As you might suspect, there are advantages and disadvantages to patenting. Given these pros and cons, you need to decide whether or not to patent your inventions. To help you make informed decisions, this chapter discusses some of the important advantages and disadvantages of patenting.
Advantages of Patenting
Companies patent for a variety of different reasons. The most common reason is to prevent copying.
Barrier to Imitation
Under certain circumstances, patents can be an important barrier to imitation and a powerful mechanism to capture the returns to innovation.1 For example, the mobile telephone company Qualcomm was founded to exploit a technology called Code Division Multiple Access (CDMA), which allows more efficient use of the radio spectrum for cellular telephones. Qualcomm obtained a patent on this technology and used the patent to protect its products, as well as to earn revenues by licensing the technology to other firms. Qualcomm has grown into a $3 billion company, successfully competing against large, established firms, such as Motorola, something it would have been unable to do if CDMA had not been patented.2
Legal Protection
Patents also help companies to use the legal system to protect their intellectual property. As you will see in the next chapter, it is much easier to use the legal system to enforce patents than to enforce trade secrets. Moreover, having a patent helps you to defend your firm against patent litigation by allowing you to counterclaim in an infringement lawsuit.3
Because patent litigation often results in court-mandated licensing or licensing from the settlement of lawsuits, the use of patents to protect intellectual property also has the benefit of creating a new source of revenue for many companies. In some cases, this source of revenue can be quite large. For example, much of IBM’s $1.4 billion annual royalty flow is the result of patent litigation.4
Value Chain Leverage
Patents also give companies control over other firms in their value chain. By owning patents that are used by your customers or suppliers, you can influence their behavior and make them act more favorably toward you. For example, Nokia has obtained patents on cell phone speakers even though it does not produce phone components because the patents give the company leverage over its speaker supplier.5
Markets for Knowledge
Having a patent facilitates the sale of technology to other firms. While patented technologies can be sold to others, technologies protected by secrecy cannot. Therefore, to license a technology to another company, it helps to obtain a patent on it. Take the example of Dr. Howard Dananberg, a podiatrist in Bedford, New Hampshire, who invented a “comfortable high-heel shoe” (U.S. patent number 5,782,015). Because Dr. Dananberg lacked the assets necessary to design, manufacture, and sell shoes that were attractive to women, he sought to license his technology to companies that already produced shoes. To do this, he needed to turn over his shoe design to shoemakers, which necessitated obtaining a patent. Otherwise, if he had tried to license his invention, he would have had no protection against an unscrupulous licensee who chose to steal his design.6
Raising Funds
Patents help new companies raise money because they provide a verifiable source of competitive advantage. Investors can see the mechanism through which the new venture will deter imitation, reducing their uncertainty about the value of the venture. Moreover, patents offer salable assets if a new venture fails. Because investors can “take the patents to the bank” at the end of the day, they see their investments in start-ups with strong patents as partially collateralized, increasing the amount of money that they are willing to provide to them.7
Disadvantages of Patenting
While patents are valuable for many of the reasons just described, they also have several disadvantages.
Effectiveness at Deterring Imitation
Patents are not always effective at deterring imitation. Sometimes other firms can invent around your patents. (Inventing around is the process of coming up with something that accomplishes the same goal as the patented invention without violating the claims of the patent.) By inventing around your patents, other companies can use your invention without having to pay you royalties and without having to incur the high costs of developing the invention.
If your competitors can invent around your patents, then those patents are not worth the cost of obtaining them. Moreover, patenting might actually be doing you more harm than good because by patenting, you have to disclose the specifications of your invention, which might be the source of information that your competitors need to copy your product.
Inventing around occurs when there are multiple ways of accomplishing the same goal. For example, an imitator can often invent around an electronic device patent by changing the design of the circuitry, allowing the imitative product to satisfy customers in the same way as the innovative one but without violating the claims on the patented invention.
Thus, only for inventions for which there is a single way to accomplish a particular goal, are patents very effective at deterring imitation. For example, the patent on Symantec Corporation’s antivirus software, which finds computer viruses without searching every byte of data, is effective because software engineers do not believe that there is any way other than Symantec’s to find computer viruses without checking all of the data in a file.8
Benefits of Nondisclosure
Patenting is disadvantageous when a company will gain more from nondisclosure than from a government-granted monopoly. A patent gives you a 20-year monopoly on your invention, but secrecy might allow that monopoly to last longer. For example, the chemical formula for Coca-Cola has been maintained as a secret for over 100 years. (Because the beverage is composed of complex natural substances, it is not possible to reverse engineer and duplicate it.)9 As a result, no other companies have been able to create beverages that taste exactly like Coke. If the formula for Coca-Cola had been patented, it would have been disclosed in the specifications of the patent. Once the monopoly on it expired, which would have been decades ago, competitors would have been able to produce soft drinks with exactly the same chemical composition (and therefore taste) as Coke.
Pace of Change
Patents are not very helpful when the pace of technological change is very fast. When technological change is very rapid, the inventions that patents protect will quickly become irrelevant. Given the time it takes to obtain patents, and the cost of patenting, you probably will not be able to earn sufficient payback to justify the investment in such patents.10 For example, suppose your semiconductor will be obsolete in 2 years because of the pace of innovation in that industry. You might be better off just keeping it secret and using that proprietary knowledge to ensure that you, and not your competitors, will be able to develop the next generation of semiconductors. If you patent your invention, the semiconductor will be obsolete by the time that the patent issues. But once it issues, the invention will be public knowledge, and that might help your competitors to develop the next generation of semiconductors.
Moreover, to obtain a patent, you need to explain how the invention works in a way that enables a person trained in the art to make the invention. Sometimes, this information makes it possible for others to leapfrog your invention. If that is the case, you are better off keeping the invention a secret.
Difficulty Proving Infringement
Patents are not very useful when proving that others have infringed your patent, or defending it in a lawsuit, is very costly or difficult. If you cannot amass the evidence that it takes to prove that infringement actually occurred, or the fixed costs of defending a patent are so high that it does not pay to protect it through the court system, then you will not get enough of a return on your investment in a patent to justify its cost.11 For example, it may be very difficult to prove that someone infringed a surgical method that you invented, such as a type of incision used in cataract surgery, because there are no sales of physical objects, like drugs or devices, which would show that your method was used.12 As a result, you might not want to waste your money trying to patent the surgical method.
Effectiveness of Patents in Different Industries
Patents are not equally effective in all industries. In general, they tend to be more effective in industries in which the core technology is biological or chemical, and less effective in industries in which the core technology is mechanical or electrical.13 Why? The reason has to do with the difficulty of accomplishing the same goals through different technical means. For mechanical or electrical devices, you can make slight modifications to the design and accomplish the same goal, but you cannot do this with things that are biological or chemical. For example, a drug has a very precise molecular structure, and slight alterations will often transform the drug from something beneficial to something harmful, while relatively major changes to the structure of electronic circuitry often do not alter an electronic device’s effectiveness.
Researchers have examined how effective patents are in different industries. In industries like drugs and chemicals, patents are very effective at protecting new products, but in industries such as cosmetics or pulp and paper, they are not.14 These differences in patent effectiveness explain why obtaining patents is crucial to generating high financial returns in industries in which patents are very effective, such as pharmaceuticals.15 It also explains why start-ups in some industries, like biotechnology, often specialize in technology development and do not build assets across the different parts of the value chain, relying instead on licensing to capture value from innovation.