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How to Beef Up Your Patent Budget 

Convincing senior management to increase an IP department’s budget can be one of the biggest challenges for in-house counsel, but there are some straightforward steps they can take to get more bang for their buck.

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When compared to large, well-established businesses, developing tech companies often have to contend with limited resources for managing patent IP. This can be challenging, especially when in-house counsel are regularly called upon to deal with other day-to-day legal issues. The resource challenge most often expressed from counsel is a lack of money, which hamstrings execution of even the simplest of strategies. There are many reasons for a limited IP budget, but at the root is a natural tendency of upper management to defer investing in IP, usually because IP is generally a long-term proposition, and a growing business always has more immediate challenges. However, putting aside IP investment often leaves growing tech companies at a disadvantage as their patent portfolio is far outpaced by the growth of the business.

Take John H., for example, in-house counsel at a successful software startup. (John H. is not his real name, but these are real-world examples throughout the article with identities changed for the sake of anonymity and confidentiality.) John’s startup had just reached $250 million revenue and they were predicting revenue of $500 million the next year. Ten patent filings for the core technology had become issued patents and ten additional patent applications had been written and submitted. John had also just secured a much-needed increased budget of $2 million for the next year. His experience told him, however, that his biggest challenge was soon going to be aggressive litigation from the competition. But where was the threat going to come from, who was most likely to make the first call, and how was his $2 million budget going to cover the complexities brought by multiple competitor licensing advances?

Over the years, through multiple patent market downturns, we’ve advised patent counsel on tactics they can utilize to increase and better manage their patent budget. Some of these tactics are well practiced, while others are more creative, but no less essential. We’ve seen each strategy work to find extra money in the proverbial IP-couch cushions, and, just as importantly, underscore the real value of a well-thought out IP plan to a growing business. There are three direct ways of helping a fixed budget: (1) reducing the existing cost basis; (2) utilizing other sources of money; and (3) generating value. Of course, each tactic and variation can affect other strategies in quite complex ways. Recognizing when to use any given tactic, even though it may be an obvious strategy to consider, can be a difficult art to master. Because everything is dependent upon context at the time of implementation, it is natural to grab any opportunity when it presents itself. However, we have found that this is seldom the best action. Looking ahead and sticking to a plan can smooth out unseen bumps, lead to better outcomes, and maximize limited resources to the best effect.

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Maintenance Review

The most used tactic for saving money in our experience is triaging maintenance review. As the maintenance payment window nears for each patent, a review of whether the patent should be kept alive is essential. Regular maintenance review is common practice, but for companies that haven’t executed this strategy previously, a full portfolio review identifying patents to abandon can be a proactive solution for a one-time influx of cash savings. A judicious and scrupulous appraisal on what patents to keep and what patents to cut is the hallmark of a strong patent program.

A common question we hear is, “How should our company decide which patents to keep and which patents to abandon?” There are three prime areas on which to focus. The first is identifying patents with overly narrow claims. Often times, patent claims become so narrowed through the course of prosecution that by the time they issue they’ve lost their breadth and don’t cover key aspects of the original invention. The second area to consider for abandonment are redundancies within the patent portfolio. Many tech companies will find that they have a number of essentially duplicate patents. For instance, a family of five patents may have three key patents, but also two patents that, for all intents and purposes, cover very similar aspects of the invention. These two patents could be abandoned without losing much (if any) of the value of patent family. The third prime area to contemplate is non-core patents. The patent portfolio of a growing tech company may begin to amass patents covering technologies that are not core to their business. This could be for a variety of reasons, including a change in company strategy or acquiring patents through a merger or acquisition. All three of these areas could present patents to abandon that would reduce the existing cost basis.

Consider a hypothetical growing tech company with a modest patent portfolio of 50 U.S. patents. A review of their patent filings may reveal upwards of 10 patent filings that are narrow, redundant, or non-core. For patents early in their life approaching the first maintenance fee window, abandonment for a small entity would save $6,300 over the life of the patent, and would save $63,000 for this company to abandon all 10 identified patents. If the company has more than 500 employees, which many growing tech companies do, they would no longer qualify for small entity status, in which case the cost savings double at $12,600 over the life of the patent and $126,000 saved from all 10 patents. This type of savings can be directly invested back into newer and stronger filings, and it hasn’t taken into account time and cost savings from the ongoing management of the patents throughout their life. 

When performing a maintenance review, however, always be judicious with what patents to keep. One thing to consider carefully is the potential for indirect effects abandoning assets can have on the business as a whole. For example, as your company grows, it will naturally tack in the market place. This may leave some patent applications as less germane and therefore they may become ideal candidates for abandonment. However, continuing to maintain a select few can be advantageous because of potential licensing opportunities down the road, or in order to be ready if the company tacks back. In addition, our clients have found the discipline of applying a dispassionate review under the constraint of always having to keep something for an undefined future can be very helpful in teasing out the real value and quality of each asset that is maintained, which is important for every IP portfolio—value and quality. If questioning whether to keep or abandon a particular patent, we typically counsel to err on the side of keeping.

An important data point in the course of the review is tracking the cost savings on maintenance fees that will be preserved each year for the would-be life of the patents. Creating a detailed report of maintenance fee savings for the money decision-makers displays your department’s fiscal responsibility and can help convince them to add any reduced expenses to future budgets.

The aforementioned in-house counsel, John H., was able to save money by deciding which of his applications matched his IP strategy. He compiled a report that outlined the savings he would create by reducing the redundant filings and eliminating excess prosecution, issuance, and maintenance fees. With only ten patent applications to review at the time, the savings weren’t significant, but as we’ll see, he was able to combine the review with other strategies to effectively increase his budget. Regular maintenance review won’t add millions, but every little bit helps.

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Utilize Other Budget Sources

When a large tech company in Silicon Valley was recently nearing its IPO announcement, the Director of Intellectual Property knew from experience that he was going to face challenges. He had made a number of requests for an increased IP budget over the last year, and while many of them were approved, management made clear no more budget increases would be approved prior to their IPO, (as is typical as IPO announcements near). From experience, he knew the announcement was sure to put a target on their back, especially given litigious incumbents in his company’s technology space and their likely reaction to the IPO. A recent 2018 study from the University of Amsterdam published in SSRN found “that firms become targets of excessive patent lawsuits starting just one quarter before the IPO, and the intensity of such lawsuits persists in the post-IPO period.” (For additional examples, see text box for a recent history in patent threats for companies nearing IPO.) After the Director called to express his concerns, we strategized how he could increase the budget available to him without having to actually increase his IP budget at all.

During a review of their department’s current expenses, he identified items that could be shifted outside of the Intellectual Property department. They were currently managing the intake of IP from two recent acquisitions and the burden of analysis, cataloging, and maintenance of the patents and trade secrets was theirs. The Director’s team quickly made the necessary internal moves to have these expenditures shifted to existing budgets set aside for company acquisitions. By acting quickly, they were afforded some budget relief.

Next, they reviewed patent costs both early and late in the patent life-cycle. Expenses early in the invention process were being paid for by the Intellectual Property Department, so the Director created some budget flexibility by getting approval to allocate the initial patenting process to the engineering and R&D budget, specifically initial invention disclosure and the first review of whether to pursue a patent. In addition, the employee incentive program for participating in the generation of patents was moved into the R&D budget as well.

The Director was then able to create even more budget flexibility by shifting a portion of his expenses to a litigation budget that had been set aside. As the number of inbound patent licensing requests increased, so did the cost to assess and neutralize these threats. He was able to allocate these costs to the legal budget as litigation deterrence, thereby removing another upcoming expense from his budget.

All of these strategies to reallocate budget expenses may not be available to every Director and General Counsel, but we have found in-house counsel can often find budget relief by utilizing other sources of funds for discrete tasks they must undertake. 

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Using IP as an Asset in Broader Business Deals

Some strategies for generating cash from patents are well-known. For example, divesting non-core technology the company has pivoted away from is common practice. Some tech companies additionally leverage their patent portfolios in licensing efforts. Both strategies help to shift the perception that the IP Department is just a cost center and relieves some of the short-term pressure often applied by management. However, patent monetization through these avenues is not available to a large number of companies. Licensing creates a slew of complications, not the least of which is disrupting the vendor and partner ecosystem, and patent divestment can be a difficult proposition for a tech company with an eye on technology expansion. But an often-under-utilized strategy that growing tech companies should implement is to leverage their IP in partner and vendor negotiations.

Creating value from IP is often seen as only about licensing and divestment, but the reality is that it’s extremely difficult for the large majority of companies. A much more powerful way to utilize IP is as an asset in broader business dealings. The strength of this tactic isn’t to take a threatening approach, but quite the opposite. Helping potential partners and vendors understand the value in creating a shared ecosystem can help create premiums by adding weight to agreements made during final negotiations. This is clearly an art, and we have seen as many variations as we have deal structures, but the underlying key to success is always a clearly quantified and an early patent assessment. Setting out the value of a portfolio at the start of a deal, even if some of the assets are only tangentially related, is essential for maximizing upside. Even plans for IP growth can be extremely valuable and have often tipped the balance in a delicate negotiation.

For example, in recent discussions between two medical software companies negotiating the specifics of creating and releasing a joint product to the market, our client was having a difficult time getting favorable terms on a few items important to them—two in particular. The two sides were a small percentage apart on the agreed distribution of value that would be allocated to each company from the product’s success. Our client wanted a 60-40% split, while the other company wanted an even 50-50% split of revenue. Additionally, since our client’s company was investing the majority of the engineering personnel into the development project, retaining the intellectual property themselves was important to them. With some guidance, the CEO congenially introduced their modest but growing portfolio of 15 issued U.S. patents and applications into the discussions. Through showing the unique value of their patents and agreeing to offer a broad non-exclusive license, our client was able to retain all rights to the newly developed IP and received agreement on a 57-43% split of revenue, a percentage allocation much closer to their desired position.

Rather than letting IP sit on the shelf until it must be enforced, smart tech companies regularly utilize their IP as an asset in broader business dealings. It can create considerable value for the company; value that is sometimes tangible and trackable, and other times is hard to quantify, but the positive business effects are observable.

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Plan Ahead

The most creative tactics for increasing the patent budget always involve managing up. The first and most obvious step is arming upper management with patent data. A good starting point is compiling litigation data in your market space and the litigation history of your competition. The purpose isn’t to create FUD (Fear Uncertainty and Doubt) within upper management, but instead to present a realistic picture of the tendencies of the competition and help crystalize in their minds why an increased budget may be required, if not now, then in the future. (It shouldn’t need to be said, but the affect a good understanding that IP-leverage can have even on day-to-day decisions is often far under-appreciated outside the IP domain.) A patent landscape study comparing your portfolio to the size and strength of the competition is another good starting point—this is easily managed, inexpensive, and can be done in partnership with outside expertise. 

An effective and often missed opportunity is threat forecasting, where an analysis identifies possible risks and threats from competitors and outlines the potential future costs needed to defend against those threats. The forecast helps to grow mindshare and can directly influence company decisions. By bounding the problem, we find this encourages upper management to be open to the idea of assigning money now in preparation. For example, a General Counsel of a fast-growing med-tech company created a threat forecast that showed that between $10 and $20 million would be needed to nullify likely litigation threats over the next 3 years. In the end, in addition to her previously approved $1 million intellectual property budget, she was assigned an extra $1 million by management to defer later costs and to take advantage of an advantageous patent market which was at a low in its cycle.

An easily missed, but important piece of data, is an equivalent review of the competition with respect to their IP. For example, a competitor may be struggling to maintain traction in a particular market segment, but may have some excellent IP. By understanding the ebb and flow of the competition’s IP holdings as early as possible, opportunities to acquire or protect may arise, so allowing upper management to adapt their thinking at the right time. The aforementioned General Counsel of the med-tech company provided data to her management about a minor competitor who was missing updates to a particular product line, but who had several key patents in this area. By acting early, an agreement to license the patents was put in place, which laid the groundwork for the company to be acquired later on for reasonable terms.

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Creating an IP Strategy That Fits

Every industry and each company are different. Strategies that might work for mid-sized companies in the medical device space, likely won’t work for a small software startup. The key is to create a comprehensive IP strategy that fits your company’s current needs, and then regularly review the plan to adjust it as the company grows and pivots. No single strategy is likely to be the IP-silver-bullet, especially when it comes to increasing your IP budget, which means implementing a variety of strategies is important to stretching every allocated dollar to exact maximum value.

Remember our in-house-counsel friend, John H., who was able to save money by deciding which of his applications were essential to his IP strategy? The actions he implemented to increase his IP budget were more wide-ranging. In addition to prosecution and maintenance savings, he was able to use part of a “litigation war chest” that had been set aside for the company to acquire a license to a patent portfolio of a company that had a history of being very aggressive when protecting their market share. Interestingly, the win for John with upper management was the fact that the competition was now more comfortable with where John’s company was headed. Nearly as important was the peace of mind management had that they were no longer #1 on this competitor’s hit list, for at least the next few years. (As an aside, the licensee actually later became an ally with John’s company in a much larger litigation effort from other incumbents. Whether this deal was a defining moment is unknowable, but any action often has far-reaching consequences, and so may be worth pursuing.)There is no simple prescription for adding money to your budget, but taking simple steps can be effective and may have advantages that you can’t yet possibly see. By being creative, upper management can have better data and, as a result, a more inclusive appreciation of the intricate ecosystem that you are building and its importance to a growing company. 

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This article, written by Vitek IP, first appeared in IAM Winter, published by Law Business Research – IP Division. To view the issue in full, please go to www.IAM-media.com.

Need assistance with your patent portfolio? Looking for patent analysis support? Wanting to sell your patents and maximize the value? Contact Vitek today.

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Vitek IP’s blog provides active thoughts on the state of the patent market. The words written here are not intended to be legal or investment advice, nor should they be taken that way. We know you are an intelligent, rational human being and you are not considering an opinion blog to be anything more than that–an opinion. Glad we all agree.