: I appreciate your comment. Let me address each of your points separately.

    First, as for the point that someone should not invest in a patent unless a product covered by the patent is in the market today or in the future, we don’t disagree. You say in the last sentence “inventors should have an acquirer in mind before investing in a patent.” So, we are saying the same thing here. My main point, however, was that most companies and inventors think about inventions first, not whether the invention is marketable. Without the latter, a patent is just an expensive piece of paper.

    Second, there are actually many products that will not have competition or minimal competition. How many Snuggie-like products do we need? Snuggies has first mover advantage, so they don’t need a patent to control the market, at least as long as it takes for most people who will buy Snuggies to buy them. For many consumer products, the relevant market life is less than the time it takes a competitor to copy it and get it into the market. Also, there are many products were it is unlikely that there will be multiple market channels for identical or similar products–Walmart is an example of this in that once someone is in Walmart and the product sells, there is little likelihood that Walmart will change suppliers even if it could do so. There are more examples that will follow in part 3 of this series.

    Third, yes it is the right thing to do not to infringe, but there are many reasons why someone would not avoid a patent. Maybe they don’t even know the patent exists. In many areas this is the case. Also, if you are not going to sue, your competitor might get a bit closer than it would if it knew you were going to sue. We will certainly see some changes in this regard in the future. Again, more on this in a subsequent post.

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