How Patents Are Really Used

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Texas Border Business

Fernando González

By Fernando González

I once met with a couple that wanted to quit their day jobs and create a startup around a design for a new trashcan lid. They had already patented it using their savings. I gave them the “bad” news that they would have better results keeping their day jobs and licensing their patent to an existing manufacturer rather than creating an entire company around a single design. I told them any new startup has to build up all the overhead of a company while competing with established manufacturers with all their advantages. They left very unhappily with my advice, but 6 months later called back asking for referrals to lawyers that could help them license out the patent after all. This scenario is plenty common.

According to the United States Patent and Trademark Office (USPTO), more than half of U.S. patents are allowed to lapse because of unpaid maintenance fees. This implies those patents did not get licensed or generate any value. Some reports state that only 2% of patents issued ever earn back the cost of the patent, and that between 75% and 95 % of patents lie dormant.

Consider the difference between selling and licensing a patent. Selling is called assignment of a patent and changes the actual ownership. The filing at the Patent Office gets updated to reflect the new owner but keeps the original inventor names. Licensing is not assignment because the licensor still owns the patent and the licensee is granted some rights, usually in exchange for ongoing royalty payments. The specific rights granted must be detailed in the license agreement, and each agreement is different.

An exclusive license should cost more than a non-exclusive one and will likely include other grants such as the right to sue infringers of the patent. Some licenses are actually for an entire portfolio of patents. (Portfolio licenses are frequently cross-licenses between two competitor companies.)

Companies that patent their inventions are generally not interested in licensing anything out. They will hold their patents defensively and generate zero licensing revenue. Instead, they expect to generate extra profits by excluding others from the market. Some large companies might license out inventions they unintentionally created that are unrelated to their own business functions. This can be an alternate source of revenue but faces the same issues of recovering patenting and licensing costs before the effort is profitable.

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Individual inventors rarely have the resources to both patent their idea and bring it to market, so most of those patents get licensed to existing manufacturers.

Universities are very different from either company or individual inventors. Universities are non-practicing entities, meaning they don’t manufacture things for profit, so they are only interested in licensing their patents to companies. A few universities will only license to established companies since those companies can better estimate a patent’s value and negotiate an appropriate royalty rate. A few universities default to starting up a company for each group of patents and licensing them into those startups with attractive, exclusive terms. This is motivated because academic inventions tend to be very early stage and need some development before established companies will be interested. This is especially true for anything that needs FDA approval. Most universities do a mix of both depending on the technology.

Universities usually publish a list of available technologies on their own websites or other portals where technology scouts can go to browse for interesting patents. If you are curious to start a company and want to license a university technology, look for their office of Technology Commercialization or Technology Transfer.

Before you spend thousands to patent your idea, ask yourself: do you want to pay for a patent merely because you had the idea, or because you first went and found a huge unmet market need and then invented the solution to meet that need?

Fernando González is the Director of Technology Commercialization at UTRGV and has spent 20 years involved in software development, telecommunications, copyright, and patent licensing and supporting start-ups.

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