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The strategic potential of patents

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Image: The strategic potential of patentsIn recent years analysts and managers have become aware of the importance of knowledge for business and so their focus has moved to intellectual assets as strategic assets.

Companies are increasingly aware of the competitive advantage a well-developed and strong portfolio of patents, copyrights, and trademarks may offer. Many firms' strategy towards patents is still haphazard, however, which might be due to the scant guidance on offer.

Patents

Patents and copyrights are the two most important examples of legal means to prevent the unrestricted and unconditional imitation of fruits of the intellect. Other intellectual property rights (IPRs) include trademarks, plant patents and design patents. Databases are also protected under copyright law, and are of increasing strategic importance to firms.

Organizations can seek to protect their intellectual property in ways that do not rely on IPR law, however. Secrecy is an important additional means of protecting knowledge from being used by others than the person or organization that has developed it. Secrecy, however, needs to be enforced by other bodies of law such as labour or contract laws. Some knowledge may not be protectable by legal means, and what may be referred to as human capital, embodied in individuals is prime among that.

Patents offer a more powerful protection from imitation compared with other IPRs as they protect the newly developed idea itself. Copyright rather protects the particular way in which an idea is expressed – moderations of the idea that are sufficiently different may be developed by third parties without further ado.

Patents are not considered the most important means to protect a firm's strategic position. This differs, of course, across industries, with firms in industries such as the pharmaceutical industry, where inventing-around is difficult, indicating that patents are important.
Economically, at a more macro level, the significance of IPRs is difficult to establish. Indirect measures will have to be relied on. While it has been acknowledged that some parties may benefit more than others, in relative terms a Pareto improvement will be the expected outcome. Welfare economic analyses show that the use of patent can be beneficial to society as a whole if and when their breadth is limited, even though their duration may be longer than it is now, which increases the possibilities for inventing-around a patent. Such possibilities are as much dependent on the nature of the technology or patent law, as they are on the strategy of the firms.

Degrees of freedom in patent strategizing

Firms are increasingly recognizing the strategic importance of patenting. Having a portfolio of patents allows a firm such as IBM or Nokia to position itself as an indispensable partner in an alliance of firms supporting the development of particular technologies. These are issues of macro-strategizing between firms where patents can play an important role when setting standards, or when forming alliances.

In addition to the macro-strategizing, there is the issue of micro-strategizing that a firm needs to consider too. The considerations for micro-strategizing in relation to patents are in large part independent of the subsequent decisions to commercialize the intellectual property. While the decision by an organization to use the knowledge to develop goods for a market itself, to license the patents out to others, or to sell the patents is unrelated to the patent strategizing decisions discussed here, more appropriate patent strategizing is likely to increase the commercial value of the patents involved.

In deciding about if, when and how to apply for a particular patent, a firm must decide about a number of strategic micro issues. These include, but are not necessarily restricted to:

  1. market/jurisdiction;
  2. “location”;
  3. breadth;
  4. timing; and
  5. relation to complements.

Often, the decision to patent is taken keeping technical considerations in mind only. It is important, however, to decide where to patent, for instance. Which market or markets are the most important, strategically, for the firm? If a firm is in the business-to-consumer market and the most important market may well be the USA, there is an obvious need to patent in the USA. There may be more of a tendency or need to patent in Japan, in particular as the breadth for patents allowed in Japan is more limited and more patents may have to be applied for to obtain the same degree of protection. If the competitors a firm faces are all legally based in a particular country, a patent could only have to be applied for in that country.

There is a metaphorical sense in which “location” for a patent is important as well. Not all newly developed knowledge is actually patented. There are several reasons for this. Not all newly developed knowledge may be patentable if the legal and technical criteria are not met. In addition, strategically, a firm may decide not to (immediately) actually patent newly developed knowledge even when it may be patentable in principle. Quite a few, particularly larger firms, actively search the databases that contain the patents granted to take cues from when considering their own R&D strategy.

“Patents are part of the intangible strategic assets of a company and they may be more difficult to manage than tangible assets. Firms are only in recent years turning their attention to strategically using their intangible assets.”

Patents might also be applied for to protect knowledge that the focal firm will never use, just to mislead competing firms. A firm can decide to take out several patents for a single coherent set of newly developed, patentable knowledge, yet decide not to cover in patents certain areas of knowledge. Patents for areas A and B are applied for, but for the remaining terrain no patent is applied for. Taking a patent for the remaining terrain might jeopardize the firm's strategic position and knowledge advantage. Filing for patents A and B classified in different international patent classification (IPC) categories would decrease the likelihood that other firms may learn from the focal firm's patents. Patenting relatively unrelated (to an outsider) knowledge – leaving patents A and B disconnected – also decreases the chance of competitors piecing together the full picture of the focal firm's R&D outcomes.

Patent A is more circumscribed than patent B is. There may be technical or legal reasons for this, but there may also well be strategic reasons for a firm to decide to opt for a narrower (A) rather than a broader (B) scope of a patent. A more narrowly defined patent may allow for application of more patent for the same set of knowledge. This could be advantageous in alliance negotations or legal disputes.

Time is another strategic variable to think about as management of a firm involved in patenting in at least two different ways. A first, and more mundane one is an option only available in the USA as a firm does not need to disclose the information in a patent upon application and because a first-to-invent doctrine is in place there. A firm may apply for a patent in the USA and towards the end of the review process decide to change the application. The application enters the review process from the beginning and remains submerged like a submarine, invisible to competitors, in the meantime. A competing firm may continue to develop the same technology and also apply for a patent later. Review of the competing patent application involves checking for prior art. Prior art includes previously granted patents, but not pending patents. When the competing firm is granted a patent, the focal firm can surface its own patent and start a lawsuit against the competing firm for infringement of a patent. The focal firm, if and when it can prove it was first to invent, will be likely to be successful in court. The competing firm in the meantime will have invested resources to develop knowledge which had already been developed and could have been publicly available had it not been for the strategizing of the focal firm.

Managing intangible assets

Patents are part of the intangible strategic assets of a company and they may be more difficult to manage than tangible assets. Firms are only in recent years turning their attention to strategically using their intangible assets. The difficulties of managing intangible assets should not, however, make management shy away from becoming involved.

Patent strategizing should not be by specialists, for specialists. Within a company several departments are involved in making decisions that relate to patenting, but not every department has the same knowledge or awareness of the strategic possibilities of patents.

Specialized departments within a company that have developed areas of technical or legal expertise may be highly productive and generate much novel knowledge, but leaving all aspects of decision making in relation to patenting to these experts may result in a situation where effects on the firm as a whole are not taken into account.

The decisions about different aspects of patenting must be taken at the appropriate levels in the organization. Individuals at a high level in the organization need to be involved in (corporate) decision making regarding patenting, at least with regard to some of the degrees of freedom involved. Certainly at a high level in the organization the macro-strategic issue of a company's patent portfolio is to be considered.

July 2011.


This is a shortened version of “Patent strategizing”, which originally appeared in Journal of Intellectual Capital, Volume 12 Number 2, 2011.

The author is Wilfred Dolfsma.