IP management has been transformed by the success of inter partes review, which provides a cost-effective way of challenging weak patents. Further, large patent portfolios are inherently expensive (ie, involving filing, maintenance and attorney fees) and frequently comprise weak patents. Therefore, traditional IP management schemes can fail to protect a company’s significant investment in innovation and new products, despite the huge sums devoted to patent filing and maintenance fees.
Emerging best practices in IP management reflect a growing awareness that the traditional management approach is extremely wasteful and significant improvements could be made through eliminating or reducing sources of waste. This belated recognition is similar to efforts championed by Toyota, Ford, Honda and other auto companies 20 years ago to redesign their manufacturing and product development processes in order to eliminate waste.
To understand the major sources of waste associated with traditional IP management and to quantify its impact, the following data from Global Prior Art, Inc’s internal database – covering 35 years of research and over 15,000 topics – is illustrative:
- More than 50% of a firm’s patents can be invalidated by a skilled searcher using a low (eg, accelerated exam-type search) or moderate search effort.
- More than 90% of a firm’s key patents can be invalidated with an inter partes review quality search, which extends the coverage of a typical moderate-level search.
- Many patents that survive an invalidity test lack economic value because they cover outdated technology.
- Only 4% to 5% of a company’s patents are both useful and able to survive an invalidity challenge.
These waste sources result in significant cost and IP risk, which can be quantified. They also suggest that a disciplined strategic approach that entails a moderate level of IP research upfront allows for weak patents to be removed (50% of filings), while creating stronger claims for the remainder based on prior art. The introduction of market and competitive analysis information yields a further screen to limit and focus a portfolio.
This scenario examines the cost of eliminating 50% of a company’s patent filings by conducting a moderate due diligence effort upfront to eliminate waste. The cost associated with such waste can be derived from industry data, such as the American Intellectual Property Law Association’s (AIPLA) 2017 Report of the Economic Survey. For example, in an IAM Yearbook 2016 article on patent portfolio pruning, Alex Butler and Daniela Hoya estimated that a business unit with $1 billion in annual revenue would file 100 patent families annually, which represents a patent development expense of $25 million to $40 million and an annual ‘patent carrying’ expense of $7.5 million.
In addition to the patent filing and maintenance fees noted in the literature, portfolios comprising weak patents involve high costs. These expenses, along with their impact and an estimate of their cost, may be summarised as follows:
- Defending patent infringement suits and licensing fees: $6.6 million to $13.2 million annually ($6.6 million is the AIPLA estimated cost to defend a patent infringement suit (Section 337), with more than $25 million at risk; further, this scenario assumes that annual licensing fees fall in the same range, bringing the total litigation and licensing cost to $13.2 million).
- Cost of pulling a new product back from the market due to freedom-to-operate issues: $20 million to $50 million.
- Cost of wasted product development and R&D effort: 10% of R&D or $10 million.
- Total expense due to poor patents and associated IP risk or waste: $36.6 million to $73.2 million.
These figures illustrate that adopting best practice in IP management has a ripple effect that is much greater than the savings that can be attained solely by portfolio pruning. A disciplined and strategic approach to IP management that eliminates weak patents and yields strong patents will reduce risk and exposure to litigation, which result in higher corporate profitability.
Our next report will dive deeper into the transformations affecting best practice in IP management, which include dramatic shifts in the perception and implementation of intellectual property, including new performance metrics and organisational structures.
This article first appeared in IAM. For further information please visit www.IAM-media.com.