Commentators like me frequently rail against what we view as the often unnecessarily high cost of obtaining patent protection. In truth, many patents are overpriced and provide questionable business value to their clients. Over-priced patents do not form the basis of this article, however. Instead, this is about the opposite phenomenon, i.e., under-priced patents. Specifically, in this article, I describe a company’s desire to obtain low cost patents and what such a patent strategy may reveal about its long term viability.
I was recently contacted by a large printer manufacturer (“PrinterCo” for the purposes of this discussion) to see whether I was interested in preparing patent applications for the price of $1300 each. This price seemed somewhat ridiculous to me because even the most “bargain basement” patent preparation prices that pop up on my Google sidebar advertising do not seem to dip beneath a threshold level of $2800. And, as a high level chemical patent prosecution attorney, I routinely drafted patent applications that cost $15K or more in 2005. PrinterCo’s desire to obtain patent applications for $1300 thus both surprised and intrigued me, and I wanted to learn more about what type of patent application its management sought for this price.
That PrinterCo was seeking to obtain patent drafting services at a lower price than I would expect might be explainable because many IP strategy savvy companies seek to maximize their freedom to operate by filing patent applications that they never intend to see through to issuance. This “publish and abandon” approach can effectively prevent others from obtaining patent rights that can block a company like PrinterCo from freely developing products in a particular technology area. However, because these patent applications are not drafted with the intent to issue, the filing company will not end up with enforceable rights. Nonetheless, “freedom to operate” afforded by publishing and abandoning applications addressing a relevant technology can serve as a valuable right in itself. It thus made sense to me that PrinterCo might seek to file a large number of patent applications to strategically prevent other companies from patenting in its technology space.
A “freedom to operate” patent application can certainly be prepared in about 8-10 hours by someone with a few years of experience. Therefore, $1300 would not result in a terribly low hourly rate for someone working out of his home with little or no overhead. “Freedom to operate” is all that can reasonably be expected in this time, however, because even the most experienced person requires time to understand the invention to be claimed and to properly draft claims that will avoid the prior art. Indeed, because it takes time to read prior art references, one cannot understand the relevant prior art in a total of 8-10 hours, especially in crowded areas such as printer, ink and cartridge technology relevant to PrinterCo’s business.
Fully expecting the $1300 to apply to such a freedom to operate strategy, I was quite honestly shocked to find out that PrinterCo fully intended to see patent applications drafted for this price through to issuance. Furthermore, PrinterCo’s managing patent attorney stated that he expected to obtain patents from this process that could be the subject of future litigation. After hearing this strategy, I politely declined PrinterCo’s proposal and wished the attorney farewell, as I saw no way I could ethically meet PrinterCo’s objectives.
Frankly, even if PrinterCo had wanted me to prepare “freedom to operate” patent applications for $1300, I likely would not have done so. I was actually more interested in learning about this company’s patent strategy in view of this ridiculously low price. And, now that I know, it appears clear that PrinterCo is pursuing a short-term cost reduction strategy directed toward allowing it current management to meet cost cutting goals, at the expense of the long term asset value of the company. Let me explain what I mean by this. . . .
For the last several years, printer companies have engaged in aggressive patenting strategies that effectively require printer users to purchase ink refills exclusively from them. Companies such as PrinterCo likely lose money on printers, scanners, etc., but make huge profits on patented ink cartridge refills that work only in their proprietary equipment. (In 2008, it was estimated that printer ink costs from $3K to $7K per gallon.) Moreover, these companies have undertaken expensive patent litigation directed to preventing third parties from selling “generic” printer ink refills.
Critically, such a business strategy requires any patents covering the ink and cartridge refills be skillfully drafted such that the claimed invention cannot easily be designed around without the copier also incurring of patent infringement liability. Moreover, the profit margins involved in printer ink cartridge refill sales are such that third parties will clamor to knock-off refills for any top selling printer or scanner if the underlying patent protection is weak. If PrinterCo or its competitors now abandon their aggressive patenting strategies, competitors will certainly see an opportunity to introduce knock-off ink and cartridge refills, and erosion of their profit margins will invariably occur.
Other than making PrinterCo’s current legal management look effective in cutting legal budgets in today’s economic climate, I cannot fathom why this company is trying to lower its patent application costs to the ridiculously low price of $1300. PrinterCo’s ability to maintain its profit margins depends on its obtaining strong patent rights. A substantial aspect of PrinterCo’s corporate asset value lies in its ability to prevent others from knocking off its printer cartridge ink refills. In other words, PrinterCo’s patent strategy serves as the foundation for the company’s ability to execute on its business strategy. It is thus nothing short of idiotic for PrinterCo to allow its legal managers to treat its patent application drafting processes as vehicles for cost control, where the motivation for the reduction in patent costs is certainly the legal staff’s meeting of their cost cutting objectives.
Put simply, PrinterCo’s corporate asset value is jeopardized by its legal managers self-serving objective to lower the company’s patent costs. If PrinterCo continues to pursue this low cost patent application strategy, I predict that its cartridge ink refill business will quickly become commoditized as a result of low cost, non-infringing competitive knock offs. And, since the public expects PrinterCo’s printers, scanners etc. to be low priced, there will be little ability for the company to obtain premium margins on its product lines. In short, PrinterCo quite likely might find it difficult to remain viable in the coming years due to its current short-sighted patent strategy. Hopefully, PrinterCo’s management, both legal and otherwise, are still around when shareholders realize that the company’s patent strategy has resulted in the company no longer being a viable specialty products company. I would love to see them held accountable for such mis-management.
Today’s post is by Guest Barista Jackie Hutter, Proprietor of the IP Asset Maximizer Blog and Chief IP Strategist at The Hutter Group, LLC, and was first published on the IP Asset Maximizer Blog.