Patents of the firm

A patent is a grant from the federal government conferring the rights to exclude others from making, selling, or using an invention for the term of the patent.9

The owner of the patent is granted a legal monopoly for a limited amount of time. However, a patent does not give its owner the right to make, use, or sell the in- vention; it gives the owner only the right to exclude others from doing so. This is a confusing issue for many entrepreneurs. If a company is granted a patent for an item, it is natural to assume that it could start making and selling the item immediately. But it cannot. A patent owner can legally make or sell the patented invention only if no other patents are infringed on by doing so.10 For example, if an inventor obtained a patent on a computer chip and the chip needed technol- ogy patented earlier by Intel to work, the inventor would need to obtain permis- sion from Intel to make and sell the chip. Intel may refuse permission or ask for a licensing fee for the use of its patented technology. Although this system may seem odd, it is really the only way the system could work. Many inventions are improvements on existing inventions, and the system allows the improvements to be patented, but only with the permission of the original inventors, who usually benefit by obtaining licensing income in exchange for their consent.11

Patent protection has deep roots in U.S. history and is the only form of intellectual property right expressly mentioned in the original articles of the U.S. Constitution. The first patent was granted in 1790 for a process of making potash, an ingredient in fertilizer. The patent was signed by George Washington and was issued to a Vermont inventor named Samuel Hopkins. Patents are important because they grant inventors temporary, exclusive rights to market their inventions. This right gives inventors and their financial backers the op- portunity to recoup their costs and earn a profit in exchange for the risks and costs they incur during the invention process. If it weren’t for patent laws, inventors would have little incentive to invest time and money in new inven- tions. “No one would develop a drug if you didn’t have a patent,” Dr. William Haseltine, former CEO of Human Genome Sciences, a biotech firm, once said.12

Since the first patent was granted in 1790, the USPTO has granted 8.7 mil- lion patents, including 302,150 in 2013 alone. The number of patents granted in 2013 was 62 percent more than the number granted in 2003, just 10 years earlier. These data suggest that a willingness to invent in the United States is strong. Interestingly, the USPTO, the sole entity responsible for granting patents in the United States, is strained. At the end of 2013, there were 584,998 patent applications pending, and it took an average of 29.1 months to get a patent ap- plication approved. Actually, the USPTO has been making strides in this area. The total time required to get a patent application approved reached a high of 35.3 months in 2010.

Some inventors and companies are very prolific and have multiple patents. There is increasing interest in patents, as shown in Table 12.2, as advances in technology spawn new inventions.

1. Types of patents

There are three types of patents: utility patents, design patents, and plant pat- ents. As shown in Figure 12.2, there are three basic requirements for a patent to be granted: The subject of the patent application must be (1) useful, (2) novel in relation to prior arts in the field, and (3) not obvious to a person of ordinary skill in the field.

Utility patents are the most common type of patent and cover what we generally think of as new inventions. Of the 601,317 patent applications filed in 2013, 94 percent were for utility patents.13 Patents in this category may be granted to anyone who “invents or discovers any new and useful process, ma-chine, manufacture, or composition of matter, or any new and useful improve- ment thereof.”14 The term of a utility patent is 20 years from the date of the initial application. After 20 years, the patent expires, and the invention falls into the public domain, which means that anyone can produce and sell the invention without paying the prior patent holder. Consider the pharmaceutical industry. Assume a drug produced by a large firm such as Pfizer Inc. is prescribed for you and that, when seeking to fill the prescription, your pharmacist tells you there is no generic equivalent available. The lack of a generic equivalent typically means that a patent owned by Pfizer protects the drug and that the 20-year term of the patent has not expired. If the pharmacist tells you there is a generic version of the drug available, that typically means the 20-year patent has expired and other companies are now making a drug chemically identical to Pfizer’s. The price of the generic version of the drug is generally lower because the manufac- turer of the generic version of the drug is not trying to recover the costs Pfizer (in this case) incurred to develop the product (the drug) in question.

A utility patent cannot be obtained for an “idea” or a “suggestion” for a new product or process. A complete description of the invention for which a utility patent is sought is required, including drawings and technical details. In addi- tion, a patent must be applied for within one year of when a product or process was first offered for sale, put into public use, or was described in any printed publication. The requirement that a patent application must be filed within one year of the milestones referred to previously is called the one year after first use deadline.

Recently, utility patent law has added business method patents, which have been of particular interest to Internet firms. A business method patent is a patent that protects an invention that is or facilitates a method of do- ing business. Patents for these purposes were not allowed until 1998, when a federal circuit court issued an opinion allowing a patent for a business method, holding that business methods, mathematical algorithms, and soft- ware are patentable as long as they produce useful, tangible, and concrete results. This ruling opened a “Pandora’s box” and has caused many firms to scramble to try to patent their business methods. Since 1998, the most no- table business method patents awarded have been’s one-click ordering system,’s “name-your-price” business model, and Netflix’s method for allowing customers to set up a rental list of movies they want mailed to them or that they wish to download for streaming purposes. Activities associated with a business method patent can be an important source of competitive advantage for a firm.

Design patents are the second most common type of patent and cover the invention of new, original, and ornamental designs for manufactured prod- ucts.15 Of the 601,317 patent applications filed in 2013, 5.8 percent were for design patents.16 A design patent is good for 14 years from the grant date. While a utility patent protects the way an invention is used and works, a de- sign patent protects the way it looks. As a result, if an entrepreneur invented a new version of the computer mouse, it would be prudent to apply for a util-ity patent to cover the way the mouse works and for a design patent to protect the way the mouse looks. Although all computer mice perform essentially the same function, they can be ornamentally designed in an infinite number of ways. As long as each new design is considered by the USPTO to be novel and nonobvious, it is eligible for design patent protection. This is not a trivial issue in that product design is increasingly becoming an important source of com- petitive advantage for many firms producing many different types of products.

Plant patents protect new varieties of plants that can be reproduced asex- ually. While only 1,320 of the 601,317 patent applications filed in 2013 were for plant patents, these patents provide essential protection for companies specializing in plant genetics and related areas. Plants that can be reproduced asexually are reproduced by grafting or crossbreeding rather than by planting seeds. The new variety can be different from previous plants in its resistance to disease or drought or in its scent, appearance, color, or productivity. Thus, a new color for a rose or a new type of hybrid vegetable would be eligible for plant patent protection. The term for plant patent protection is 20 years from the date of the original application.

Table 12.3 provides a summary of the three forms of patent protection, the types of inventions the patents cover, and the duration of the patents.

2. Who can Apply for a patent?

Only the inventor of a product can apply for a patent. If two or more people make an invention jointly, they must apply for the patent together. Someone who simply heard about the design of a product or is trying to patent some- thing that is in the public domain may not apply for a patent.

There are notable exceptions to these rules. First, if an invention is made during the course of the inventor’s employment, the employer typically is as- signed the right to apply for the patent through an assignment of invention agreement signed by the employee as part of the employment agreement. A second exception is that the rights to apply for an invention can be sold. This option can be an important source of revenue for entrepreneurial firms. If a firm has an invention that it doesn’t want to pursue on its own, the rights to apply for a patent on the invention can be sold to another party.

3. The process of obtaining a patent

Obtaining a patent is a six-step process, as illustrated in Figure 12.3 and as we discuss here. The costs involved include attorney fees, fees for drawings (which are sometimes lumped together with the attorney fees), and USPTO filing and maintenance fees. For a small entity, it costs around $700 to file a utility pat- ent application. An additional $480 fee is assessed when a patent is issued. Maintenance fees of $800, $1,800, and $3,700 are due at the 3 ½ year mark, the 7 ½ year mark, and the 11 ½ year mark, respectively, to keep a patent in force. Additional fees may be assessed depending on the nature of the patent. Attorney fees vary depending on the complexity of the technology involved. An estimate of attorney fees to obtain a patent is provided in Table 12.4.

The inventions that independent inventors create range from relatively sim- ple to moderately complex. Businesses are across the board. For a highly com- plex technology, such as a semiconductor product, the costs could substantially exceed $15,000.

The six-step process for obtaining a patent is shown next.

Step 1 Make sure the invention is practical. As mentioned earlier, there are two rules of thumb for making the decision to patent. Intellectual property that is worth protecting typically is directly related to the competitive advantage of the firm seeking the protection or has inde- pendent value in the marketplace.

Step 2 Determine what type of application to file. As mentioned, there are three types of patents: utility patents, design patents, and plant patents. The most common by far is the utility patent.

Step 3 Hire a patent attorney. It is highly recommended that an inventor work with a patent attorney. Even though there are “patent-it-yourself” books and websites on the market, it is generally naïve for an entre- preneur to think that the patent process can be successfully navigated without expert help. A correctly prepared patent application with cor- rectly defined claims will provide the best chance for an application to be approved. In addition, a new product may have patentable features that may not be obvious to a novice in the field. As an indication of the difficulty of writing a patent application, the USPTO requires all attor- neys and agents to pass a tough exam before they can interact with the agency on behalf of a client.

Step 4 Conduct a patent search. To be patentable, an invention must be novel and different enough from what already exists. A patent attor- ney typically spends several hours searching the USPTO’s database (which is available online at to study similar patents. After the search is completed and the patents that are similar to the invention in question have been carefully studied, the patent attorney renders an opinion regarding the probability of obtaining a patent on the new invention.

Step 5 File a patent application. The fifth step, if the inventor decides to proceed, is to file a patent application with the USPTO in Washington, DC. Applications can be filed electronically or by mail. Unlike copy- right and trademark applications, which can be prepared and filed easily by their owners, patent applications are highly technical and almost always require expert assistance. In terms of priority in filing a patent application, the United States uses a first-to-file system, as is used in all countries. The United States switched to a first-to-file system from a first-to-invent system on March 16, 2013, with the en- actment of the America Invents Act. In a first-to-file system, the right to the grant of a patent for an invention lies with the first person to file a patent application for the invention, regardless of the date of the actual invention.

Step 6 Obtain a decision from the USPTO.  When the USPTO receives a patent application, it is given a serial number, assigned to an exam- iner, and then waits to be examined. The patent examiner investi- gates the application and issues a written report (“Office Action”) to the applicant’s patent attorney, often asking for modifications to the application. Most of the interactions that applicants have with the USPTO are by mail or e-mail. Occasionally, an inventor and a lawyer will meet face to face with a patent examiner to discuss the invention and the written report. There is room to negotiate with the patent of- fice to try to make an invention patentable. Eventually, a yes-or-no decision will be rendered. A rejected application can be appealed, but appeals are rare and expensive.

One provision of patent law that is particularly important to entrepreneurs is that the USPTO allows inventors to file a provisional patent application for utility patents, pending the preparation and filing of a complete application. A provisional patent application provides the means to establish an early effective filing date for a nonprovisional patent application, and allows the term “Patent Pending” to be applied. There is often confusion regarding what a provisional patent application is. It’s not a provisional patent—there is no such thing. It’s merely a provisional application for a patent, and is used to establish an early filing date for a subsequently filed full utility patent. It can actually give an entrepreneur a false sense of security if not filed correctly. The ins and outs of filing a provisional patent application are explained in this chapter’s “Savvy Entrepreneurial Firm” feature.

In some instances, entrepreneurs license their patents to larger firms, which have nationwide distribution channels to market a product. In fact, consumer product companies like Procter & Gamble (P&G) and General Mills, which at one time relied strictly on their own scientists to develop new products, now have formal programs for inventors and entrepreneurs to submit product ideas, as illustrated in the “Partnering for Success” feature. The arrangements described in the “Partnering for Success” feature represent a win-win for both inventors and larger firms. The inventor receives distribution for his or her product and potential licensing income, and the large firm receives an innovative new prod- uct to place in its distribution channels. One requirement most large firms have is that an idea must be patented or a patent must be applied for before they will consider licensing it.

4. Patent infringement

Patent infringement takes place when one party engages in the unauthor- ized use of another party’s patent. A typical example of an infringement claim was that initiated by Alacritech, a start-up firm, which claimed that Microsoft violated two of its patents on technology used to speed the performance of computers connected to networks. According to court documents, Alacritech showed its technology to Microsoft, hoping that Microsoft would license it. But Microsoft passed on the offer and later announced a surprisingly similar tech- nology, called Chimney. Alacritech again offered to license the technology to Microsoft but was rebuffed. In response, Alacritech filed suit against Microsoft. Microsoft claimed that its technology was developed independently.17 After hearing the case, the U.S. District Court in San Francisco sided with Alacritech and filed a preliminary injunction against Microsoft, preventing it from ship- ping products that contained the contested technology. Later, the suit was set- tled out of court, with Microsoft agreeing to license Alacritech’s technology.18

The tough part about patent infringement cases is that they are costly to litigate, which puts start-up firms and their entrepreneurs at quite a dis- advantage. While there is no way of knowing how much it cost Alacritech to sue Microsoft, a typical patent-infringement suit, according to Fortune Small Business, costs each side at least $500,000 to litigate.19

Source: Barringer Bruce R, Ireland R Duane (2015), Entrepreneurship: successfully launching new ventures, Pearson; 5th edition.

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