Germany: Patent Strategy - Preliminary Aspects of License Agreements

Dr. Uta Köster is an attorney-at-law with a doctorate degree in Biology. Her practice focuses on Patent law, particularly, Biotechnology patents. She is an associate with the Munich based Intellectual Property Law firm Bardehle Pagenberg Dost Altenburg Geissler.

In particular, during the past 10-15 years the awareness for the value of intellectual property within companies has risen enormously. If before 1985 there might have been a certain general hesitance towards filing applications, today there is a veritable race for protection which is reflected in the exponentially rising statistics of applications for patents and trademarks in Europe and the U.S. as well as in the other major industrialized countries.

While earlier the first priority was to file a patent (or utility model) application for any invention that seemed to be "patentable", there has now been a certain shift towards a more strategic approach. Patents and Intellectual Property (IP) in general are undergoing a revolution with regard to their appreciation as intangible assets. Surveys on the most valuable trademarks (with Coca-Cola ranking traditionally first) as well as horrendous sums paid in damages for patent infringement are no longer published only in specialist magazines.

Today, up to 85% of the value of the market capitalization are attributed to the intangible assets of a given company. Up-to-date studies by financial service providers show that the highest rate of return with regard to investment is achieved in a company by its immaterial values. This term subsumes technical property rights such as patents and utility models, trademarks, copyrights, designs, know-how, but also other trade secrets, data banks, concepts, methods and other knowledge and abilities of company employees.

Reasons for the growing importance of IP are:

• the advancing globalization of the economy with the consequences of

• growing competition between companies

• growing piracy of products

• stagnating return rates (profits) from material assets of companies in many industrialized countries such as Germany and Japan and, therefore, the necessity to maximize the return of (investment) values - not only from tangible company assets

• growing awareness for the importance of protecting Intellectual Property

Modern companies are learning to appreciate their intangible assets or IP as "profit centers" as opposed to "cost factors". They have come to treat their IP with the same care in financial administration as the material values of the company, the "tangible assets" (i.e. machines, real estate, reserves, products etc.)

Starting from the USA, but in the meantime also in Europe and in the other parts of the industrial world, companies are increasingly trying to build up their Intellectual Property in a strategic way, i.e. to evaluate and use it advantageously with regard to market competition and cost/benefit ratio. "Patent Strategy" which is also being called "Intellectual Asset Management" (IAM) employs specialist IP-lawyers, patent attorneys and economists. The integration of law, business and technical disciplines necessitates the development of new strategies and processes. These are introduced in companies in order to exploit existing property rights or Intellectual Property , but also to exploit evolving IP with a view to maximizing income, in particular, from license fees, as well as to reduce tax and to build up strategic advantages against competitors and to raise the shareholder value.

• Strategic alignment of research and development (inventions)

• a focussed build-up of a patent portfolio and patent management

• market analysis

• strategic product development

• research for and monitoring of competitor's property rights

• valuation of internal and external property rights

• in- and out-licensing

• estimating internal and external risks of infringement

• enforcing and defending property rights

The above criteria of "Patent Strategy" can be applied in principle to other property rights, like trademarks, copyright, know-how, et seq.

The basis of "Patent Strategy" is the principal effect of a patent, namely the granting of a "right to prohibit" third parties from using the invention. The aim of a modern company is a strategically optimized patent portfolio. Such a portfolio has three main functions: First, a protective function, in particular, in the form of (legal) protection of infringement of external property rights by products or technologies owned by the company and at the same time the guarantee of the own (technological) "freedom to operate". Secondly, the attack function in the form of excluding competitors or limiting their freedom to operate by augmenting market shares and turn-over by way of out-licensing. This also applies to the possibility of putting ones own property rights on the table as a counter balance in confrontations with competitors (cross-licensing). Last but not least, there is a marketing function behind the patent: A strategically optimized patent portfolio is an expression of the technical supremacy of a company, of its positive attitude towards research and development and business strategy which, in turn, is strengthening acquisition of orders, credit worthiness and shareholder value.

The processes of Patent Strategy can be divided into early and late processes. Early processes of Patent Strategy define processes that reach up to the existence of a property right or up to the development of a strategic patent portfolio; late processes of Patent Strategy are described after the coming into existence of a property right or a portfolio.

The following steps are meant to interact with each other and are the basis for building a strategically optimized patent portfolio within a company. However, they also apply in the framework of an examination of an existing patent portfolio.

As one of the first aspects of Patent Strategy in the early phase, the current or the targeted market for the technology in question as well as for the products of the company should be defined. The own product information and prognosis is to be drawn up by way of identified market shares and turnover information (such as development, geographic distribution and tendencies).

The fields of technology relevant for the company should be identified. From this basis the companies competing in the relevant market area of technology can be found. A comparison of competition can be made and the competitive conditions can be analyzed clearly.

A further aspect, primarily in the early phase of Patent Strategy, is the conduct of searches for prior art. Searches for prior art are to be conducted with a view to relevant property rights of thirds, but also with regard to other scientific state of the art in the relevant area. In particular, the technological profile of competitors is to be identified and their patent portfolio is to be scrutinized with precision. A patent portfolio should include, along with granted patents, also national, European or international patent applications, which are publicly accessible 18 months after the application date. Here, a permanent monitoring of the patent applications of direct competitors is advised.

Existing property rights of third parties in ones own technical field as well as patent portfolios of competitors can be revealed with the help of online search. On the internet, searches can be conducted with the help of commercial online-databanks (such as Inpadic, World Patent Index and others) or directly at the patent offices in the Patent Roll, or lately also via accessible databanks there.

A searcher can look up, for instance, the names of competitors, who show up in the patent specification as applicants or as patent owners, or he/she can search for property rights or whole families of patents from certain fields of technology via the patent classification number or with "key words". Even the legal status of a property right can be revealed (for instance, whether an opposition procedure is pending).

Further, it is advised to analyze the characteristics of the competitor's patent portfolio. This facilitates a precise estimation of the subject matter of the patents (or of the applications) as well as their potential scope of protection. This method helps to achieve a realistic delimitation to ones own technology. The degree of the internal "freedom to operate" can be defined and gaps in the legal protection can be identified. Thus the internal and external risk of infringement as well as the potential to circumvent internal and external property rights becomes calculable. There is nothing worse than to start a production without patent protection, only to collide later on with a property right of a competitor.

A combined overview of the market and product analysis, on the one hand, and the analysis of the competitive situation and the competitor's portfolios on the other can thus yield precise directions for the research and development from which patentable inventions are expected.

Today, the decision which invention shall be patented in which country is made increasingly with an evaluation of legal and economic factors. In addition to clarifying the question of patentability, a weighing of cost / benefit should be a priority.

In Germany, the Act on Employees’ Inventions ("Arbeitnehmererfindungsgesetz") is regulating within the frame of its scope of application the ownership of inventions as special law to the Patent Act. Every employee - with the exception of freelancers or members of a partnership (BGB, KG, OHG) - has to report his/her invention to the employer. Service inventions made during employment are treated as opposed to free inventions, that have been made without relating to an employment. Since the abolition of the privilege for university teachers (§ 42 former version) on February 7, 2002, all inventions made by members of universities have to be reported, be it professors or any other employees of academic institutions.

For the inventor, any authority of free use is to be excluded. However, in principle, employees’ inventions made within companies are service inventions. These can be claimed limited or unlimited by the employer within four months, or they can be released. On the receipt of the declaration of an unlimited claim, all rights to the invention are transferred to the employer, including the right of a previously made patent application by the employee. There is no protection of good faith.

In that case it is necessary to amend the patent application. Any previous assignment of the invention by the employee to third parties are void with respect to the employer. There is no protection of good faith.

With regard to the situation of ownership, additional contractual obligations should be examined, in particular of non-employees such as freelancers, or agreements with external contractual partners such as co-operations. Amendments or changes have to be administered where necessary.

In any case the patent should not be allowed to generate more costs than profits. For a cost/benefit analysis it is decisive to think in a product oriented manner. A potential profit resulting from the invention is to be juxtaposed with the costs of the patent application, the maintenance of the patent and, if necessary, the costs of the defense.

The costs for a patent application can be roughly calculated by estimating in how many countries patent protection will be sought and how long the examination and granting procedures will take. In general, companies residing in Germany first file a German patent application. Then, within the 12 month priority deadline, they file in other countries. There is a choice between the European application procedure (EPC) - alternatively to separate applications in other countries around the world - or the international (including the EPC countries) PCT-application procedure (Patent Cooperation Treaty).

The advantage of a PCT-application procedure in comparison to an EP application with additional national applications (for instance in the U.S. and Japan) consists, on the one hand, in the reception of a search report and a preliminary examination report (chapter II PCT) for a first estimation of the patentability of the invention. A further important advantage is, that the fees for the foreign application in the national / regional (EP) phase are only due 31 months later, counting from the date of application. Therefore, with the PCT-application, the applicant has time - under simultaneous protection of the invention by way of a national priority-application - to calculate the risks of investment and probability of grant until he starts into the national/regional phase, without having to pay the fees for the foreign applications.

It is advised to strive for the broadest possible and most clearly delimitated scope of patent protection for the invention or for a series of inventions. Here, the state of the art is of foremost relevance. The protected technology of the competitors, i. e. the patent protection of competing products, are the demarcation line to ones own protection. There have been situations when, after searches for third parties’ property rights and state of the art, novel and unprotected technological niches have been explored which could be occupied with internal patent applications and patent protection.

The late phase of Patent Strategy with existing property rights is implemented by the so-called "patent portfolio management". In addition to an analysis of the existing patent portfolio, the valuation of the property rights as well as the exploitation of property rights are of particular relevance here.

There are numerous companies that own hundreds if not thousands of patents, which they use to strengthen their market power and their position in the context of license negotiations. The management of large patent portfolios requires considerable resources. In particular, special decisions have to be made concerning the sustaining or giving up of individual patents. As with the decisions on patent applications, these decisions should be made in regular accordance with current market and product analysis, with R & D projects and the results of the monitoring and analysis of the competitor's patent portfolios.

A further target of the portfolio analysis or portfolio maintenance is to identify new fields of application for the protected technology of the company and to find technologies that supplement the patent portfolio with regard to in-licensing.

An important aspect in the context of patent portfolio analysis is the valuation of property rights. Besides the question of maintaining or giving up certain property rights, the following criteria for an economic valuation of property rights may be conceived:

• investment and financing by external investors
• securing of credits
• company due diligence (for example before an initial public offering)
• striking of the balance, calculation of profit and loss
• fiscal aspects
• company controlling
• merger & acquisition acts
• remuneration of employee-inventors
• cost risk of lawsuits (investigating the value in litigation)
• calculation of damages in patent infringement (with the method of license analogy)
• exploitation of property rights (such as licensing, transfer of patents)

Patents and other industrial property rights and their valuation are playing an increasingly important role with due diligence in the context of company transactions. Possibly the most frequent case of patent valuation is the licensing or sale of a patented invention or of an invention that has been filed as a patent. The concrete value of an invention mainly depends on the current individual situation. It does not make much sense to name a certain method for patent valuation to be generally applied. A multitude of factors are influencing the value, in particular, existing factors of uncertainty and risk in the valuation of technical property rights.

Technical, legal and economic factors in relation to a protected invention may appear in the context of a patent valuation. As far as they are calculable, they should be included in the respective patent valuation.

There are three dominant traditional methods of patent valuation which are repeatedly mentioned in the literature: The cost-oriented method, the market-oriented method and the profit-oriented method. None of these methods encompasses the whole range of influences that become manifest in the value of a patent. In the literature as well as among practitioners, there is a consent that none of said traditional methods used on its own will approximate the objective value of a patent. The values resulting from these methods should, therefore, be interpreted with caution and should only be used as approximate values.

a) The cost-oriented method determines the patent value on the basis of all factual and fictional costs that have originated or will be originating in connection with the patent. The costs are added and inserted as the patent value. In this process, the following cost categories are considered: direct patent costs (for application, maintenance, defense) and indirect costs (which are, for example, caused by reaction of the competition), historical costs (such as costs of personnel, material, R & D), costs for production and marketing etc. The disadvantage of this method is, that there is no clear correlation between the patent costs and the patent value, and the sum of the costs is rarely corresponding to the real value of the patent.

b) The market-oriented method uses prices realized from the sale of comparable patents or licenses of comparable patents as a basis for the determination of the patent value. A weakness of this method lies in the investigation of comparable property rights. The market value of a patent can be an important factor of orientation, however, the sum, which a buyer is prepared to pay, does not always mirror the objective value of a patent.

A well known market-oriented approach for the valuation of patents is the license analogy. It is applied with the calculation of damages in patent infringement suits as well as with the remuneration for employees' inventions and, in certain situations, with the negotiation of license fees. Here, a price is established, which the licensee would be willing to pay for utilization of the patent.

c) The profit-oriented method uses, in order to determine the patent value, the profits made by a patent. Firstly, those profits are investigated, which are expected to be made directly or indirectly from the patent. Then the expected duration of exploitation of the patent is estimated and the calculated profit after tax is discounted.

For a realistic and fair patent value, additional indicators related to the individual case should be considered together with the criteria of the above-mentioned traditional methods (costs, market and profit). It is a regularly returning phenomenon, that a patent with a strong market performance backed up by an attractive product, is not necessarily a legally strong patent, and vice versa, a legally strong patent cannot always be well exploited commercially.

The following list provides, in addition to the above-mentioned risk factors, further important factors of influence, which may be examined by IP-lawyers or patent attorneys and which should also be taken account of in the patent valuation.

• scope of protection (wording of the patent claims)
• possibilities of circumvention for competitors
• life of the patent (max. 20 years as of application)
• territorial validity
• patent situation (external patents)
• pending opposition and nullity procedures
• infringement suits against third parties / own infringement
• dependencies
• technological branch
• inventive step (only further development)
• additional know-how
• investment and production costs
• invention of employee

Besides the realization of the above mentioned criteria for patent valuation (e.g. investing and financing et seq.) the possibilities of exploitation of patents and/or patent applications can be better estimated, in case they can be based on the basis of an investigated patent value (the same holds true for trademarks, copyrights, know-how etc.) Particularly, possibilities of exploitation are:

• out-licensing of internal technology
• supplementing internal technology by in-licensing
• suing third parties for patent infringement
• co-operations in R & D
• sale of property rights
• joint venture, merging of companies

With regard to the exploitation of property rights, aspects of licensing are clearly in the foreground. Considering the various processes of patent strategy allows for a number of the goals of patent strategy to be realized, such as maintaining the internal exclusivity or exclusion of the competition, a limited opening of the market for competitors, access to new markets, strategic choice of potential licensees (strategic alliances) and determination of licensing fees.

© by Uta Köster, 2002. This article was first published with Patent World, London, Nov. 2002

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.