License to Kill–Patenting Pitfalls

Innovation Stream--Moving ideas to patents to licenses to commerce

Inventors face a number of obstacles in looking to see their inventions and ideas translated into new companies and successful commercial products.  It is not enough to simply patent your invention and then wait for the masses to knock down your door looking to make you rich through a license or startup investment.  Two weeks ago at their monthly meeting, the Rio Bravo Technology Entrepreneurs Council (RBTEC) had a panel of experts delve into some of the issues and pitfalls related to licensing patents.  This included, purposefully, licensing by large companies to tie up inventions that may compete with their current products (“licensing to kill”) to control their market share.  Such defensive strategy may get the inventor funds for their efforts but ultimately does little to get fresh new ideas into the market place.  Before going further its helpful to look at the backdrop to patents and licensing in our region and the market in general.

In 2010, the US Patent and Trade Office had over half a million patent applications and granted close to a quarter of a million (244,341), roughly half of which were foreign.  Mexico by contrast over the 192 years of record keeping had a only a total of roughly 250,000 issued patents during almost two centuries!  Given the major differences in the legal, regulatory and academic environments of the two countries, the disparity in these numbers is not a clear indicator of creativity.  However, they do reflect the challenge of creating knowledge-based companies in Mexico given the gap in the number of patents issued.

Focusing in the US Paso del Norte region (roughly from Santa Fe, NM to El Paso, TX) we see federal research investments exceeding $6 billion annually, mostly for two national labs (Sandia and Los Alamos), Holloman and Kirkland Air Force bases, White Sands Missile and Test Facility, and several major universities, including UTEP, NMSU and UNM.  Within the DOE nationally there are over 20,000 patents available for licensing with some 2,700 found at the two national energy labs in our region.  At the university level, the numbers drop significantly with UTEP, NMSU and UNM holding 20, 34 and 347 patents available for licensing, respectively.

Finally, inventions are developed not only by public research and educational institutions, but by private companies and individual “garage” inventors (interestingly, experience shows this latter group often is more innovative and successful as entrepreneurs than those from the better funded but more risk-averse, large public and private institutions).  A review of US Patent statistics by metropolitan region shows that individuals/companies had obtained significant numbers of patents during the past five years —  64 in Las Cruces, 136 in El Paso, 199 in Santa Fe, and 1,034 in Albuquerque.

While one can wish for more patents  and intellectual property (IP) to be created, it would appear that lack of IP is not a significant barrier to creating new companies and commercial products in the border region.  The RBTEC panel discussed a number of obstacles that exist in moving IP from the laboratory (or garage) to the market place.  These include:

  • Costs–patenting in the US  alone costs approximately $25,000 per patent but provides protection only in the US market.  If the product is to be  protected in other markets (Europe, Latin America, China, Japan, India, etc.) the patenting costs alone can exceed hundreds of thousands of dollars per invention.  One patent alone is often insufficient in protecting the basic IP of an invention and inventors often look to have a host of patents to protect the core IP.  In the case of large companies and public institutions, the costs of patenting are borne by the institutions, who also own the IP.  The actual inventors have already turned over any ownership rights and, if fortunate, obtain some portion of royalties if and when the patents are licensed.  For individuals without institutional support patenting costs are a significant barrier to moving forward.
  • Licensing Options–in determining licensing options, the owners of the patent, assuming they have no direct or personal interest in commercializing the invention, are looking for return in the form of royalties.  Thus, any licensing agreement would look to maximizing returns, with negotiations centering on exclusivity (full or partial licensing), market geographical area (one country, several or globally), market segment (different products using the same patent) and likelihood of success with built-in fee structures as the company successfully employs the invention, obtains growth, etc.
  • Importance of Inventors–a patent is only as good as the information contained in the documentation.  Much is usually left out, in part to protect ongoing IP development as well as information considered as “trade craft” or “trade secrets” for the owner’s protection. Often the information in the patent is insufficient to actually apply the invention to a successful product; therefore,  a strong relationship with the actual inventor either as part of the company or as a consultant  must be established and maintained at least in the initial stages of the product development.  This creates a major problem when working with security sensitive institutions such as the national labs whose researchers and actual works are insulated from the public.
  • Competition–licensing companies often (always) are looking to protect themselves and their products and might look to license a patent with no intent to actually commercialize the product (the so-called “license-to-kill” strategy already noted) to protect  sunk costs in other products and/or to prevent competitors from getting the control of a new, perhaps, better technology or product.  The licensor must be careful that they have take-back provisions incorporated into their agreements to avoid their inventions simply being put on the shelf to gather dust.
  • Changes in the patent law–the introduction of new regulations  where “first to patent” in lieu of the “first to invent” will govern the issuing of new patents —  is expected to have significant impact on how patents and licensing strategies will play out in the future.  This is more likely to impact the small inventor rather than corporations where time is money and the little guys don’t generally have  ready access to the amounts needed to protect their ideas by moving quickly to patent.

Over the past several decades our public institutions have invested considerable time and effort to look at strategies to justify the significant public funding in research and development ($ billions annually as already noted, in the Paso del Norte region alone) as well as to obtain returns that could provide additional research support back to those institutions.   In general such efforts have led to the establishment of patent and technology transfer offices (TTO’s) and policies to regulate the involvement of researchers and faculty of any royalties derived from institutionally owned patents.  While these strategies have been successful in part (witness success, for example, at Stanford or MIT that have had TTO’s for decades with significant return of their investments), simply establishing TTO’s (UTEP’s first opened theirs in 2001) while necessary, are not sufficient for accelerated commercialization.  These efforts have been primarily “static” in nature, focusing almost exclusively on patenting and licensing with little effort in being “proactive”–that is, actually working with the community outside of the institution to “pushing” IP–even some that may not belong to the public institution– to create sustainable start-ups.  Some new models have been developed of late, such as UTEP’s Center for Research Entrepreneurship and Innovative Enterprises (CREIE) and the the PdN Hub of Human Innovation which are exploring new ways of commercializing technology in our border region.  These will be the topic of future posts.–Paul Maxwell

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