Entrepreneurs Should Give Patents Another Look

Prof Steve NicholsOften frowned upon and always expensive, patents are not exactly top of an overstretched startup’s to-do list. But they are worth a second look, according to Prof. Steve Nichols of the University of Texas at Austin.

Director of UT’s Chair of Free Enterprise, Nichols was speaking last week at the 2012 TCD Innovation Award in the Science Gallery (@ScienceGallery).

Before making his case, the professor said “Most patents in the world are worth nothing, in fact, they are worth less than nothing” since they cost money to file. But he then pointed to a number of recent developments in the marketplace:

  • Facebook’s $1 billion purchase of Instagram.
  • Microsoft’s $1 billion purchase of 800 AOL patents (that Facebook also tried to buy). Noting that gave each patent an average value of $1.3 million, Nichols quipped, “I’m surprised AOL is still worth $1 billion.”
  • Google’s purchase of 1,029 patents from IBM and its $12.5 billion purchase of Motorola’s mobile unit.
  • Then, yesterday, a few days Nichols’ talk, Twitter announced that its developers could restrict their patent filing to defensive purposes only. In other words, Twitter’s innovators can restrict the company from suing others offensively for patent infringement.

Read More: The existence of patents is an important predictor of entrepreneurial success.

So what’s going on here? Nichols explained that patents are not only a means to protect intellectual property (IP) but they are also a potent strategic weapon. He laid out three possible ways of defending against accusations of patent infringement: The defendant can deny using the IP, it can claim the lawsuit is invalid if it is using the IP, or it can countersue.

With large multinationals, this pattern of suit, counter-suit, and counter-counter-suit can make lawyers rich and lead to “mutually assured destruction,” Nichols said. But it can wipe out a smaller company if it finds itself in the legal crosshairs. This is where your own IP collection helps. “One of key reasons for collecting patents is this defensive use of patents,” he said.

Small, cash-strapped companies will find it easier to persuade legal firms to take their case on a contingency basis if the defendant has patents that form the basis of a counter-suit, Nichols said.

Asked about the price of filing patents, Nichols acknowledged the expense. It would cost around $150,000 for patents in the major world markets, so companies should be spend strategically, he said.

The Microsofts and Facebooks of the world are flush with cash, but they are also careful about how they spend it. Instagram had IP Facebook wanted badly. “They will never amortize that billion dollars,” Nichols said.

Despite the illusion of rapid obsolescence, smaller companies should look at their potential for patent filings, he advised. A company with a process or service made by combining A+B (for example) can defend its innovation even in fast-moving technology markets. This is because A+B are the base components of the competitor’s A+B+C or A+B+C+D versions of the product or service — and the competitor will have to cease production or pay licensing fees, Nichols said.

Other reports on the innovation talks can be found here and here.

Image of Prof. Steve Nichols copyright University of Texas.







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