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As the tech industry’s elite struggle with their huge patent portfolios, a recent survey shows just how daunting a single lawsuit can be for a small company.
How Much Does It Cost To Patent Something
Jim Kerstetter has been writing about the high-tech industry since the 1990s. He was a senior editor at PC Week and a Silicon Valley correspondent for BusinessWeek. He is now senior managing editor at the News. He moved back to Boston because he missed the Red Sox. Email Jim.
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So you face a patent lawsuit. Or maybe you want to sue someone. Get out your checkbook because it won’t be cheap.
A survey conducted last year by the American Intellectual Property Law Association to find the average cost of litigating patent infringement claims produced some startling numbers (at least for beginners): For a claim less than is worth $1 million, the median legal fee is $650,000. When $1 million to $25 million is considered “at risk,” total litigation costs can reach $2.5 million. For a claim over $25 million, the median legal fee is $5 million.
This is the cost of fighting a patent infringement lawsuit if you are the plaintiff or the defendant. This does not include how much you will have to pay if you are the defendant who loses the case.
“These litigation costs are certainly expensive,” says James Crowne, director of legal affairs at AIPLA. “But then the cost of getting a patent comes first.”
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Welcome to the patent law industry, an expensive, high investment, but ultimately essential part of doing business in high tech or any other industry that relies on innovation. Even the staunchest defenders of the current patent system agree that litigation can be difficult and sometimes the patents awarded don’t quite make sense, but they argue that an anarchic alternative would be even worse. Whether you believe them probably depends on which side of the courtroom you sit on.
Of course, we’re all paying attention to patents right now, because of big battles between tech giants for big money and amid Silicon Valley’s calls for dramatic patent reform. But for all the gnashing of teeth, very little is likely to change anytime soon. Some reform in the form of a patent appeals board is expected to take place this fall, although the exact details of how the board will work have yet to be worked out, Crowne said. Optimists hope it will at least reduce costs.
That leaves us with what appears to be a free-for-all (although some legal experts doubt that the actual volume of patent litigation has increased that much in recent years.) Yahoo sued Facebook, so Facebook promptly sued Yahoo. Apple has sued just about everyone to protect the iPhone and iPad franchises. Everyone immediately sued Apple. Google announced that it will spend $12.5 billion to acquire Motorola Mobility, mainly because it needs its own large patent portfolio to protect itself. IBM, Hewlett-Packard and Oracle have huge piles of patents and will no doubt use them to crush the competition if they see fit.
Ultimately, all these lawsuits become a competition between the tech industry properties. The suits are strategic, as with Apple, to protect the business. They are also board-driven, as is the case with Yahoo, as companies come under increasing pressure to squeeze every penny they own, including patents. Will Yahoo’s claim be an inconvenience or a crippling handicap for Facebook as it heads toward an initial public offering? This is most likely an inconvenience.
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But for small companies, a simple patent fight can be financially devastating. Therefore, many are willing to settle, even if they believe they have done nothing wrong. It can be cheaper to settle a case or agree to licensing terms for, say, $100,000 than to fight, said Christopher Marlett, chief executive of MDB Capital Group, an investment banking firm that focuses on intellectual property. It seems unfair, but going to the courtroom is often a roll of the dice.
“In that courtroom, it’s a very technical presentation in front of a jury that has no technical background,” said Marlett. “In a lot of these cases, juries say I’m in over my head and the lawyer they like best gets the verdict. That brings a lot of risk into the equation.” If these claims were decided by a panel of technical experts, the fight would be worth it. But a panel of your peers who aren’t exactly your technical peers? Maybe this is something to avoid.
Of course, settling a dispute regardless of whether you did something wrong is not exactly disclosure. However, AIPLA’s figures – the latest data available – show just how expensive the process can be. Fighting a patent lawsuit can cost at least twice as much as a trademark or copyright infringement lawsuit. Patent claims are the financial breaker of all intellectual property litigation, and while the actual cost hasn’t changed much in the past six years (see chart above), it’s still terrifying.
So what do you do about it? A beginner has two choices: either you roll the dice, do your own due diligence and hope you got it right, or you cough up a hefty chunk of cash to have someone else do it for you. Marlett’s company conducts a “freedom to operate” survey before launching to make sure whatever it builds doesn’t infringe on well-known patents or its partners. It’s not cheap. A typical survey will cost about $100,000.
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It sounds expensive, but he says it’s worth it. “It’s kind of like building a $5 million house and not buying fire insurance,” Marlett said. “That’s the cost of doing business. You want to protect your assets.”
There’s a flip side: While investors lament the ruinous state of patents, it can also work to a small company’s advantage. Take VirnetX, a small company recommended by Marlett. In its early days, VirnetX aggressively patented technology that created virtual private networks over the Internet. Before long, almost every major tech company did the same. VirnetX eventually sued Microsoft and won a $200 million settlement. Now he is suing Apple, Cisco and other big companies. Now the publicly traded company is worth $1.2 billion.
Are they patent trolls for suing over intellectual property? VirnetX certainly wouldn’t say that. They claimed that big companies were trampling on their rights. For about $10,000 (the typical legal fees of a patent application), the patent owner gets 20 years of exclusive ownership of the idea. The clock starts ticking the minute you apply for a patent. “The whole idea of exclusive rights in patent law is to provide an incentive for innovation, and it’s a limited right,” Crowne said.
Take it away and find out why? You can certainly point to overbroad patents and a system that so often seems to reward patents that are clearly brain dead (a way to put ads on a website, anyone?), but at the heart of patents is a process that is supposed to provide a financial reward for a great idea. Instead, let’s attack a system that doesn’t keep up with the times and so often seems to threaten little boys. The type of intellectual property (IP) protection required for an invention depends on the nature of the invention. Each of the 4 main types of intellectual property rights – patents, trade secrets, copyrights and trademarks – has its own use cases. Patents are best suited for inventions that revolve around a product – the manufacturing process, its layout or appearance, etc. If you want to protect a formula or recipe, keeping it as a trade secret would be the best option. Copyright protection is appropriate for works of art such as music. Trademarks are the best way to protect visuals that represent a brand.
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Each type of intellectual property rights protection costs differently. This post provides great information on the costs associated with each type of IPR protection.
In August 2010, two MIT graduates filed a patent for an application that helps multiple clients share and access files over a network. There is a high probability that you have used this file sharing app. You must have used “Dropbox”, right? Today it has over 14 million users and is a billion dollar business.
Not every founder, inventor or developer is as generous as Linus Torvalds, who gave his masterpiece (LINUX) to the world for free?
If the founders (Drew Houston and Arash Ferdowsi) of Dropbox Inc. they didn’t protect their assets with a patent, Dropbox could even have 10x its user base today, but they wouldn’t benefit from it. This is why individuals and organizations must protect their intellectual property.
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Most organizations are wary of the costs associated with protecting their intellectual property. There is an assumption that securing it costs a bomb. While there is no simple answer to how much it costs to protect your intellectual property,
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