While all companies invest resources in developing and improving their products and services, few actively consider using the patent system to leverage their investment. Innovation can result from improving the efficiency of existing processes or just adapting products to market needs. For example, a supplier may invest resources to modify a product to meet a need of a customer. From a marketing perspective, the key focus is maintaining or enhancing the company’s market position, and once one project is complete, the focus switches to the next.

However, pausing to consider the strategic use of the patent system could be useful in protecting the company’s market position on a longer term basis. If a company patents an innovation, then a competitor cannot use that innovation. Obtaining a patent can therefore prevent a competitor from introducing a “me too” product, or from using a process enhancement to reduce their production costs. Accordingly, patenting an innovation can increase a company’s market share by preventing copycat products, or by enabling a company to lower its sales price while maintaining its profit margin. A patent may also enable a company to enhance its profit margin by allowing it to position products having unique features at a higher price point.

The ability of a business to identify, patent, and exploit its innovations is therefore a key factor to remaining competitive in today’s marketplace. But how can a business owner, accountant, or consultant identify whether a company is developing innovations worth patenting? The company’s financial statements may provide several indicators.

In some cases, a company’s financial statements will specifically list research and development expenses. Further, a company may apply for research-based tax incentive programs such as the Federal Scientific Research and Experimental Development (SR&ED) Program, the Ontario Research and Development Tax Credit (ORDTC), or the Ontario Innovation Tax Credit (OITC).

In other cases, costs associated with innovation may not be clearly isolated. Even if a company has a research and development facility, innovation may arise from the work of employees in other departments, including those involved in product testing, client support teams, product support teams, and market research groups. Employees involved in analyzing a company’s products may develop ways to improve the products. Employees involved in assessing a client’s needs and analyzing the market place may envision new products or may be involved in adapting technology to meet a specific need. The work of any of these employees could result in innovations worth protecting. Therefore, company expenses could be analyzed to isolate costs associated with potentially innovative business activities. If such costs are significant, then a review could be conducted to determine if the resulting work is yielding innovations that may be worth patenting.

A more counter-intuitive indicator that a company may be developing innovations worth patenting is diminishing profit margins or sales of a product. High profit margins and sales immediately following the release of a product may result from the first-mover advantage in introducing innovative features that appeal to consumers and differentiate the company’s product in the market place. A subsequent erosion of revenue attributable to that product may indicate that the product’s innovative features were inadequately protected, allowing competitors to flood the market with similar or identical products to gain market share. Although such erosion of revenue may also be attributed to market saturation or loss of consumer interest, a pattern of diminishing sales revenue following product launches may be indicative of a company that is innovating but underutilizing patent protection to entrench its market position and guard profit margins. In such cases, bolstering the company’s bottom line may require adopting a more aggressive patent filing strategy.

Not all innovations are worth protecting. Determining which innovations to protect requires analyzing the significance of the development to future revenue streams. It also requires analyzing the likelihood that investing resources to obtain patent protection will provide a scope of protection sufficient for the company to maintain a competitive market position. Accordingly, an understanding is required of future products that may incorporate the innovative technology, as well as the patent landscape. One way to conduct the analysis is to have an innovation review team comprising members of the business unit, the technology team, and patent counsel meet to review innovations and select which to patent. While an innovation may involve a substantial technological breakthrough, it may not be worth protecting if it does not contribute to the product strategy of the company. Conversely, a slight advance in a field may form the foundation for a new product platform. Despite a lower likelihood of obtaining significant patent protection in cases of marginal technological advances, the projected revenue stream from future products may indicate that protection should nonetheless be sought.

While not all patent applications are successful, the failure to seek protection enables competitors to reap the benefits of your company’s innovative efforts. Obtaining patent protection can help maintain your company’s profit margins and market share, and ensure continued success.