In our third and final discussion with Todd Miller, I asked him to answer the questions our readers had submitted on this blog and various other forums. Todd told us about the basics of patents, and how to deal with patent disputes in our last Q&A sessions.
It happened that on June 28th, the US Supreme Court had a patent case ruling related to “business methods” (Bilski v. Kappos), and many readers asked us to talk about this case. So I asked Todd to also tell us what the court was considering, what the ruling was, and how will it affect business moving forward. Given that I hold a few business patents, this was of particular interest to me personally.
SECTION I: Reader questions
Do you have a list of reference sites to see if a process, formula, or tangible product has already been patented? Also, if someone were (more or less) uninformed on how to conduct a targeted search, how would he or she search to see if his or her idea has already been patented?
The best site is http://www.uspto.gov/. There, the U.S. government provides a number of ways to search to see if an idea has already been patented. In particular, you’ll want to refer to http://www.uspto.gov/patents/process/search/index.jsp. What I typically do is conduct a Boolean search at http://patft.uspto.gov/netahtml/PTO/search-bool.html. There, you can search by field, such as by title, abstract, summary of the invention, claims, etc. Plug in key words to your invention and review what results, if any, pop up.
The European Patent Office has a fine site at http://ep.espacenet.com. Also consider using WIPO’s PATENTSCOPE® service at http://www.wipo.int/patentscope/en/.
Google also has full-text searchability of some 7 million patents offered at http://www.google.com/patents. Google highlights your search terms and allows the patent to be easily downloaded. But in my experience, Google’s database does not contain the most recent patents or the published applications. The USPTO’s site does.
Google Scholar is also a terrific resource. Subscription tools such as Dialogue are also wonderful.
How do you place a value on certain patents when there is no market? Does one use the dollar value of the attorneys’ fees?
Where there is no established market, a patent’s value still goes back to basics, in other words, the amount a buyer is willing to pay. In setting a price, consider looking at analogous established markets for guidance. Also consider what income, cost-savings, or other benefits may accrue to a user of the claimed invention.
Will you accept infringement litigation on a contingency basis?
Yes.
Can you tell us a little more about patent infringement? How is the average person supposed to know whether a product or process infringes?
This question is a complicated one answered by the jury, or judge if there is no jury, during every patent trial unless infringement has been stipulated or is otherwise not an issue. Patent infringement is a two-step process. First, the claims are construed as a matter of law based upon how one of ordinary skill in the art would understand the claims at the time of the invention. The claim scope is then compared to the accused product or method as a matter of fact. To infringe, the accused product or method must embody each limitation in the claim, either literally or by a substantial equivalent.
Here’s an example that I give when teaching. Supposed the asserted claim is: “A bicycle comprising: a first wheel, a second wheel, and a frame linking the first wheel to the second wheel.” If the accused device is a unicycle, there is no infringement. The claim requires at least two wheels, and the accused device only has one. Since the accused product does not embody each limitation in the claim, there can be no infringement. When teaching, I take this rather simple example and expand upon it to show how complex the issues can quickly become. For example, does a motorcycle infringe this claim? What about a car? What about a device with a wheel and a block and a frame linking the wheel to the block? To me, it’s all richly engaging.
SECTION II: The Supreme Court decision on Bilski
Can you tell us what was at issue in Bilski?
Generally speaking, the Supreme Court considered whether to exclude business methods from patent protection.
Can you give my readers an example of what you mean by “business methods”?
The simplest example is the business method claimed by Bilski, namely, instructing how commodities buyers and sellers in the energy market can protect, or hedge, against the risk of price changes. Other examples of business methods include tax strategies, e-commerce, banking, and insurance schemes.
Did the court decide to exclude business methods from patent protection?
No. The Supreme Court was unwilling to exclude all business methods from patent protection.
Did the court rule that Bilksi’s business method was patentable?
No.
Why not?
Bilski was attempting to patent a mathematical formula that covered the basic concept of hedging risk. An abstract idea, law of nature, or mathematical formula is not patent-eligible.
How does Bilski affect doing business moving forward?
Business methods will continue to be patentable. However, any attempt to patent a mental process, algorithm, mathematical formula, or fundamental principle that does not require a particular machine, article, transformation, or application will be met with rejection at the United States Patent and Trademark Office.
What about the patents that are already out there covering business methods?
Those patents are presumptively valid. But challengers will point to Bilski to argue that not all business methods are patentable. Should the claims cover an abstract idea, or merely limit the use of an abstract idea or add insignificant postsolution activity, a challenger may say these claims are invalid, just like they were in Bilski. A challenger may also say that the claims are invalid as being obvious where the claims cover a mathematical formula or the like known in the prior art.
Any other thoughts?
Post-Bilski, the Supreme Court has suggested that the Federal Circuit continue to develop tests to determine what is patent-eligible subject matter. Including the recently remanded Mayo Collaborative Services v. Prometheus Laboratories Inc., there are about six other cases ripe for Federal Circuit clarification regarding the patentability of business methods, software, medical, or other processes. In the meantime and no doubt for some time afterwards, expect to see more rather than less prosecution and litigation on what is patent eligible or obvious if the formula, algorithm, etc. is known in the prior art.
Todd R. Miller is a trial attorney who represents clients in high-stakes, complex intellectual property disputes. He has particular experience in patent litigation arising in the electronics, computer, semiconductor, and software industries. Having tried and won matters before jurors, judges, and arbitrators, Todd is a seasoned litigator who efficiently and effectively advocates the case to obtain client goals. More at: http://www.jonesday.com/trmiller/
The answers provided reflect only the present considerations and views of Mr. Miller, and should not be attributed to Jones Day, or to any of his or its former or present clients.
Showing posts with label intellectual properties. Show all posts
Showing posts with label intellectual properties. Show all posts
July 6, 2010
June 23, 2010
Interview with Todd R. Miller, part II: patent disputes and patent litigation
In part I of my discussions with Todd Miller, we discussed the ins and outs of applying for patent protection, when to apply, how to apply, and what to expect. In part II, we discuss what to expect if there’s a patent dispute or litigation. This is Todd’s specialty, and if you have any questions about patent disputes or how to handle them, make sure to leave your questions in the comment section here. We will compile your questions with responses from Todd for the third installment of this series.
Please note specific cases will not be considered for discussion.
If patent rights are being violated, what are the options?
The options generally include doing nothing, filing a lawsuit, or putting the infringer on notice by sending what’s commonly referred to as a notice letter.
Why would you want to give an infringer notice?
To dissuade commencement or continuance of infringement, to seek license royalties, to seek some other business relationship, to start running the damages where actual notice is required by law, or to give the infringer knowledge of the patent to set up possible liability for enhanced damages or active inducement.
Are there any issues with sending a patent notice letter?
Yes. Depending on how notice was provided and other circumstances, the recipient may choose to file a declaratory judgment lawsuit. Doing so gives the choice of forum and timing to the accused infringer. Other issues include legal retaliation such as the filing of a lawsuit asserting patent violations by the other side. Business retaliation is also a possibility.
Are there any practical tips for sending patent notice letters?
If the product is covered by a patent, mark the product; it provides constructive notice. Care must be taken here to make sure the product is indeed covered by a patent and only active patent numbers are marked.
If there is a concern with a declaratory judgment action, consider giving notice of the patent without mentioning infringement or licensing, or requesting a confidentiality agreement, or filing an infringement suit first but not serving it.
To set up a willfulness claim, elaborate with a claim chart or otherwise show why it would be objectively reckless to continue. In anticipation of litigation, appropriately label documents and involve counsel on communications. Finally, before sending, conduct a thorough litigation risk analysis.
What about receiving a patent notice letter? Are there any issues there?
A patent notice letter may provide the accused infringer of actual knowledge of the patent and infringement, and thus set the stage for a willfulness finding or patent inducement.
Are there any practical tips with regard to receiving patent notice letters?
Immediately after receiving the notice letter, send out a litigation hold notice and label attorney-client and work product documents appropriately. Take advantage of the opportunity to make your own evidence and keep managing it. Under attorney-client privilege and work product protection, determine if a design-around is possible. If so, take remedial steps. Have defenses that make it a “close case.” Determine if an offensive case is possible and how best to use it. Consider reexamination or the threat of it.
What percentage of patents end up in litigation?
Very few, roughly 2%.
Once a patent ends up in litigation, what is the likelihood of adjudication versus the likelihood that the case will be settled?
Patent cases, like other civil matters, typically settle. Looking at the 2009 data as a guide, roughly 88% of the patent cases settled. About 8% were disposed of by summary judgment; about 3% were disposed of by jury trial; and about 1 % were disposed of by bench trial. From January 2005 to May 2010, there have only been 263 patent verdicts.
What is the typical period from start to finish for a patent litigation?
This depends on multiple factors including the case filing location, whether the jurisdiction has patent local rules, the court’s existing docket load, the merits of the case, the amount of damages at stake, etc. Total time can thus range anywhere from weeks to years.
Do companies typically recoup their entire cost of litigation?
Successful patent holders typically recoup their entire cost of litigation. A victory also provides a number of other intangibles including increased leverage in future settlements.
What is the median cost of patent litigation?
The median cost typically depends on the amount and the location of the suit. According to the AIPLA Report of the Economic Survey 2009, the nationwide median cost where less than $1 million was at stake was $650,000. For cases between $1 million and $25 million, the median cost was $2.5 million, and for cases with over $25 million at stake, the median cost was $5.5 million.
How should a company deal with international patent infringement?
For international patent infringements, a company needs to have a strategic plan of where to sue first and when to sue. While U.S. litigation is more expensive, the market is typically larger and thus more damages may be at stake. For purposes of maintaining costs and effecting a coordinated approach, it is preferable to have a single firm handle such work.
What’s the best way to prevent a patent litigation case?
Short of completely staying out of the market, a search for patents that may pose a barrier should be performed. If there is anything close, the options include designing around, licensing, and obtaining advice of counsel. A company should also build up its own patent portfolio as a deterrent, as well as for cross-licensing and offensive position.
What industries are currently experiencing the most patent disputes?
There has been an explosion of internet-related business method patent cases. Cases involving the electrical arts and pharmaceutical industries continue to be prevalent. There has also been an uptick in litigation involving the “clean tech” area including hybrid cars, wind turbines, and smart grids.
Todd R. Miller is a trial attorney who represents clients in high-stakes, complex intellectual property disputes. He has particular experience in patent litigation arising in the electronics, computer, semiconductor, and software industries. Having tried and won matters before jurors, judges, and arbitrators, Todd is a seasoned litigator who efficiently and effectively advocates the case to obtain client goals. More at: http://www.jonesday.com/trmiller/
The answers provided reflect only the present considerations and views of Mr. Miller, and should not be attributed to Jones Day, or to any of his or its former or present clients.
Please note specific cases will not be considered for discussion.
If patent rights are being violated, what are the options?
The options generally include doing nothing, filing a lawsuit, or putting the infringer on notice by sending what’s commonly referred to as a notice letter.
Why would you want to give an infringer notice?
To dissuade commencement or continuance of infringement, to seek license royalties, to seek some other business relationship, to start running the damages where actual notice is required by law, or to give the infringer knowledge of the patent to set up possible liability for enhanced damages or active inducement.
Are there any issues with sending a patent notice letter?
Yes. Depending on how notice was provided and other circumstances, the recipient may choose to file a declaratory judgment lawsuit. Doing so gives the choice of forum and timing to the accused infringer. Other issues include legal retaliation such as the filing of a lawsuit asserting patent violations by the other side. Business retaliation is also a possibility.
Are there any practical tips for sending patent notice letters?
If the product is covered by a patent, mark the product; it provides constructive notice. Care must be taken here to make sure the product is indeed covered by a patent and only active patent numbers are marked.
If there is a concern with a declaratory judgment action, consider giving notice of the patent without mentioning infringement or licensing, or requesting a confidentiality agreement, or filing an infringement suit first but not serving it.
To set up a willfulness claim, elaborate with a claim chart or otherwise show why it would be objectively reckless to continue. In anticipation of litigation, appropriately label documents and involve counsel on communications. Finally, before sending, conduct a thorough litigation risk analysis.
What about receiving a patent notice letter? Are there any issues there?
A patent notice letter may provide the accused infringer of actual knowledge of the patent and infringement, and thus set the stage for a willfulness finding or patent inducement.
Are there any practical tips with regard to receiving patent notice letters?
Immediately after receiving the notice letter, send out a litigation hold notice and label attorney-client and work product documents appropriately. Take advantage of the opportunity to make your own evidence and keep managing it. Under attorney-client privilege and work product protection, determine if a design-around is possible. If so, take remedial steps. Have defenses that make it a “close case.” Determine if an offensive case is possible and how best to use it. Consider reexamination or the threat of it.
What percentage of patents end up in litigation?
Very few, roughly 2%.
Once a patent ends up in litigation, what is the likelihood of adjudication versus the likelihood that the case will be settled?
Patent cases, like other civil matters, typically settle. Looking at the 2009 data as a guide, roughly 88% of the patent cases settled. About 8% were disposed of by summary judgment; about 3% were disposed of by jury trial; and about 1 % were disposed of by bench trial. From January 2005 to May 2010, there have only been 263 patent verdicts.
What is the typical period from start to finish for a patent litigation?
This depends on multiple factors including the case filing location, whether the jurisdiction has patent local rules, the court’s existing docket load, the merits of the case, the amount of damages at stake, etc. Total time can thus range anywhere from weeks to years.
Do companies typically recoup their entire cost of litigation?
Successful patent holders typically recoup their entire cost of litigation. A victory also provides a number of other intangibles including increased leverage in future settlements.
What is the median cost of patent litigation?
The median cost typically depends on the amount and the location of the suit. According to the AIPLA Report of the Economic Survey 2009, the nationwide median cost where less than $1 million was at stake was $650,000. For cases between $1 million and $25 million, the median cost was $2.5 million, and for cases with over $25 million at stake, the median cost was $5.5 million.
How should a company deal with international patent infringement?
For international patent infringements, a company needs to have a strategic plan of where to sue first and when to sue. While U.S. litigation is more expensive, the market is typically larger and thus more damages may be at stake. For purposes of maintaining costs and effecting a coordinated approach, it is preferable to have a single firm handle such work.
What’s the best way to prevent a patent litigation case?
Short of completely staying out of the market, a search for patents that may pose a barrier should be performed. If there is anything close, the options include designing around, licensing, and obtaining advice of counsel. A company should also build up its own patent portfolio as a deterrent, as well as for cross-licensing and offensive position.
What industries are currently experiencing the most patent disputes?
There has been an explosion of internet-related business method patent cases. Cases involving the electrical arts and pharmaceutical industries continue to be prevalent. There has also been an uptick in litigation involving the “clean tech” area including hybrid cars, wind turbines, and smart grids.
Todd R. Miller is a trial attorney who represents clients in high-stakes, complex intellectual property disputes. He has particular experience in patent litigation arising in the electronics, computer, semiconductor, and software industries. Having tried and won matters before jurors, judges, and arbitrators, Todd is a seasoned litigator who efficiently and effectively advocates the case to obtain client goals. More at: http://www.jonesday.com/trmiller/
The answers provided reflect only the present considerations and views of Mr. Miller, and should not be attributed to Jones Day, or to any of his or its former or present clients.
June 21, 2010
An interview with Todd R. Miller, IP trial attorney; Part I: the ins and outs of filing for patents
As my readers recall, in the past I’ve written about the benefits of patents for small companies, and ways to protect your intellectual properties with audits. Today’s blog is part one of an interview I conducted with Todd R. Miller, a partner at Jones Day, a full service international law firm. Todd is a trial attorney in intellectual property disputes, a very specialized field in IP law. I recently met him through some of my clean tech activities, and found him to be a brilliant and passionate attorney in his field. We had so many discussions about patents and patent protection, I decided an interview was in order.
In today’s blog, we discuss the ins and outs of applying for patent protection, when to apply, how to apply, and what to expect. In part two (to be published later in the week), Todd will dig deeper into patent disputes and litigation. Make sure to come back and read part two.
NOTE: Todd has agreed to respond to the readers’ questions as part three of this series, so if you have any questions, please discuss them very clearly in the comment section. I’ll compile all the questions and we’ll publish them with the corresponding responses within 10 days. Please note that I will not publish any advice on individual cases.
If an inventor comes up with a great new idea, should the inventor file a patent application or keep it as a trade secret?
It depends. Both patents and trade secrets have their advantages and disadvantages. When filing for a patent, the application must contain a written description sufficient to allow those skilled in the field of the invention to make and use it. In return for disclosing this information to the public and thereby foregoing trade secret protection, should the application issue into a patent, the patentee is granted the exclusive right to work that invention in the U.S. for 20 years from the first filing date.
For start-ups and other emerging companies, patents are sometimes the most important assets and are often necessary before venture capitalists or others invest in a new company. Obtaining a patent typically takes a few years in the U.S. Patent and Trademark Office, so if the invention is one that has a short life span and not easily reverse engineered, a trade secret may be more appropriate. Moreover, unlike patent rights that are of finite duration, a trade secret can be kept indefinitely as long as the information is kept confidential. Coca Cola’s secret formula is one of the best-known trade secrets. Had the formula been disclosed in a patent application, any patent rights obtained would have long expired.
Assuming an inventor decides to file a patent application, where should protection be sought?
Patent protection is territorial. In other words, a patent must be obtained in each country. As worldwide patent protection is extremely expensive, those with limited funds should pick countries that will have significant markets for production and a need for the patented invention.
What is the typical cost to prepare and file a patent application in the U.S.?
The cost will depend on the type of application being filed, the subject matter, and the complexity. For example, the preparation and filing of a utility patent application of minimal complexity typically ran around $7,500 in 2008, according to the AIPLA Report of the Economic Survey 2009, and a relatively complex biotech/chemical patent application ran around $12,500.
If speed is an issue, are there certain countries that may issue a patent quicker than others?
In the U.S., an applicant can file a petition to expedite the patent process for a number of reasons including health of the applicant and possible patent infringement. The U.S. also an accelerated examination program in which the applicant is required to provide specific information to enable review of the application to proceed rapidly and accurately. A detailed article on the subject of the accelerated examination program can be found attached to my bio.
In addition, certain countries are offering special programs for clean technologies. As of December 8, 2009, the United States implemented a Green Technology Pilot Program to last for twelve months for the first 3,000 pending new applications that relate to green technologies. Applications that are accepted under this program will save approximately one year off the normal four-year examination time.
South Korea has implemented an expedited examination program called “Superspeed” for green technologies. Examination for applications accepted under the program is estimated to take thirty days or less. First-time applicants may then be able to seek expedited examination in other countries with which Korea has negotiated Patent Prosecution Highway Agreements. The United Kingdom also has a program in which examination for clean technologies may take as little as nine months.
Do you have any practical tips for any of my readers who are inventors?
If money is an issue, remember that the U.S. Patent and Trademark Office is a government agency paid for in part by taxpayer dollars. The PTO is there to help you. Their website, http://www.uspto.gov/, is terrific. For over a year, I taught a class on the fundamentals of intellectual property to business executives and used this website regularly as part of the instruction process.
Inventors should also consider contacting the Inventors Assistance Center with the PTO. The IAC is staffed by former Supervisory Patent Examiners and experienced Primary Examiners who answer general questions concerning patent examining policy and procedure.
Anything else?
The best advice that I can give here is for an inventor to do their best to “work backwards.” In other words, before spending any money or time investing in what it undoubtedly a terrific invention, ask yourself who would buy the product or process and why.
Todd R. Miller is a trial attorney who represents clients in high-stakes, complex intellectual property disputes. He has particular experience in patent litigation arising in the electronics, computer, semiconductor, and software industries. Having tried and won matters before jurors, judges, and arbitrators, Todd is a seasoned litigator who efficiently and effectively advocates the case to obtain client goals. More at: http://www.jonesday.com/trmiller/
The answers provided reflect only the present considerations and views of Mr. Miller, and should not be attributed to Jones Day, or to any of his or its former or present clients.
In today’s blog, we discuss the ins and outs of applying for patent protection, when to apply, how to apply, and what to expect. In part two (to be published later in the week), Todd will dig deeper into patent disputes and litigation. Make sure to come back and read part two.
NOTE: Todd has agreed to respond to the readers’ questions as part three of this series, so if you have any questions, please discuss them very clearly in the comment section. I’ll compile all the questions and we’ll publish them with the corresponding responses within 10 days. Please note that I will not publish any advice on individual cases.
If an inventor comes up with a great new idea, should the inventor file a patent application or keep it as a trade secret?
It depends. Both patents and trade secrets have their advantages and disadvantages. When filing for a patent, the application must contain a written description sufficient to allow those skilled in the field of the invention to make and use it. In return for disclosing this information to the public and thereby foregoing trade secret protection, should the application issue into a patent, the patentee is granted the exclusive right to work that invention in the U.S. for 20 years from the first filing date.
For start-ups and other emerging companies, patents are sometimes the most important assets and are often necessary before venture capitalists or others invest in a new company. Obtaining a patent typically takes a few years in the U.S. Patent and Trademark Office, so if the invention is one that has a short life span and not easily reverse engineered, a trade secret may be more appropriate. Moreover, unlike patent rights that are of finite duration, a trade secret can be kept indefinitely as long as the information is kept confidential. Coca Cola’s secret formula is one of the best-known trade secrets. Had the formula been disclosed in a patent application, any patent rights obtained would have long expired.
Assuming an inventor decides to file a patent application, where should protection be sought?
Patent protection is territorial. In other words, a patent must be obtained in each country. As worldwide patent protection is extremely expensive, those with limited funds should pick countries that will have significant markets for production and a need for the patented invention.
What is the typical cost to prepare and file a patent application in the U.S.?
The cost will depend on the type of application being filed, the subject matter, and the complexity. For example, the preparation and filing of a utility patent application of minimal complexity typically ran around $7,500 in 2008, according to the AIPLA Report of the Economic Survey 2009, and a relatively complex biotech/chemical patent application ran around $12,500.
If speed is an issue, are there certain countries that may issue a patent quicker than others?
In the U.S., an applicant can file a petition to expedite the patent process for a number of reasons including health of the applicant and possible patent infringement. The U.S. also an accelerated examination program in which the applicant is required to provide specific information to enable review of the application to proceed rapidly and accurately. A detailed article on the subject of the accelerated examination program can be found attached to my bio.
In addition, certain countries are offering special programs for clean technologies. As of December 8, 2009, the United States implemented a Green Technology Pilot Program to last for twelve months for the first 3,000 pending new applications that relate to green technologies. Applications that are accepted under this program will save approximately one year off the normal four-year examination time.
South Korea has implemented an expedited examination program called “Superspeed” for green technologies. Examination for applications accepted under the program is estimated to take thirty days or less. First-time applicants may then be able to seek expedited examination in other countries with which Korea has negotiated Patent Prosecution Highway Agreements. The United Kingdom also has a program in which examination for clean technologies may take as little as nine months.
Do you have any practical tips for any of my readers who are inventors?
If money is an issue, remember that the U.S. Patent and Trademark Office is a government agency paid for in part by taxpayer dollars. The PTO is there to help you. Their website, http://www.uspto.gov/, is terrific. For over a year, I taught a class on the fundamentals of intellectual property to business executives and used this website regularly as part of the instruction process.
Inventors should also consider contacting the Inventors Assistance Center with the PTO. The IAC is staffed by former Supervisory Patent Examiners and experienced Primary Examiners who answer general questions concerning patent examining policy and procedure.
Anything else?
The best advice that I can give here is for an inventor to do their best to “work backwards.” In other words, before spending any money or time investing in what it undoubtedly a terrific invention, ask yourself who would buy the product or process and why.
Todd R. Miller is a trial attorney who represents clients in high-stakes, complex intellectual property disputes. He has particular experience in patent litigation arising in the electronics, computer, semiconductor, and software industries. Having tried and won matters before jurors, judges, and arbitrators, Todd is a seasoned litigator who efficiently and effectively advocates the case to obtain client goals. More at: http://www.jonesday.com/trmiller/
The answers provided reflect only the present considerations and views of Mr. Miller, and should not be attributed to Jones Day, or to any of his or its former or present clients.
September 30, 2009
How do you know your intellectual property licensees are not duping you? Get familiar with royalty audits.
I can be such a nerd sometimes. Sure, I do my portrait paintings and world travel, but sometimes really nerdy things get me all excited. Case in point: licensing intellectual properties. Sure, your average person on the street doesn’t even know what that means, but I think there’s something entirely cool about developing technologies or intellectual properties (i.e., creating something valuable) and having other companies sell it in some shape or form and pay you a percentage of the proceeds. Several of my clients and past employers have exclusively used this business model to generate revenues. Cool, no?
(OK, I told you I can be a nerd.)
Today I found myself sitting at a presentation by Sidney Blum, an expert in the field of royalty auditing. Royalty auditing requires your licensees to open up their books and operations for a third party accounting audit in order to determine whether or not they have been paying your royalties properly.
According to Blum, licensees routinely underpay the licensors by 20-30%. Some licensees, by way of policy, underpay until they get caught, at which point they pay pennies on the dollar owed. Hello! That’s a good chunk of money if royalties are your main source of revenues. How much does a typical company spend on product development or sales and marketing to increase revenues by 20-30%?
Common reasons for the underpayment of royalties range from fraud to oversight, to misinterpretation of the terms of the contract such as: the “sales price” (what happens to discounts, freebees, barters, etc), inventory accounting (does anyone really have a good handle on their inventory?), sub-licensing, foreign exchange conversion rates, and many other factors.
I know, when you’re working on that licensing agreement, everyone is ready to pop the champaign bottles, and details fall by the wayside. It’s particularly exciting when you are with a smaller company licensing IP to a larger company (been there, done that). But you want to make sure to get paid for your hard work. So here are some things to consider for a licensing deal:
Engage a royalty auditor in the early stages of contract negotiation. Everyone associates contract administrators and attorneys with licensing agreements. But I highly recommend (my clients know what this means – “you must”) you also engage a royalty auditor in the early stages of a licensing contract negotiation. They will know what can go wrong and try to prevent it from happening. Two good firms in southern California are Green Hasson & Janks, and Stonefield Josephson.
Include a detailed audit clause in the contract. Discuss the details with your royalty auditor.
Include penalties and back interest in the contract. Not everyone does.
Don’t be afraid to perform royalty audits. Seems a bit nerve wrecking, but get used to performing this regularly. According to Blum, licensees don’t walk away from a good deal because they were audited. Think about it, if they have nothing to hide, the audit shouldn’t bother them (except it’s probably a pain in the neck, but that should be part of the contract – not the pain in the neck, the audit).
Expect some underpayment beforehand. I know someone who owns a bunch of bars and says he factors cash stealing by employees into his business model. You can apply the same principle to your business. Increase your minimum annual royalties, or simply raise your royalties to cover for the loss.
Enforce the contract. Once the contract is signed, make sure your finance department understands it in detail so they can charge your licensees properly. Make sure all the negotiated clauses are enforced.
Keep your licensees. Sure, they all underpay, but they’re still paying! Don’t lose your licensees over underpayment issues. Have a good contract in place, enforce it, and make the licensee pay penalties for misbehaving. Then get back to business.
At the end of the day, conducting a royalty audit is a business decision. More often than not, the audit more than pays for itself. The question becomes how often you will conduct them, and how you’ll collect your royalties once the underpayments are discovered. That’ll be up to you and your licensees.
Disclaimer I: under no circumstances, any IP attorney or audit CPA I have ever known or will ever come to know will be considered a nerd. Count on them being way cool. You heard it here first.
Disclaimer II: Disclaimer I was not written by an attorney.
(OK, I told you I can be a nerd.)
Today I found myself sitting at a presentation by Sidney Blum, an expert in the field of royalty auditing. Royalty auditing requires your licensees to open up their books and operations for a third party accounting audit in order to determine whether or not they have been paying your royalties properly.
According to Blum, licensees routinely underpay the licensors by 20-30%. Some licensees, by way of policy, underpay until they get caught, at which point they pay pennies on the dollar owed. Hello! That’s a good chunk of money if royalties are your main source of revenues. How much does a typical company spend on product development or sales and marketing to increase revenues by 20-30%?
Common reasons for the underpayment of royalties range from fraud to oversight, to misinterpretation of the terms of the contract such as: the “sales price” (what happens to discounts, freebees, barters, etc), inventory accounting (does anyone really have a good handle on their inventory?), sub-licensing, foreign exchange conversion rates, and many other factors.
I know, when you’re working on that licensing agreement, everyone is ready to pop the champaign bottles, and details fall by the wayside. It’s particularly exciting when you are with a smaller company licensing IP to a larger company (been there, done that). But you want to make sure to get paid for your hard work. So here are some things to consider for a licensing deal:
Engage a royalty auditor in the early stages of contract negotiation. Everyone associates contract administrators and attorneys with licensing agreements. But I highly recommend (my clients know what this means – “you must”) you also engage a royalty auditor in the early stages of a licensing contract negotiation. They will know what can go wrong and try to prevent it from happening. Two good firms in southern California are Green Hasson & Janks, and Stonefield Josephson.
Include a detailed audit clause in the contract. Discuss the details with your royalty auditor.
Include penalties and back interest in the contract. Not everyone does.
Don’t be afraid to perform royalty audits. Seems a bit nerve wrecking, but get used to performing this regularly. According to Blum, licensees don’t walk away from a good deal because they were audited. Think about it, if they have nothing to hide, the audit shouldn’t bother them (except it’s probably a pain in the neck, but that should be part of the contract – not the pain in the neck, the audit).
Expect some underpayment beforehand. I know someone who owns a bunch of bars and says he factors cash stealing by employees into his business model. You can apply the same principle to your business. Increase your minimum annual royalties, or simply raise your royalties to cover for the loss.
Enforce the contract. Once the contract is signed, make sure your finance department understands it in detail so they can charge your licensees properly. Make sure all the negotiated clauses are enforced.
Keep your licensees. Sure, they all underpay, but they’re still paying! Don’t lose your licensees over underpayment issues. Have a good contract in place, enforce it, and make the licensee pay penalties for misbehaving. Then get back to business.
At the end of the day, conducting a royalty audit is a business decision. More often than not, the audit more than pays for itself. The question becomes how often you will conduct them, and how you’ll collect your royalties once the underpayments are discovered. That’ll be up to you and your licensees.
Disclaimer I: under no circumstances, any IP attorney or audit CPA I have ever known or will ever come to know will be considered a nerd. Count on them being way cool. You heard it here first.
Disclaimer II: Disclaimer I was not written by an attorney.
August 6, 2009
How patents can benefit small businesses (yes, yours too!)
Before I started working with Corporate America, I thought patents were exclusively reserved for mad scientists and geniuses, those who spend hours in a laboratory mixing chemicals, and blow up the lab and burn half their hair in the process. A patent workshop at Xerox, my first real employer out of college, was my first exposure to patents and patent protection. Xerox had good reasons to encourage its employee base to focus on patents. The company had grown fat off of its xerography patents for decades, and the year the main patents ran out, the Japanese had very competitive products sitting on the shelves all over US.
Point #1: Patents can protect your business from competition. That translates to revenues and profits for you, and more work for your competition.
Years after that workshop, I landed a marketing job at a small company with a handful of patents. There, I saw (and fully unleashed) the PR power of patents. Every sales presentation, press release, data sheet, and outbound communication was peppered with mentions of our patents and patent-pending technologies that we licensed to large corporate clients. Not only the patents firmed up a tight niche for our technologies by fending off competition, they also helped us present our smallish group as the innovative elites in the field: you really want our technologies, because we were the geniuses who came up with them first!
Point #2: Patents can be optimally used in marketing and PR because of the elite factor associated with them. Use this to your advantage!
Through various consulting and business ventures, I got more and more entrenched with companies developing intellectual properties (which eventually became a niche for my own services) – companies ranging from the third largest patent holder in the world at the time, to mad scientist outfits mixing chemicals day in and day out. I ended up with a few patents of my own. And here’s the kick – it all happened by accident. I wasn’t thinking about developing patents. I was developing a program that I thought was unique and clever, and the next thing I knew I was sitting across the table from patent attorneys filling out the documents.
Point #3: Patents are often the result of unplanned activities that are easily overlooked. Pay attention any time a new idea is put on the table and ask yourselves: can we patent this?
One of the small companies I worked with developed light conducting chemicals and LED patents. The founder of the company had many patents under his belt and continued to produce more. Despite the best efforts of those around him, the company eventually folded without a viable product or client base due to poor business execution.
Point #3: Patents protect your business but don’t build it. You still need to execute.
I’ve made a habit of asking potential clients about their patent portfolio – within the first 10 minutes. It makes a huge difference to me whether or not the client is cognizant of the power of their own innovation or what they can do with it. Not too long ago, I sat across the table from the CEO of a small software company who lamented lowered sales “because of the bad economy”. Or so he thought. Turns out they had developed very unique web technologies without patenting them. They had a good run until a couple of overseas outfits developed identical technologies and attacked their customer base with no licensing fees and very low royalties. Last I checked, a few of the top executives were connecting to recruiters on LinkedIn. OOPS!
Point #4: Read point #1 – over and over again.
Point #5: If you think securing patents is an expensive proposition, read point #4 – over and over again.
During the recent downturn, even as hordes of small companies are shutting down, those with patent portfolios have edged out those without. Although venture capital funding is down by 63% so far this year, the market for buying intellectual properties and patent portfolios is as hot as ever. Those money people don’t cease to realize the power of innovation and are actively purchasing intellectual properties and patent portfolios of distressed companies. So even in death, companies can realize the benefits of their patents.
I hate to end this blog post talking about the death of companies. So get to work, execute, and … read point #1 – over and over again.
Point #1: Patents can protect your business from competition. That translates to revenues and profits for you, and more work for your competition.
Years after that workshop, I landed a marketing job at a small company with a handful of patents. There, I saw (and fully unleashed) the PR power of patents. Every sales presentation, press release, data sheet, and outbound communication was peppered with mentions of our patents and patent-pending technologies that we licensed to large corporate clients. Not only the patents firmed up a tight niche for our technologies by fending off competition, they also helped us present our smallish group as the innovative elites in the field: you really want our technologies, because we were the geniuses who came up with them first!
Point #2: Patents can be optimally used in marketing and PR because of the elite factor associated with them. Use this to your advantage!
Through various consulting and business ventures, I got more and more entrenched with companies developing intellectual properties (which eventually became a niche for my own services) – companies ranging from the third largest patent holder in the world at the time, to mad scientist outfits mixing chemicals day in and day out. I ended up with a few patents of my own. And here’s the kick – it all happened by accident. I wasn’t thinking about developing patents. I was developing a program that I thought was unique and clever, and the next thing I knew I was sitting across the table from patent attorneys filling out the documents.
Point #3: Patents are often the result of unplanned activities that are easily overlooked. Pay attention any time a new idea is put on the table and ask yourselves: can we patent this?
One of the small companies I worked with developed light conducting chemicals and LED patents. The founder of the company had many patents under his belt and continued to produce more. Despite the best efforts of those around him, the company eventually folded without a viable product or client base due to poor business execution.
Point #3: Patents protect your business but don’t build it. You still need to execute.
I’ve made a habit of asking potential clients about their patent portfolio – within the first 10 minutes. It makes a huge difference to me whether or not the client is cognizant of the power of their own innovation or what they can do with it. Not too long ago, I sat across the table from the CEO of a small software company who lamented lowered sales “because of the bad economy”. Or so he thought. Turns out they had developed very unique web technologies without patenting them. They had a good run until a couple of overseas outfits developed identical technologies and attacked their customer base with no licensing fees and very low royalties. Last I checked, a few of the top executives were connecting to recruiters on LinkedIn. OOPS!
Point #4: Read point #1 – over and over again.
Point #5: If you think securing patents is an expensive proposition, read point #4 – over and over again.
During the recent downturn, even as hordes of small companies are shutting down, those with patent portfolios have edged out those without. Although venture capital funding is down by 63% so far this year, the market for buying intellectual properties and patent portfolios is as hot as ever. Those money people don’t cease to realize the power of innovation and are actively purchasing intellectual properties and patent portfolios of distressed companies. So even in death, companies can realize the benefits of their patents.
I hate to end this blog post talking about the death of companies. So get to work, execute, and … read point #1 – over and over again.
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