1. Patents

2. Overview Firms must decide whether and how to protect their technological innovations. Protecting innovation helps a firm retain control over it and appropriate the rents from it. However, sometimes not protecting a technology is to the firm’s advantage – it may encourage others to support the technology and increase its likelihood of becoming dominant.

3. Appropriability Appropriability: The degree to which a firm is able to capture the rents from its innovation. ◦ Appropriability is determined by how easily or quickly competitors can copy the innovation.  Some innovations are inherently difficult to copy (tacit, socially complex, etc.)  Firms may also attempt to protect innovations through patents, trademarks, copyrights or trade secrets.

4. Why You Need Intellectual Property Protection Helps to deter imitation by competitors which will undermine your profits from innovation Competitors can imitate one’s products by: ◦ Reverse engineering them ◦ Hiring one’s employees ◦ Working on similar projects ◦ Reading one’s publications and patent disclosures

5. The Amount of Time It Takes to Imitate New Products

6. What Is Patentable? A patent is a government-granted monopoly that prevents others from using an invention for a specified period of time in return for the inventor’s disclosure about how the invention works

7. What Can Be Patented? Patents cannot be obtained on natural substances or ideas Patents can be obtained only on: ◦ A working process ◦ Machine ◦ Manufacture ◦ Composition of matter

8. Novel, Non-Obvious and Useful Patents are only granted for inventions that the patent office determines are: Novel: if it has not been previously invented Obvious: if it is a clear next step in technological development to a person who is an expert in the field Useful: it has to work, have a use, and be functional

9. A United States Patent

10. First to Invent The U.S. patent system differs from the patent systems in all other countries (except the Philippines) because the United States awards patents to the first party to invent something, not to the first inventor to file for a patent

11. Nondisclosure In the United States, patents are only awarded for inventions that have not been offered for sale, and have not been publicly disclosed, either in an open forum or in print, more than one year earlier

12. Expansion of What Is Patentable In recent years, the variety of things that can be patented has increased and now includes: ◦ Genetically-engineered organisms ◦ Computer software ◦ Business methods Raised issues: ◦ Backlogs in the patent office ◦ More patent disputes ◦ Innovation hindered by property rights ◦ Blocking follow-on research

13. Forms of Patents ◦ Patents: rights granted by the government that excludes others from producing, using, or selling an invention. ◦ Must be useful, novel, and not be obvious.  Utility patents protect new and useful processes, machines, manufactured items or combination of materials.  Design patents protect original and ornamental designs for manufactured items.  Plant patents protect distinct new varieties of plants. ◦ In 1998, many software algorithms became eligible for patent protection.

14. Growth in Number of Utility Patents Issued

15. Design and Plant Patents There are two additional types of patents other than utility patents: ◦ Design patents: given for the appearance of products ◦ Plant patents: given only for engineered plants that are reproduced asexually

16. Patent Costs The patent process can take 2-5 years, and involves a number of costs. Fee Types ($US)Regular FeeSmall Entity Fee Patent Filing Fees Basic patent filing fee—utility1000 500 Design patent filing fee 430 215 Plant patent filing fee 660 330 Patent Issuance Fees (paid after Patent Office approves patent) Utility patent issue fee1,400 700 Design patent issue fee 800 400 Plant patent issue fee 1100 550 Publication fee 300 300 Patent Maintenance Fees (to keep patent in force) Due at 3.5 years after issuance of patent 900 450 Due at 7.5 years after issuance of patent2,3001,150 Due at 11.5 years after issuance of patent3,8001,900

17. The Parts of a Patent Two key parts: ◦ Specification: how the invention works, and may include accompanying illustrations. The specification is what the inventor must trade-off in return for the monopoly right that they receive ◦ Claims: identify a particular feature or combination of features that are protected by the patent. The claims are what indicate whether another patent infringes on the patent

18. Number of Claims

19. Pioneering patents A special case of patents with strong claims, which the control of these patents is important because they can be used to extract royalty payments from a large number of users Pioneering patents and patents with broad claims are especially important if starting a company The more pioneering the patent, and the broader its scope, the more competitor firms one can deter from imitating the new product or service

20. Defining the Claims The claims that are allowed to make are limited by what previous inventors, whose patents have already been granted, have claimed To determine what claims should be granted, the inventor has a duty to provide citations to previous patents whose technical art is built upon in creating the inventions

21. Who Can Apply? Only inventors can apply for, and be awarded, patents, which they do by applying to the USPTO

22. Picket Fences and Brackets Effective patenting strategy often involves the creation of a picket fence of patents around a core invention and bracketing, keeping an inventor from using the invention by patenting around it

23. Patent Litigation Patents provide the right to sue others if they infringe on the patent by making, using, selling or importing something covered by the claims of the patent If a company wins a patent infringement lawsuit, it can obtain: ◦ An injunction prohibiting the infringing activity ◦ Lost profits or imputed royalties are common penalties when infringement is accidental ◦ As much as triple damages for willful infringement Because patents that are invalid cannot be infringed, a common defense against infringement is to invalidate the patent by demonstrating that the inventor had disclosed the invention prior to filing for the patent, or that the invention is obvious to a person trained in the art Because small and new firms must spend a large portion of their revenues and senior management time to enforce their patent rights, large, established firms sometimes willfully infringe their patents, believing that they do not have the money or energy to fight back

24. Patent Trolls Patent trolls are companies whose purpose is to buy up patents and enforce their claims through litigation or threat of litigation

25. Patent Laws Around the World ◦ Countries have their own laws regarding patent protection. Some treaties seek to harmonize these laws.  Paris Convention for the Protection of Industrial Property  Foreign nationals can apply for the same patent rights in each member country as that country’s own citizens.  Provides right of “priority” – once inventor has applied for protection in one member country, they can (within certain time period) apply for protection in others and be treated as if they had applied on same date as first application.  Patent Cooperation Treaty (PCT)  Inventor can apply for patent in a single PCT receiving office and reserve right to apply in more than 100 countries for up to 2 ½ years. Establishes date of application in all member countries simultaneously. Also makes results of patent process more uniform.

26. Patents, Trademarks and Copyrights

27. Advantages of Patenting Patents can: ◦ Slow imitation ◦ Facilitate legal protection of intellectual property ◦ Enhance value chain leverage ◦ Make markets for knowledge possible ◦ Help new firms to raise money

28. Why Companies Say That They Patent

29. Barrier to Imitation Patents can be an important barrier to imitation, and a powerful mechanism to capture the returns on innovation

30. Legal Protection Patents also help companies to use the legal system to protect their intellectual property

31. Value Chain Leverage Patents also give companies control over other firms in their value chain By owning patents that are used by customers or suppliers, companies can more easily influence their behavior, and make them act more favorably towards them

32. Markets for Knowledge Having a patent facilitates the sale of technology to other firms Patented technologies can be sold to others; technologies protected by secrecy cannot To license a technology to another company, one needs to obtain a patent on it

33. Fundraising Patents help new companies raise money because they provide a verifiable source of competitive advantage. Investors can see the mechanism through which the new venture will deter imitation, reducing their uncertainty about the value of the venture

34. Disadvantages of Patenting Not always effective at deterring imitation Gain may be greater by keeping it a secret Pace of change may make patent irrelevant Difficulty proving infringement

35. Effectiveness at Deterring Imitation Patents are not always effective at deterring imitation Other firms occasionally can invent around patents, the process of coming up with something that accomplishes the same goal as the patented invention without violating the claims of the patent By inventing around patents, other companies can use the invention without having to: ◦ Pay royalties that reduce their profit margins ◦ Incur the high costs of developing the invention

36. Benefits of Nondisclosure Patenting is disadvantageous when a company will gain more from non- disclosure than from a government- granted monopoly A patent gives a 20-year control on the invention, but secrecy might allow that control to last longer

37. Pace of Change When technological change is very rapid, the invention that a patent protects will quickly become irrelevant. Given the time it takes to obtain a patent, and the cost of patenting, one probably won’t be able to earn sufficient payback to justify the investment in it

38. Difficulty Proving Infringement If evidence cannot be gathered to prove that infringement actually occurred, or the fixed costs of defending a patent are so high that it does not pay to protect it through the court system, then the returns on the investment in a patent do not justify the cost

39. The Effectiveness and Use of Protection Mechanisms In some industries, legal protection mechanisms are more effective than others ◦ E.g., in pharmaceutical patents are powerful; in electronics they might be easily invented around. It is notoriously difficult to protect manufacturing processes and techniques. In some situations, diffusing a technology may be more valuable than protecting it. However, once control is relinquished it is difficult to reclaim.

40. The Advantages and Disadvantages of Patenting

41. The Effectiveness and Use of Protection Mechanisms ◦ Advantages of Protection  Proprietary systems offer greater rent appropriability.  Rents can be used to invest in further development, promotion, and distribution.  Give the firm control over the evolution of the technology and complements ◦ Advantages of Diffusion  May accrue more rapid adoptions if produced and promoted by multiple firms  Technology might be improved by other firms (though external development poses its own risks).

42. The Effectiveness and Use of Protection Mechanisms Production Capabilities, Marketing Capabilities, and Capital ◦ Factors influencing benefits of protection vs. diffusion 1.Can firm produce the technology at sufficient volume or quality levels? 2.Are complements important? Are they available in sufficient range and quality? Can the firm afford to develop and produce them itself? 3.Is there industry opposition against sole source technology? 4.Can the firm improve the technology well enough and fast enough to compete with others? 5.How important is it to prevent the technology from being altered in ways that fragment it as a standard? 6.How valuable is architectural control to the firm? Does it have a major stake in complements for the technology?

43. Effectiveness of Patents in the Industry Effectiveness of Patents in the Industry Patent effectiveness varies substantially across industries because of differences in the nature of technology, and these industry differences affect several aspects of technology strategy

44. Effectiveness of Product Patents by Industry

45. Theory In Action IBM and the Attack of the Clones In 1980, IBM was in a hurry to introduce a personal computer (PC). It used off-the-shelf components such as Intel microprocessors an operating system from Microsoft, MS DOS. It believed that its proprietary basic input/output system (BIOS) would protect the computer from being copied. However, Compaq reverse engineered the BIOS in a matter of months without violating the copyright, and quickly introduced a computer that behaved like an IBM computer in every way. Compaq sold a record-breaking 47,000 IBM-compatible computers its first year, and other clones were quick to follow.

46. The Effectiveness and Use of Protection Mechanisms Wholly Proprietary Systems vs. Wholly Open Systems ◦ Wholly proprietary systems may be legally produced or augmented only by their developers. ◦ Wholly open system may be freely accessed, augmented and distributed by anyone. ◦ Many technologies lie somewhere between these extremes.

47. Theory in Action Sun Microsystems and Java In 1995, Sun developed a software programming language called Java that enabled programs to be run on any operating system (e.g., Windows, Macintosh). This would lessen pressure for one operating system to be dominant. Members of the software community felt that Sun should make Java completely “open” – they argued that “Java is bigger than any one company.” However, Sun was afraid that if Java were completely open, companies would begin to customize it in ways that would fragment it as a standard. Sun decided to distribute Java under a “community source” program: no license fees, but all modifications to Java required compatibility tests performed by Java’s own standards body.