The True Cost of Patent Protection, and an Ideal Tool to Make Even Smarter Patent Investment Decisions
In response to the latest newsletter, one reader wrote me to ask about when it makes financial sense to invest in a patent:
As an aside, an interesting article for a future Bulletproof newsletter might be a discussion of when a patent makes financial sense (and importantly, when it does not). I have filed more than a few patent applications of my own, many of which failed to be granted, and all but one of which didn’t “pay off.” I once came up with a cool little technology for shaping rear apertures of peep sights into a rectangular shape, and can go into the optical math of why this slightly improves your depth of field for a rifle.
My benefit is small, but real. My gamble was that if the military were interested, it could be a big payout. Turns out they are not, so the investment didn’t pay off.
“What’s your advice on determining when it makes sense to invest in a patent?”
As it happens, this was from one of my many readers who does not yet happen to be a client.
First, I’d like to suggest one small correction in the question. We shouldn’t think of investing in a patent, we should think about investing in a patent application. That serves to remind us that even with the significant investment, we might not ever get a patent. My track record has been that the vast majority of my clients do get patents on their applications, and this is probably high because of the caliber of clients I have, and the seriousness of their businesses (they aren’t typically amateur inventors with unrealistic expectations, but industry innovators with real technological advancements). Still, I advise that one should discount the benefit of an expected patent by about half, just to account for the fact that you might not get the protection you hope for. A simpler way to do the calculation is to double the expected cost, and see if it still pencils out.
The Cost of a Patent
Most of the cost of a patent is in the preparation and filing of the application. I quote the cost in each case based on the apparent complexity, then stick to the quote. Most clients prefer to know up front what the cost will be before they make the decision, instead of worrying if the hours will be more than expected.
A patent application for a typical firearms industry invention might cost as much as a fine scoped custom rifle, or a low-end transferrable machine gun (not collectible), or a shotgun that’s much nicer than a consumer model, but nowhere near as expensive as the kind that Steven Spielberg collects (same goes for his machine gun collection – you won’t need to spend that much on a patent).
After the application is filed, there’s the uncertainty about what the patent examiner will throw back at us. I don’t even try to estimate this, let alone quote the cost in advance of seeing the actual response. But on average, the typical case requires an investment in responses to arguments that are less than the initial application cost.
So let’s say that you’ve been quoted the cost of the application, and we estimate the cost of arguments beyond that, and double that to account for the uncertainty. That sobers you up. A new entry-level Tesla might actually improve your life more than a plaque on the wall, so consider carefully whether your patent is going to achieve the one thing every inventor really wants: To Make You Money!
What Really Motivates Inventors
It’s possible that you merely want to have your name listed in Google Patents for posterity. Or perhaps you have invented some nefarious device that you want to prevent from being exploited by evil entities (at least for the 20 years until the patent expires). But the real reason that most patent applications are filed is because the owner of the invention wants to make money.
It could be an individual who wants to turn his ideas into gold. It could be a large corporation that wants to make sure its R&D investment isn’t wasted, and it keeps a competitive advantage in the marketplace (this is the vast bulk of all patent applications filed worldwide).
For most of my clients it’s a blend of benefits that drives the investment: Keep the competition away. Earn respect in the marketplace as an innovator. Generate licensing revenues. Increase the asset value of the company for possible future acquisition. Plus some old-fashioned pride as being listed among the Brownings, Stoners, and other historic industry inventors.
My client Marty Bordson (Badger Ordnance) invented the ambidextrous charging handle for the AR-15 platform. I got him a couple patents on it, and now he’s either collecting licensing royalties, or making sales that would not have occurred without the patent, or having lawyers write letters and file suits against those who are stubborn. Marty told me recently that he didn’t really expect to get rich off his invention, but he doesn’t mind if it happens. As a long-time enthusiast going way back (sorry Marty) he revealed to me recently that he was mostly attracted by being another inventor who contributed something to the field that will live on beyond him. And he doesn’t feel bad about the aggressive legal strategy, because as told me: “If they don’t think the invention is worth five bucks more to their customers, they don’t have to use it.”
The biggest challenge in making any investment is uncertainty. This could also be called “risk.” There’s the risk that your invention won’t work, or that even if it does, the market won’t be interested (maybe someone else invents something even better). These are risks in which I can’t be of much help, aside from sharing an idea or two as part of the patent process, or connecting you to the right players in the industry.
There’s the legal uncertainty, which is what drives the biggest question everyone asks me: “What are the odds you’ll be able to get me a good patent?” That depends mostly on what “prior art” (pre-existing technology) is out there. We can search to try to learn as much as we can, but often the inventor and I will have a pretty good idea of the closest technology, and the patent examiner won’t come up with anything closer.
One client asked me if sometimes my clients’ patent applications face hostility from anti-gun patent examiners. I was happy to reply that the examiners who handle firearms patents are usually in their jobs because they like gun technology (same as me, logically). Compared to other government employees in Washington DC, they’re a bunch of good ol’ boys, and they will chat about their next hunting trip. Plus after working with many of the same ones over the years, I’ve found that we can cut to the chase to get past roadblocks. They trust me after years of good interactions, and know I don’t try to deceive them, and I’m bringing real inventions from real industry players. I have dossiers on each of them in which I note their quirks and styles (and probably their kids’ names) Generally they’re smart and capable, even if they have a bit more of the “stubbornness gene” that runs strong in patent examiners.
How to Pay for a Patent
Most of the cost of a patent is up front, but a good patent pays for itself over time. A patent expires 20 years after its filed. For even a marginally successful patented product, that’s a lot of time to pay off the investment. But with the time value of money and all the other things a business can do with its money, you don’t want to wait 20 years for the investment to pay off. Every situation is different, but if the cost of the patent (doubled for the legal uncertainties) can’t be paid off in 5-10 years, then it probably isn’t worth pursuing. Not every patentable invention is a good investment (I suspect that each of my clients probably has 10 times as many patentable inventions than they actually decide to apply for).
But your new product will likely still generate revenue and profits even if you don’t get a patent. So the benefits of the patent are in the additional profits you will earn because of the patent. You might have larger market share and sales volume because you are the only provider of the patented technology. You might be able to increase profits because you can set pricing higher based on the value of your patented product, instead of facing competitors who undercut you on pricing of an unpatented product to give a minimal margin above manufacturing costs. And you may enjoy secondary benefits with a reputation as an innovator, and gaining new customers for your entire product line who noticed you first because of your patented product.
These are challenging calculations, but if you project an increase in profits of more than, say $10,000 per year, then getting the patent is probably a no-brainer. My other test is when you wake up at 3:00AM, staring at the ceiling, and feel that twisted knot in your gut that says: “I’ll kick myself if I don’t patent this one!” I get calls from clients who have told me for years that they think patents aren’t worth the investment (“too easy to get around” or “too expensive to enforce”) who finally have the invention they know they must patent.
“Too Easy to Get Around”?
I admit that sometimes I help my clients get around other patents. Sometimes, it’s possible (occasionally easy) to design around a patent. All you need to do is eliminate only one of the key features of the claim. But I often advise my clients who are accused of infringing a good patent that they must drop the product, or negotiate a license to pay royalties. Some patents really do work.
When I encounter an ardent patent-skeptic, I give them one of my favorite patent examples from one of my own clients. I ask them if they know that those Crimson Trace Lasergrips devices were patented. They usually do, and then I ask them if they ever saw cheap Chinese knockoffs of handgrips having lasers at gun shows or online. No? I ask them to consider the premium prices commanded by the patent product, and how much they thought it would cost for a Chinese manufacturer to put a laser, switch, and batter in a plastic grip panel.
Did that patent work? Clearly, one respected company was built on the value of a patent.
Another important point is that the patent owner was able to benefit from the patent without being bankrupted by the cost to enforce it. In the real world a patent is a meaningful deterrent to potential infringers, and actual infringers are usually stopped without filing a full-blown lawsuit. Unless there is some real question about the validity or scope of a patent, the typical result is that the infringer willingly goes away. Larger, well-run companies like some of those I represent are the most likely to respect the patent rights of others, even when faced with an accusation of patent infringement by a little guy who could never afford to pursue a lawsuit.
The Best Way to Reduce Uncertainty
In the “first to file” era where inventors are motivated to file a patent application even sooner than they ever would have, we face even more uncertainty. Time spent working on an invention, or assessing market response can be an invaluable way to reduce much of the uncertainty about the value of potential patent rights. Fortunately, our new strategies for filing low cost (nearly no cost) Provisional applications buys lots of time. Putting off the big investment decision usually means making a better-informed decision.
I never used to think much of Provisional applications, but now I think they’re an ideal tool for making smarter patent investment decisions. Give me a call if you’d like to learn more.