New Zealand: Patent protection isn't just about beating the competition - protecting your investment in R&D

You could let your competitor use your innovation for a royalty payment as well.

I'd say most Kiwi businesses applying for patents do so to stop others stealing their technology. It's usually about protecting the company's patch from unwanted and unfair competition.

This is an entirely reasonable motive in many circumstances - why should another business profit from your clever thinking and investment in R&D?

However, it could make sense to let your competitor profit from your innovation if that means you also make more profit.

I'm talking about is a form of patent¹ licensing where you let your competitor use your innovation in return for a royalty payment. This payment has a number of benefits in this circumstance.

Firstly, it may create a long term price or profit advantage over your competitor because you don't have to pay the royalty to exploit the same innovation. The royalty can be re-invested in new R&D to ensure your business stays ahead of the competition. Secondly, you might negotiate a reporting mechanism to calculate royalties to facilitate payment based on sales. This means you may get periodic reports on your competitor's sales, which can be useful² information. Thirdly, if you permit your competitor to use your innovation for a reasonable fee, you remove much of the incentive for that competitor to design around your patent.

This strategy was successfully adopted by IBM. Its licensing policy said no innovation was sacrosanct - anything could be licensed out to anyone, including competitors. While the policy was borne out of an agreement to resolve antitrust litigation in the US in the 1950s, IBM decided in 1991 to continue with the open licensing policy because it had served them well since the 1950s. It is reported that IBM generates over a billion dollars annually in technology licensing.

Granted, no New Zealand company has a patent portfolio to rival IBM's. However, the principles are similar, regardless of company size. I'm also not suggesting this open licensing approach will suit all companies or all industries. But any New Zealand company that has international patents can make good money by making licensing part of its business model.

Royalty income goes straight to the bottom line because the costs to develop the IP³ are all sunk and there is no marginal cost to let another business use the IP. If you're in an industry where the profit margin is 20%, then for every $100,000 of royalty income you generate you would need to make $500,000 in sales to deliver the same amount of profit.

Generating additional profit through licensing is therefore a second motive for seeking patent protection.

A third motive is increasing your chance of investment funding. I have heard a venture capitalist say he receives about 300 business plans per year, which he has to quickly whittle down to around 10 companies he is prepared to invest in. Part of the process of culling business plans is putting them through a rough and ready filter. He uses tick boxes like a strong customer need; an experienced management team, scalability and barriers to competitor entry.

Patents provide the barrier to entry and allow that box to be ticked. I'm not saying you will get investment because you have a patent, but rather your plan won't get thrown on the scrap heap because you didn't have a patent.

A fourth motive is to create assets that international business understands and can attribute value to, for the purposes of a trade sale. It is far harder to understand and value know how or a trade secret than it is a patent. A patent is recognised as an asset and has boundaries defined by the patent claims⁴.

Without patents to define the boundaries of the competitive advantage enjoyed by the vendor, the purchaser is likely to heavily discount the value of any know how or alleged trade secret. Not only do patents establish a portfolio of readily tradable assets, they play a role in market signalling because once published⁵ they are searchable. A large multinational looking to buy a smaller, innovative company in a trade sale will likely search patents in territories of interest - so if you had a strategy of filing for patents for all your new inventions or improvements, you will be found by this multinational acquirer. This was part of the strategy adopted by Bomac Laboratories, which ultimately led to its acquisition by Bayer last year.

New Zealand businesses need patents in their arsenal. Wielded deftly and with precision, they can add significant value to your business.

Footnotes

¹ A proprietary right in an invention which provides the owner with an exclusive right for up to 20 years to make, sell, use or import the invention. In exchange for this monopoly the patent is published so that others can see how the invention works and build on that knowledge. The patented invention may also be used by the public once the patent lapses.
² The document that accompanies a patent application. It defines the scope of the invention in the claims and provides a detailed description of the nature, use and purpose of the invention. A specification may be provisional or complete and there are different rules applying to each.
³ Refers to the ownership of an intangible thing - the innovative idea behind a new technology, product, process, design or plant variety, and other intangibles such as trade secrets, goodwill and reputation, and trade marks. Although intangible, the law recognises intellectual property as a form of property which can be sold, licensed, damaged or trespassed upon. Intellectual property encompasses patents, designs, trade marks and copyright.
⁴ Numbered paragraphs at the end of a patent complete specification which define the scope of the invention protected by the patent. The purpose of the claims is to define clearly and with precision the monopoly for which protection is sought so that others know the exact boundaries of protection.
⁵ At some point a patent application is published, meaning its contents are available for anyone to read. In New Zealand publication occurs when a patent application is accepted. However, in most countries publication occurs 18 months after the application is filed.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

James and Wells is the 2010 New Zealand Law Awards winner of the Intellectual Property Law Award for excellence in client service.