Let’s Make a Deal

By Jack Lander

Maxine Horn made a good case for “open innovation” in the May 2011 issue of this magazine (Trust & Open Innovation – a Case for ‘Open Protection).

She challenged us to debate models that might enable inventors to present ideas to industry without a patent and yet be compensated.

Here’s my proposal for what she calls a “fair trade model.”

The prevalent corporate policy is that every proposed invention is in the public domain until you and I prove otherwise with an issued patent. With very few exceptions, corporations don’t pay for mere ideas that hopefully lead to a new product.

So, what can we do if we are to profit from our ideas without waiting nearly three years or so for our patents to issue, if, indeed, they issue at all? (Less than half of applications result in issued patents).

We can attempt to license our product while our patent application is pending, of course. But corporations don’t want to get involved in licensing agreements until they see exactly what the U.S. Patent and Trademark Office issues.

Broad patent application claims can make a marketing director drool, but such claims will likely be narrowed by a patent examiner, or even rejected outright. Either narrowing or rejecting would leave the issued patent with diminished value for both the inventor and the licensee. So, the corporate preference is for waiting until the patent is issued.

But the long wait for issuance of the patent can reduce its value, even if all the claims are granted as written in the application. The market that once appeared so inviting now may show less promise. There is definite value in being first, or at least early, to market.

As Don Kelly, a former USPTO chief of staff and now a licensed patent agent and principal at Intellectual Assets Management Associates in Alexandria, Va., states: “. . . Intellectual assets coupled with the strategic advantages of early access hold great value for the licensee.”

IPWatchdog.com founder and patent attorney Gene Quinn adds: “With some inventions, such as a toy or game, what can matter most is getting to market first.”

Early market entry enables the inventor to reap monetary rewards and it enables the corporation to gain an edge on competition while earning a few extra years of profit. Furthermore, by being first in the marketplace, the corporation may be able to prevent competitors from gaining a significant foothold in the most desirable marketing channels.

So, the benefits to both parties from licensing while the patent application is pending appear to outweigh the detriments of waiting for the patent to issue.

All that we need is a way to write a licensing agreement that adjusts the value of the mix of issued patent claims, some of which have most likely been narrowed, and some of which may have been rejected altogether.

And we may also need to adjust for a forecast of market decline compared with the market forecast at the time of the original agreement.

But overall, such concessions are beneficial to the inventor as well as the licensee. A depreciated agreement in hand is better than no agreement at all.

Is there a means to arrive at a fair royalty value for the issued patent? Consider this model: During negotiations, the corporation and the inventor agree that if the patent issues as the application was written – that is, no claims are found to be narrowed or rejected – the royalty rate will be 5 percent.

This rate will be paid, and past payments will be nonrefundable when the patent issues even if the key claims are narrowed or rejected.

If the patent application is rejected altogether, thereafter a royalty rate of 1 percent will be paid to compensate the inventor for conceiving and revealing the invention. These rates are examples only, and not to be taken as standard.

By adjusting for an anticipated reduction in the issued patent’s value, a corporation can overcome the reluctance of paying for a mere “idea.”

What happens if the narrowing and rejecting of the certain claims results in diminished value, but the granted claims still have value more than the 1 percent minimum royalty?

Here’s the tricky part: The agreement should call for bargaining in good faith.

I expect that most agreements would be resolved politely.

In my experience, inventors tend to overvalue their inventions from the beginning, and especially to do so when the patent is issued.

Meanwhile, corporations tend to downplay the value of the issued patent, especially if lawyers focus on the narrowed and/or rejected claims alone.

A corporation may also downplay the value of its early market entry and the established thrust of its market position, including its “patent pending” status that likely discouraged competition from tooling up and entering the market.

In any event, the fair royalty value lies between 5 percent and 1 percent. What we need are standard bargaining guidelines.

These guidelines should be universal, not specific to any future case. The guidelines must have permanence, like bylaws or a constitution, but they must also be subject to amendment and changes.

What do we do when the parties can’t agree on a final royalty rate? This can be solved by binding arbitration. Using the guidelines, a professional arbiter can set the new royalty rate.

Evaluating a new product essentially is a marketing assessment. How do the issued claims limit competition, and thereby increase the product’s marketability and/or profit? The guidelines must be written to help answer these often-baffling questions.

At first, we will likely settle on the three whole numbers that are left to us in this example: 2, 3, or 4 percent. As we gain experience and tweak our guidelines, our inclination to round numbers will need refining. Why not 2.7 percent, or 3.2 percent?

Industry has a lot to gain by working with independent inventors. It also could gain by giving up its traditional attitude that unless an inventor has a strong, issued patent, he or she is not entitled to even token compensation.

Yet inventors must understand that they have to pay a price for entry into serious negotiations. That price is a prior art search and the filing of a utility patent application, or a provisional patent application, either of which must have fully developed, professionally drafted claims.

Without paying these “dues,” inventors can overwhelm corporations with off-the-wall ideas in which they have no investment and for which they have done no feasibility or prior art searching.

There may be an inviting open innovation market for inventors, but there is no free lunch.

Editor’s note: This article appears in the July 2011 print edition.

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