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How to budget for patents and how to keep the costs down – December 2002

In brief: This paper was the topic of the third seminar in AAR's monthly 'How to...' Intellectual Property seminar series. Chris Bird , Special Counsel at Allens Arthur Robinson Patent & Trade Marks Attorneys, outlines the timetable for a patent filing program, explains what costs you face at the major decision points, and spells out the options available to ensure you're getting the most cost-effective protection.

Introduction – the hard facts
  • Patents can be one of the most valuable assets a company has
  • Patents are expensive, and embarking on a patent filing program should never be undertaken lightly
  • Making the right decisions at the right times is essential

To give a well known example, IBM were granted over 3,000 US patents in 2001. IBM is known for pursuing patents and for reaping royalty income from IP the company also pursues a policy of patenting non-core technology with licensing in mind. IBM collected around US$1.7bn in 2001 in royalties, which works out at around AU$1m per patent issued.

So, how expensive is it to get a patent? As a ballpark estimate (and the costs can vary greatly in different fields of technology and in different territories) one should budget AU$25-$30k per country. For an average case, to get protection in a handful of major territories (Australia, US, Japan, UK, France and Germany) this will amount to around AU$150-$200k at NPV, including renewals. In other words, if you can't see a return exceeding this, you should think long and hard about why you may be patenting. Clearly, there can be strategic reasons where the intangible value in the market of having a patent cannot be readily quantified, but at least its important for the decision makers to have these figures at the back of their minds.

The good news is that this expenditure can be spread over at least 21 years, and that with a good procedure for continued monitoring and constant re-evaluation you can manage the patent costs and therefore your cashflow.

The Patent Filing Program

These charts give an overview of the patent application process in Australia and of an international patent filing program. Your primary focus is likely to be obtaining an international position, and not surprisingly the real costs come when you start looking at securing protection overseas, particularly in Europe, Japan and the US.

So if we turn to the second flowchart, let us go through the steps of getting protection in a number of territories.

Assessment, novelty searching, patentability advice, and drafting and filing priority document, will cost in the region of $4-$15k. This large variation is down to the fact that many different factors can come into play here. Most importantly, this is the stage that you just can't skimp on. In many ways it really is the most important part in the life of the patent. Your entire prospects for protection rest on what you file at this point, and you are likely to be largely bound to what goes in (and what doesn't).

Preparing and filing PCT or complete applications can be costly, especially if developments have taken place during the first year that mean considerable redrafting time is needed. We would budget $10k-$15k for a PCT application. It is important to be clear on why we file a PCT, when it increases the overall cost of the patent filing program.

Filing national/regional phase will cost $2k-$15k per country – depending on the requirements for translations, the level of filing fees and the cost of employing local agents.

Complex prosecution (which would include negotiation with patent office, via a local agent) can add a cost of up to, say, $10,000 in any territory.

Getting the patent grant is not the end of the story. Then there are Renewals up until the end of the 20-year term. These are usually due at same time in different territories, except for in the US.

Patent budgeting tools are available (eg Web-based) to enable you to see cost projections over the lifetime of a patent, and look at different scenarios to investigate the likely cost impact of taking different options.

The Stage-Gate Process (analogy with new product development)

It can be very useful to think of seeking a patent as analogous to the process of product development, and the application stages akin to the stages of product development. For example, the assessment of prospects for protection is like early stage R&D – proving whether a new product idea is worth pursuing. The priority year allows more detailed development of the idea and investigation as to commerciality of the invention, whilst the prosecution is further product development and testing, and the grant can be seen as the product validation and launch.

The Stage-Gate Process is an operational roadmap for driving new product projects from idea to launch. It promotes effectiveness and efficiency and is probably the world's most widely used product development process tool, going back to NASA and their management of aerospace projects. Why is it so important and so useful? It breaks up the activity into sequential phases, and has been found to be extremely effective in controlling product quality and development expense. It is thus very popular with management, as it restricts investment in the next phase until the management is comfortable with the outcome of the current stage. Now this works well in the primarily linear context of patent applications.

The Stage-Gate Process
  • Dynamic process of stages (defined activities) and gates (decision points)
  • Stagehands and Gatekeepers
  • GO, KILL, HOLD, RECYCLE

In the stage-gate process, we view the development project as a dynamic process, and the stage-gate model divides this into a series of activities, known as stages. Each stage contains a set of defined concurrent activities (which can often be executed in parallel to enhance efficiency). Gates are the decision points where the decision makers have to decide on continuance. In the terminology we shall use we can think of the 'Stagehands', carrying out the stage activities. In the patent filing scenario, this is primarily your patent attorney, drafting, amending, negotiating with patent offices, preparing necessary documentation at every stage and also your inventors, as developments in the technology may well be taking place in parallel, and these need to be factored in at each stage. Then, in charge of the gates, there are the 'Gatekeepers', which is you, able to commit resources for the transition between successive stages. The decisions themselves are simple, GO, KILL, HOLD, or RECYCLE. But making the decisions is the key to the entire process. Gatekeepers should have a preset list of objective criteria and rules for the decisions at each gate:

  • Have the deliverables been executed in a quality fashion?
  • Is the project attractive from an economic and business standpoint?
  • Is the information sufficient to make a decision?
  • Is the action plan and request for resources sound?

Why use the stage-gate process?

  • It puts discipline in what may otherwise be a chaotic and subjective process
  • It focuses attention on quality and benefits (performance) at the right times
  • It can speed up the process
  • It ensures no critical steps are omitted
Rationalising the decision points (in a patent filing program)
  • To file, and when to file
  • Filing complete application(s)
  • Entering the national phase
  • Opportunities for deferment of examination
  • Continuous monitoring of cases through renewals

These are not, of course, all of the gates. The above five gates represent the major spend points.

Gate 1. Filing provisional. GO or HOLD. This should not be undertaken lightly, as it starts the clock ticking, can involve significant expense, and may well also tie up valuable inventor time. Timing is critical. Gatekeeper needs comprehensive discussion with attorney – and inventors – to get this right.

Gate 2. Filing PCT or national completes. GO, RECYCLE (if not yet published), or KILL. This is a key decision point, as its the last chance to add subject matter, and taking this step will (almost certainly) lead to publication of the invention.

Gate 3. Filing national applications. GO or KILL. Almost certainly the most expensive single spend point (translations, foreign agents, etc), and absolutely critical, as any countries you don't continue in are lost to protection. Very careful cost/benefit analysis is needed for the territories that may be of interest.

Gate 4. Prosecution to grant. GO, KILL, or HOLD (deferment). Can be expensive, as overseas attorney costs can be very high if complex negotiations (and translations of instructions) are needed. If deferments are allowed, this can be very useful. For example, 7 years deferment of examination is possible in Japan. During this stage you can look at amending the application to reduce grant fees (eg reduce claim numbers to avoid surcharges, eg in Europe and Japan).

Gate 5. Maintenance. GO or KILL. Annual maintenance provides excellent gates at which Gatekeepers can continuously monitor the justification to continue with keeping a patent alive. Renewal fees generally increase over time, so the cost/benefit analysis should be revisited each time you need to instruct on renewals. In US renewals are due at 3.5, 7 and 11.5 years.

Note: there are often possibilities to make decisions late, but this is risky and can significantly increase costs. Late fees can be very severe, both in terms of patent office fees and in urgency fees to foreign agents.

Accounting for patents
  • Valuing your IP assets
  • Expenses v capital assets
  • Amortising IP capitalisation

Think about how you account for your patent spend. Please bear in mind the usual proviso that you should seek tax advice before setting any accounting policy.

Until you have a revenue, it's extremely difficult to value a patent right (or any other IP right). But it is a capital asset, and has a value, and you do not necessarily have to put down patent expenditure to operating cost. You may consider instead capitalising all your expenditure in seeking and maintaining a patent. You then amortise over the 20 year life of the patent, so by the end of the term the spend has been written off. This approach does not necessarily reflect the value of the patent at any one time, but would appear to be a fair way of allocating the cost over time. One downside is that an abandonment of a patent mid-term will involve a sudden write-off of the remaining value.

Summary
  • Patents and patent applications require continuous monitoring don't simply wind them up and let them go
  • Think of a patent application as a new product in development
  • A well managed patent portfolio can be one of the most valuable assets a company has

Remember, the best instructions get the best and most cost-effective results.

Bear in mind that delaying decisions (HOLD or RECYCLE) generally increases overall cost, but weigh this up against cash flow issues.

Like any development activity, resource spent early on is likely to save significant cost and avoid headaches down the line, and to give rise to a better product. For example, putting a lot into the initial drafting, getting assignments into place early, and seeking good and timely advice on the filing program, can avoid an whole raft of potential problems later on.

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