Often you are faced with the question: should I patent my invention? A quick, back-of-the-envelope calculation can help with this decision.
CAVEAT: these are all roughly sketched out figures. This post is written in my spare time between cooking, cleaning, childcare and work. It does not constitute legal or financial advice. The figures are rough generalisations that allow you to work out whether it’s worth investigating further but may vary considerable for each individual case. Always get professional help with the details.
Obtaining a patent is not a cheap process. As of 2017, my very rough rule-of-thumb is to budget £50k per country over the 20 year lifetime (excluding taxes – ~$75k).
This is based on, for a typical case:
- ~£10k for initial work (e.g. searching), drafting an application and the costs of first (i.e. priority) filing.
- ~£10k for developing strategy after an initial patent office search (e.g. UKIPO or in the International phase) and for filing an International patent application within a year of the first filing.
- ~£5k per country to enter the national or regional phase after the end of the International phase for the International application. This is about right for a simple US and European entry; countries requiring translations may be up to £10k per country.
- ~£15k per country for prosecution and grant. This is likely the most variable figure, with variance typically being on the upside (i.e. more expensive) if you are unlucky with prior art or a particular obstinate examiner.
- ~£10k per country for renewal fees over 20 years. Again, this varies per country.
In terms of the distribution with time, this breaks down to:
- ~£10k / year for first 3-4 years.
- ~£0.5-1k / year for next 16-17 years.
Hence, most of the costs are front-loaded to the first 3-4 years: you need ~£30k over this period to properly take part in the patenting process.
Return on Investment
For a decent return, you want the patent’s value over its 20 year life to be at least 3x its cost (excluding inflation). Say this is £150k.
This works out as a real return of at least 5-6% per year over the lifetime of the patent.
The value of a patent is unlikely to be gained evenly over its lifetime. Statistics show that much of a patent’s value is realised towards the end of its life, e.g. 10-15 or 15-20 years post filing.
Anything less than this and your business would be better off just investing in the stock market.
How to Determine Value
This is normally the hard part. However, there are a few short-cuts.
For a UK patent this may be an easy calculation.
Under the UK Patent Box scheme https://www.gov.uk/guidance/corporation-tax-the-patent-box, you can claim for a reduction in corporation tax (to 10%) for profits associated with a patented product or service.
Looking at the statistics for the period 1 April 2013 to 31 March 2014, we see that an average patent box claim was ~£500k, with the average claim for small businesses being £17k.
Most of the claims, understandably, were made by large companies. As such, the £500k / year average claim may include a number of different patented products. However, small businesses often only have one or two patents or products. Hence, the small business claim may be closer to a lower bound on yearly value per patent.
Of course, you can perform your own calculations. For a very rough upper bound on the benefit, simply add up the profits derived from each of your main products or services and multiply by 0.1. (This does assume you are making a profit.) For a lower bound, multiply this 10% saving by 0.5.
Now remember this is a yearly saving. The total saving will thus depend on the lifetime of your product.
Assuming a rough product lifetime of 10 years, and a lower bound on the tax claim of £15k / year, this means that an average UK patent provides a saving of £150k over its lifetime. This just happens to be the number we came up with above for a decent return.
From these rough calculations we see a couple of things:
- To justify a UK patent’s value based on a Patent Box claim, you need to be making around £150k / year in profit for at least one product or service.
- If this applies, a UK patent covering the product or service will pay for its costs and make a decent return.
- Patenting can thus be economically justified in this case.
Another way a patent can provide a return is through licensing. (Someone pays you for your permission to use the technology of the patent.)
Looking at our rough figures, you would need licence fees of ~£150k over 20 years, or approximately £7.5k / year.
Hence, if you feel that you can get one or more companies to pay £10k / year for the technology, patenting is worthwhile.
The recent case of Unwired Planet v Huawei https://www.judiciary.gov.uk/wp-content/uploads/2017/04/unwired-planet-v-huawei-20170405.pdf provides some useful information on industry licensing rates that can information these calculations.
In this case, an average worldwide FRAND licence rate for major markets for mobile equipment and infrastructure for a portfolio of 2G, 3G and 4G patents was deemed to be 0.05%. Now Unwired Planet have around 2,500 patents. Some googling indicates total infrastructure and handset sales to be around $150 billion (split 1:2). If everyone licensed at this rate, the annual licensing revenue would be $7.5 billion, divided by 2,500 patents gives you an average licensing income of $3 million (~£2 million) per patent per year.
Of course this is an upper-upper-bound estimate, you won’t get a licensing fee from each sale and this may be time-limited (e.g. the value of 2G technology not used in current handsets is falling). However, it does show that a licensing revenue of £20 million per patent over its lifetime is not completely pie-in-the-sky and may be relevant if you are lucky and patent a subsequent core technology.
We can do another quick cross check using IBM. Figures circling around (and seen personally in talks by IBM) are that it takes in about $1 billion USD in patent licensing revenue per year (see here – https://www.forbes.com/sites/chuckjones/2016/01/19/if-patents-are-so-valuable-why-does-ibms-intellectual-property-revenue-continue-to-decline/#335ebe9f1433). IBM has around 200,000 granted patents (see here http://www.patsnap.com/resources/company-innovation-reports/ibm). This works out at ~$5k / patent / year in licensing revenue (~£4k). Extended for 20 years, this gives us a figure of £80k per patent in licensing revenue over its lifetime.
In this case, IBM covers its patenting costs, but there is only a small real return from licensing alone. Hence, for IBM licensing is a useful aspect to cover costs, but must form only a portion of the value of a given patent.
Valuing individual patents is tricky. This article here is interesting – http://www.hayes-soloway.com/patent-valuation . It suggests a lower bound on patent transactions of around $90,000 (£70k), a median of around $200k (£150k) and an average of around $400k (£300k). Each of Kodak’s patents was valued at around $500k when recently sold in 2012.
These valuations are consistent with the numbers discussed so far. The lower bound on the value of patents when sold is a little above cost (but not below cost). The median amount provides the magical £150k figure discussed above, i.e. a real return of around 5-6%. If you are lucky and/or skilled (delete depending on your political persuasion), a value of around £300k provides a decent market-beating return of around 10%. The higher figures also compensate for the fact that average patent grant rates are around 50% – hence, there is a certain amount of survivor bias and each of these sells would need to factor in the sunk costs of their unsuccessful brethren.
Another caveat here – patents tend to be very illiquid and most patent transactions involve large companies with large patent portfolios. Hence, while these figures may be applicable to similar sized entities, they may not apply as much to small and medium sized businesses. The distribution of values is also likely to be a power law distribution, with a few patents having astronomical valuations, and a long tail of patents with low valuations.
Here, we see that if you are a large company, it is worth patenting for the value you realise if you sell your patents.
Access to Market
We now move into the more hand-wavy aspects of patent valuation.
Underlying all this discussion is the fact that patents allow you to sue those who are providing products without your permission that fall within your patent claims . Licensing is one way to realise this value by providing permission for cash.
Another way patents can provide value is by allowing you access to a market at a low cost through cross-licensing. This is where another entity has at least one patent that covers your product or service. They could thus prevent you from accessing the market by either refusing permission or demanding high licensing fees. However, you have a patent that covers their product or service. Hence, each side has a potential weapon they can deploy and the sensible outcome is to come to an agreement to provide permission to use each other’s technology.
The problem with cross-licensing is that these deals are typically performed in confidence. There is thus little data to quantify the transaction. Standard public licensing rates provide some indication of the value. Hence, the licensing figures from above may be used here.
Average licensing rates can vary from 0.01% to 30% depending on the technology, product and market. Most are probably below 5-10%, with higher rates for low volume, high profit products (e.g. software services) and lower rates for commodity items (e.g. phone handsets).
One (very rough) way you can value access to a market is thus to:
- determine the size of the potential market for your product;
- determine an average revenue for you for this market over a 20-year period; and
- times this by 10%.
Working backwards from our figures above, this gives us an average revenue of £150k / 0.1 = £1.5 million over 20 years (which may be £300k / year for a 5 year lifespan, £150k / year for a 10 year lifespan, and £75k / year for a 20 year lifespan etc.).
If you are not selling your product yet, you can look at figures for the size of the potential market by dividing these figures by an estimated, percentage market share. For example, if you believe you can gain 10% of a market, the market needs to be worth £15 million over the 20 years (e.g. £3 million / year for a 5 year lifespan, £1.5 million / year for a 10 year lifespan, and £750k / year for a 20 year lifespan etc.).
The other flip-side to this is to look at the cost of litigation. If cross-licensing can avoid the costs of litigation then this also provides value. If we say an average court case costs between £1-3 million, then the value of your patent depends on the likelihood of litigation. In this case, if a chance of litigation is above 15%, patenting is cost effective. Here, you can also ask for a quote for litigation insurance in your market and use that to determine the value of any patent on a competitor’s product or service.
These simple calculations mean that, for a product with a 5 year lifespan and a potential market of only £100k per year, patenting may not be cost effective if looking at access to market.
One reason why small businesses obtain patents is to gain investment.
Likewise, one reason venture capitalists invest in small businesses with patents is because they perform similar calculations to those above (although with prettier and more accurate spreadsheets) and realise they can obtain an above market return (or a market return for a given risk – 90% of small businesses fail folks).
Now venture capitalists have requests for funding from many small startups (understatement). Most of these will be refused. One way you can cut through the noise as a company is to show you have at least a strong chance of obtaining a patent. Hence, a patent application may provide an immediate effect by enabling leverage – i.e. the patenting costs may facilitate a much large amount of funding.
Of course, there are many different factors that influence funding, and most of these may be more important than a patent portfolio (such as founders / founder experience, market proposition, existing capital raised, and existing profit). Let’s say, conservatively, that having a patent increases your chance of funding from 0% to 10%. In this case, funding of £200k plus would justify an initial £20k patent spend (e.g. initial filing and International application).
Another way of looking at this may be to compare patenting costs and engineer costs. Say an engineer costs £50k / year, where on-costs are £75k (i.e. actual cost to company is 1.5x salary). The question to then ask is: what would increase your chances of funding more: 4 months of that engineer’s time or having a patent application?
If the answer is that, at your current stage of development, 4 months engineer time would greatly enhance your offering and increase your chance of funding by 50%, then limited funds may be better spent on that rather than patenting.
If you are at a stage where development has been kept confidential, and 4 months of engineer time would make only small incremental improvements to attract funding, then patenting becomes a better choice.
You can also run similar arguments with consultant costs and other areas such as marketing.
Patented products make for good marketing.
This may only be a small proportion of a patent’s value but should not be overlooked.
For example, an average marketing budget may be 10% of sales. If a patent replaces 1% of that (i.e. has the same effect as 1% of the sales budget), then a patent could start to make a decent return if revenues are £15 million or more over 10 year (i.e. £1.5 million / year).
What Have We Learnt
Often it is difficult to provide an answer to the question: should I get a patent?
Patent attorneys typically err on the side of saying “yes”, as that is what they do day-in-day-out. It can be like asking a decorator: should I paint my house? (I decided not to say it may be like asking a car salesman: should I buy a car? :))
In certain businesses the answer is often “yes”, but the reason is “because that’s what we do”. Similar, in other businesses (I’m looking at you software), the answer is often “no”, with the reason being “because we don’t do that here”.
Hopefully, in the discussion above, I have tried to explain some of the areas and conditions where there may be an economic justification for obtaining a patent.
In particular, assuming a product with a 10 year lifespan, patenting may be cost effective:
- if you are paying UK corporation tax and your product will earn £150k / year in profit;
- if your market is worth more than £1.5 million per year and you can capture at least 10% of this;
- if the patented technology is of interest to one or more acquirers;
- if the chance of litigation is above 15% in your market;
- if it increases your chance of funding from 0 to 10%; or
- if it increases sales by 1% of products with revenues of more than £1.5 million / year.
Some of these value factors may be gained independently. For example, a patent may allow you to reduce UK corporation tax, increase sales, provide access to a market and reduce litigation risk. The more the factors apply cumulatively, the lower the figures above need to be.
By sketching these numbers out on the back of an envelope, say over 30 minutes, you can get a feel for how relevant patenting is for your company.
If you look at these figures and gasp, then patenting may not be right for you. Although patenting is open to anyone, practically you need to be a business with actual or projected revenues of hundreds of thousands of pounds for the system to work properly.
If you are close to break-even thresholds, there need to be other good reasons to patent, or prospects for future growth need to be good, otherwise patenting may not be worthwhile economically.
If you are way over the thresholds, and you do not have a patenting strategy, then this provides strong basis for an argument to your Board of Directors to get one. It may justify spending a few thousand pounds on professional advice to fill in the details of feasibility.
If you have an existing patenting strategy, running these calculations once a year or so may enable you to make decisions on maintaining patents and patent applications, and provide justification to support existing budgets (or even to ask for more funds).