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.
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
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.
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.
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
Dynamic process of stages (defined activities) and gates (decision
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
Have the deliverables been executed in a quality
Is the project attractive from an economic and
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
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
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
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.
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
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.
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
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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