The US Patent Office's Impending Financial Crisis and What Sort of Disruptive Innovations Might be Seen as a Result

My postings have been light for the past few weeks because of the Holidays. I plan on re-posting regular content after the New Year. Nonetheless, I couldn't help posting something this week during my vacation after coming across this wonderful analysis of recent patent issuances post-KSR from Matt Buchanan of the Promote the Progress website and blog. Matt's analysis of PTO issuances over the past several years shows that KSR definitely had an effect on the number of patents issued in the last year.

What is obvious from Matt's 2008 issuance data is the fact that the PTO experienced a significant decline in revenue over the past year due to the reduction in issue fees paid by successful patentees. Moreover, this revenue decline will certainly be felt over the next 10 plus years as a result of a reduction in maintenance fees that would have been paid for these issued patents. When coupled with the current economic crisis and the need for the U.S. government to fund agencies and projects that are arguably much more critical to the health of the national economy, there is no doubt that the PTO will be faced with a significant revenue shortfall in the immediate future. As an additional issue, with the huge budget issues that the U.S. government will be facing, I believe it is highly doubtful that the PTO will see the end of fee diversion in the foreseeable future. Taken together, these factors lead me to predict that we will soon see irrefutable evidence that the PTO is in a "world of hurt" from a revenue perspective.

The good news may be that, like for the rest of the US economy, near collapse of the existing status quo may provide opportunity for the PTO to experience disruptive innovation. This is in contrast to what, in my opinion, has been only incremental innovation over the past several years. What do I think such innovation would look like?

First, I think the archaic "count system" by which PTO examiners are evaluated should be rejected wholly. This "game" allows patent examiners to work the system and reject applications for trivial reasons. While many patent applications are bogus and should never be filed in the first place, the count system sets up a bureaucratic maze whereby the merits of a patent application are often lost in the process of proving the examiner wrong. As a result, many bad patents issue, many good patents don't issue and the costs of obtaining patent protection are undoubtedly magnified. Indeed, I believe the only beneficiaries of the PTO count system are patent attorneys who get rich arguing with patent examiners.

A further disruptive change that should happen in the PTO is the elimination of the requirement that examiners have "face time" on a regular basis at the PTO facilities in Alexandria, Virginia. That is, although many examiners work from home, they can do so only up to 4 days a week, with the additional day requiring "hoteling" at a shared office space in the DC area. With all due respect to those living in Metro DC, the cost of living there is not conducive to encouraging people to establish roots in the area, a fact which reduces the ability of the PTO today to hire employees who seek to join the PTO as a career. As a result, turnover at the PTO has been horrendous in recent years.

Moreover, many examiners are young and appear to me to often be minimally supervised. In my opinion, this lack of experience and supervision no doubt reduces issued patent quality because these examiners do not have the substantive knowledge to apply decades of detailed patent caselaw correctly. Additionally, this lack of experience and supervision certainly increases the probability that reactionary rejections will occur because such youthful examiners often fail to fully comprehend the nuances embedded in decisions such as KSR.

In a personal correspondence to me on Twitter, Matt Buchanan wondered aloud whether regional/satellite PTO facilities would accommodate the need of the PTO to improve its ranks of long term employees. While I would rather see a wholly virtual PTO examiner corps, if the leaders of the union representing patent examiners (Patent Office Professionals Union) will not agree to such a radical reinvention of the PTO examiner corps, Matt's idea would appear to address the currently conflicting requirements of PTO union "face time" and the need to develop career PTO examiners who can provide for their families in locations with significantly lower costs of living than the DC Metro area.

Of course, it would also be great if the long reached-for goal of reduction or elimination of PTO fee diversion could occur. However, in the current economic climate it is doubtful that such a radical step will happen. At a minimum, I remain hopeful that the new PTO commissioner to be named in the very near future will be focused toward changing the PTO to make it more efficient and to provide maximum value for both small inventors and large inventors.

Do You Know Your Company Needs Strategic In-House IP Counsel, But Think You Can't Afford It? One Company's Solution is Hiring Part-Time Counsel

Analysts say that the current economic downturn will likely last at least until early 2010. While this no doubt seems like almost an eternity for the average consumer, for business strategic planning purposes, this date is just around the corner. Indeed, business managers at many companies are likely conducting “short term” strategic planning efforts targeted for introduction in mid-2010. This might account for the recent uptick in job postings for experienced corporate intellectual property attorneys. I see this increase in job opportunities as signifying that smart corporate leaders are realizing that sustainable business success requires companies to not only introduce innovative products and technology offerings, but also that they strategically protect such innovations. As a result, I believe that more companies will seek to hire strategic in-house IP counsel, which is good news for us IP types.

Of course, the traditional model of hiring an in-house IP counsel results in significant costs to a company--likely at least $250K per year on a fully loaded headcount basis. Such an expense may be out of the question for many small or mid-sized companies; nonetheless, the cost of hiring a sophisticated in-house counsel does not eliminate the need for innovative businesses to engage strategic IP representation. Put simply, small or mid-sized companies are not immune from competitors’ knocking off of their innovations. IP-related cost avoidance by any sized company engaged in innovative product or technology introductions is therefore a short-sighted policy. Accordingly, small and mid-sized innovative businesses must strike a balance between effective IP protection and headcount cost issues.

From a recent job listing that came across my desk, at least one company--Lydall Performance Materials of Manchester, CT--may have figured out a way to engage high level in-house IP counsel at significantly overall lower headcount expense. They appear to be accomplishing this in a manner that is not obvious in the realm of corporate attorney hiring. Specifically, Lydall seeks an experienced in-house IP counsel for 20-25 hours a week working primarily from home. Such an arrangement presumably also reduces the need to provide benefits to the attorney as well as the requirement to provide her with office and support staff, thus further reducing the overall headcount costs normally associated with hiring in-house counsel. It is likely that Lydall’s part-time in-house IP counsel hire will cost it less than ½ the cost of hiring a full-time counsel.

Judging from its product and technology focus, there is little doubt that Lydall needs to engage strategic business-focused IP counsel to maintain its competitive advantage. Indeed, Lydall's website states that it is a "specialty engineered products" company. By definition, specialty products serve a differentiated need in the marketplace and, as such, require protection through IP strategy to prevent others from knocking off that same technology. Nonetheless, a review of the public patent record indicates that Lydall has not been a particularly prolific filer in recent years. The US Patent Office records reveal that Lydall filed no patent applications between 2001 and 2006, and only 6 applications have published since then. Although Lydall has apparently not aggressively protected its innovations in the past, by hiring an in-house IP attorney, albeit a part-time one, Lydall is signaling that it intends to ensure the sustainability of its current innovations by developing and executing on a business-focused IP strategy.

And, while I have no inside information about its management, I expect that Lydall's current business team understands the critical relationship between sustainable competitive advantage and strategic IP protection. Specifically, if Lydall invests in developing innovative technology and in creating profitable markets for that technology, while not at the same time protecting such innovations with a business-appropriate IP strategy, Lydall will effectively allow its competitors to undercut it on price. When Lydall successfully protects its innovations with a business-focused IP strategy, others must design-around Lydall's innovations, which requires competitors to also invest in R&D. Comparable R&D investment by competitors levels the business playing field and reduces the "free rider problem" for Lydall.

Lydall's decision to hire a part-time in-house IP counsel indicates that this company is "thinking outside the box" of corporate attorney staffing. Moreover, this decision demonstrates that Lydall is getting serious about ensuring that it develops and maintains sustainable competitive advantage in performance engineered materials. This is not only good news for Lydall's investors, but it should also serve as a warning to its competitors. Moreover, other speciality products companies should consider emulating Lydall's smart decision to engage part-time in-house IP counsel to assist their business and innovation teams in developing and executing on a business-focused IP strategy. While Lydall appears to be on the cutting-edge of in-house IP counsel hiring strategies, I predict that other innovative companies will adopt this model in the near future.

Companies Adopting Open Innovation Methodologies Must Incorporate Patent Information for Maximum Value Creation

Open Innovation is unquestionably becoming a "hot" area of focus for U.S. companies, especially in the current economic climate in which businesses are more than ever focused on smarter ways of doing business. And, why wouldn't Open Innovation be an intriguing business model when companies can fill their product and technology pipelines for significantly lower cost and with more variability of ideas than typically is possible from their own R&D infrastructures? As a result, more and more business leaders are today viewing Open Innovation as a necessary direction in which to move their company's innovation efforts.

A fundamental premise of Open Innovation is that good ideas can come from anywhere, even when a company operates in a very specialized core business. Moreover, innovations that come from outside of one's core business, such as in packaging or transportation, are better left to those who specialize in those areas. Perhaps more controversial is the assertion that by relying only on the ideas generated from within, an organization's core business innovations can become self-limiting because the pool of knowledge and idea generation may become somewhat myopic. When properly deployed, Open Innovation methodologies not only can be the source of ideas generated outside of the organization, but can also serve as a catalyst for the existing R&D infrastructure to become more creative. In its best forms, Open Innovation becomes a source of new products and technology, as well as a means to spur the creativity of one's own people.

In seeking to capitalize on the promise of Open Innovation for modern business, many companies are developing internal expertise or engaging consultants to assist them in meeting their goals. These efforts are no doubt critical for Open Innovation success. However, I believe that a missing piece in today's existing Open Innovation methodologies is actionable knowledge regarding how patent information and analysis can be used to improve and accelerate the quest for promising ideas developed outside of one's organization. This belief emanates from my substantive client experience, as well as discussions with innovation professionals from many organizations.

In the aggregate, most innovation professionals conceptually understand that patent information should serve as a source of Open Innovation subject matter. Nonetheless, few of these professionals fully appreciate how patents can be used to improve the efficiencies and successes of innovation processes. Moreover, few patent professionals possess the business competency to translate their specialized patent legal knowledge into a form deployable in the innovation context. As such, a disconnect currently exists between patent information and Open Innovation methodologies. Failure of organizations to fully capitalize on the information available in patents necessarily results in substantial reductions in the payoff obtainable from the adoption of Open Innovation methodologies by a company.

Why do I believe patents are a critical piece to Open Innovation methodology? Put simply--patents can serve as a vertiable "shopping list" for a company seeking to identify innovations available for adoption from outside the organization. By its very nature, a patent sets forth the fundamental basis of the subject matter that the patentee wishes to exclusively own. If the patentee developed a product or technology and later decided not to introduce it into the market, then that subject matter could be essentially market ready (or nearly market ready) for a significantly less cost than to develop a similar technology from scratch within one's own organization.

And, another company's cast-off products or technology are not necessarily "junk." To the contrary, patented products or technology could have been discarded for a number of reasons such as:

• The patentee's strategy changed, thus meaning the products or technology were no longer of business relevance
• The patented products or technology were a non-core aspect of an acquisition and, although valuable to the acquired company, are no longer relevant to the new corporate owner
• The patented products or technology were "ahead of their time" and not appropriate for market introduction at the time the patentee developed them
• The patentee is using one aspect of the patented subject matter, but the products or technology have relevance outside of the patentee's market and could be licensed in an adjacent market

Moreover, patented innovations are by definition proprietary, and, if broadly patented, that innovation can comprise an exclusive product or technology offering to an acquiror. This better assures that the acquired innovation can truly be called a "differentiated" offering that is subjected to a lesser likelihood of being knocked-off by a competitor.

A further benefit to acquisition of another company's discarded product or technology is the attendant "know how" associated with the patented subject matter. When a company identifies a product or technology as suitable for patenting, it is quite likely that it is working to develop that same subject matter as a potential customer offering. Thus, the company typically owns know how and other valuable information attendant to the subject matter of the patented product or technology. By acquiring such unwanted products or technology, a company can obtain much more than is evident from the patent itself. (And, it goes without saying that one should not reject a product or technology on the basis of what the patent itself discloses--there may be much more to the described subject matter than meets the eye.)

An additional, and maybe not obvious, benefit of using patent information as part of an Open Innovation methodology is that by reviewing third party patent information, an organization can develop an institutional knowledge of what is owned by others prior to engaging in substantive internal innovation efforts. That is, if an innovation team knows early the metes and bounds of third party patent ownership, the team can better direct the company's efforts away from known products or technology into previously unexplored areas. This can reduce the potential for patent infringement liability, as well as improving the likely scope of patent protection for the team's own innovations. In this realm, incorporation of patent information into the Open Innovation process can operate as a valuable directional signal for product and technology development.

There are no doubt many additional benefits to using patent information as an element of Open Innovation methodologies. I welcome the comments of others in this regard. At a minimum, however, patent information indisputably can serve as a great source of insight and direction for those organizations that seek to identify sources of innovation outside of their own infrastructures. An organization seeking to develop an Open Innovation infrastructure will fail to fully capture the value from such a program if it does not include patent information capture and analysis into its Open Innovation methodologies.

Patent Monetization Can be a New Source of Revenue for Your Company: Make Sure You Know the Critical Steps for Success

As corporate revenues continue decreasing as a result of consumer and corporation belt-tightening, many businesses now seek to extract revenue from previously untapped areas. One such source experiencing increasing interest is patent monetization, whereby a business licenses or sells its unused or under-utilized patent assets to generate a new revenue stream.

At the surface, patent monetization would effectively appear to be a "no brainer" for business. That is, if one owns an asset that holds little internal value, but to which a third party would ascribe considerable value, why wouldn't a company move forward with selling that asset? In truth, however, few organizations possess the knowledge base required to succesfully execute on a patent monetization plan. This failure results not because patent monetization requires a complex set of skills; rather, the difficulty typically lies with the organization's lack of familiarity with the process of patent monetization.

A successful patent monetization process requires a step-wise progression through the four steps set forth in the following diagram. Each of these steps is discussed below.

Step 1: Perform an Objective Internal Patent Audit to Identify Potentially Saleable Assets
The first step to successful execution of a patent monetization plan requires the organization to understand whether its patent portfolio includes any assets that would be of interest for acquisition by a third party. This patent monetization audit objectively matches up the organization's current and future business strategy with the subject matter covered by its patent portfolio. In short, the audit should reveal those patent assets not in alignment with the organization's business strategy. The audit will also identify any patent assets that might in use by the organization, but for which it does not find it commercially necessary to exclusively retain rights. These identified assets will then comprise the potential candidates for patent monetization.

A patent monetization audit differs from the standard internal inventory of patent assets conducted by most organizations (which also may be termed an "audit"). Significantly, to accurately identify assets suitable for monetization, the audit should be conducted without regard to the history surrounding the generation of the patent asset. Often, however, those charged with conducting the audit are the same people who were involved in generating the patent assets and/or they may maintain valuable relationships with those who generated the assets. As a result, an internally directed patent audit often tends to be rather myopic, which can reduce the probability that the organization objectively identifies patent assets that should be offered to third parties for sale or license.

When conducted with an objective focus (that is, by someone with no vested interest in the outcome of the audit), a patent monetization audit is fairly straightforward. Specifically, patent assets are put into a "sell pile" when they do not align with the organization's existing or planned products or technology or which are used but not necessary to be retained exclusively. The sell pile constitutes the candidates for potential monetization and which are hoped to serve as a new source of revenue for the organization. However, the patent assets in the sell pile may not possess external market value. In order to find out whether these assets comprise candidates for monetization efforts, a market assessment and preliminary valuation must be conducted as Step 2 discussed below.

An objective monetization audit nonetheless presents the additional valuable benefit of identifying patents appropriate for abandonment. And, for any organization with fifty or more issued patents, it is probable that maintenance fee savings from abandonment of effectively worthless patents will well surpass the cost of conducting the audit. This makes a patent monetization audit a winning proposition even if it is later found that the organization does not possess any patent assets that are suitable for monetization.

Step 2: Patent Asset Marketing Assessment and Preliminary Valuation
Those patent assets placed in the sell pile in Step 1 are then reviewed to determine whether the covered subject matter would likely be of interest to a third party. In doing this, one categorizes the claim coverage of each patent and identifies what companies might find the claimed subject matter valuable to support their business objectives.

This patent asset marketing assessment should be conducted from a business perspective. That is, it must be undertaken in much the same way a company undertakes a consumer marketing study by determining who is a potential buyer for this patent asset product. It is highly recommended that a business professional manage the marketing assessment of the patent asset. While a lawyer can be peripherally involved, she should not manage the process because she will most likely review the third party analysis with an eye toward potential patent infringement, not toward making a win-win deal with a third party.

Preliminary valuation of the potentially saleable patent asset is conducted using a combination of business and patent legal analysis. The business aspect of the valuation reviews the potential purchasers identified in the assessment and attempts to determine a range at which those purchasers would pay for the patent asset. In the patent legal aspect of the valuation, a patent professional reviews the patent's record to identify any flaws in the procurement of the patent that would markedly reduce the price that a willing purchaser would otherwise pay for the asset.

It is quite probable that the patent asset market assessment and preliminary valuation will reveal that the organization's unwanted patent assets do not constitute good candidates for monetization efforts, either because there is no likely purchaser or that the quality of the patent is low as a result of mistakes made in the patent procurement process. Value exists in this "bad news," however. An organization that obtains effectively valueless patent assets should recognize that it may be wasting considerable corporate resources. As such, the patent asset marketing assessment and preliminary valuation presents a strong opportunity for an organization to improve its patenting efforts so that better patents can be obtained to allow monetization to become a reality in the future.

If the marketing assessment and preliminary valuation reveals that the organization owns patent assets in which a third party might show an interest in acquiring, a marketing plan can now be executed upon. This is described in Step 3 below.

Step 3: Execution of a Patent Monetization Marketing Plan

After the organization identifies potential purchasers of a patent asset and how much a willing buyer might pay for it, a plan for monetization marketing plan can be developed. As many potential marketing plans can exist as there are potential purchasers. In short, monetization marketing plans will differ depending on the organization's level of internal expertise, business bandwidth and type of technology involved and, due to such variability, will not be discussed in more detail in this article.

In addition to the monetization marketing plan, the marketing channel must be selected. Even in the fairly nascent patent monetization market, several channels of patent asset marketing have developed to date, each of which consists of a unique business model. Some examples of existing marketing channels include:

• Marketing through an internal patent licensing business (e.g. AT&T Intellectual Property )
• Engaging a consultant having significant licensing expertise (e.g. Gnosssis LLC)
• Sale through a patent broker (e.g. IP Investments Group and IP Value )
• Sale through a patent auction (e.g. Ocean Tomo)
• Online "matching services" (e.g. Yet2.com, Innocentive.com)

Notably absent from the above list of suitable patent asset marketing channels is engagement of a lawyer to assist in marketing of the patent asset. There is little doubt that if a lawyer approaches a third party with an "offer to license" a patent, the offer will likely be viewed as a threat of litigation. As such, if an organization truly plans to monetize its patents, as opposed to litigating them, a lawyer should not execute the marketing plan, nor should she appear to the potential purchaser to be managing the process in any way. Put simply, the organization should treat a patent monetization plan as a business, where consummation of the deal forms the primary objective of the process.

Even if an organization successfully undertakes a business-based patent monetization marketing plan, many third parties will find the approach by a patent owner with an offer to acquire a patent to be akin to a threat of future patent litigation. This is a natural reaction to the existing paradigm where patents are legal rights, as opposed to corporate assets. As the market for patent monetization evolves, third parties will hopefully view offers to sell or a license a patent in a less threatening manner. In the meantime, however, any organization seeking to market a patent without intending to enter litigation should engage a marketing partner that is more likely to be viewed as non-threatening to the third party. Litigation will always be a possibility for any organization seeking to engage in patent monetization. With a well-crafted marketing plan and a careful execution, the possibility of litigation can be minimized.

Step 4: Bring in the Lawyers to Consummate the Deal

At the end of Step 3, the patent owner should know whether a willing buyer likely exists for its patent assets. At this point, each party will bring in its respective lawyers to consummate the deal for their respective benefits.

This stage of the patent monetization process requires diligence by the parties to ensure the deal does not get away from them. The end of the deal should be a win-win: the patent owner successfully generates a new source of revenue and the purchaser obtains exclusive rights to a desirable product or technology under favorable terms. While this may be easier said than done, for patent monetization to become a viable source of revenue for organizations in the future, it must be so.