Academic journal article Santa Clara High Technology Law Journal

Is the Patent Paradox a Result of a Large Firm Perspective? - Differential Value of Small Firm Patents over Time Explains the Patent Paradox

Academic journal article Santa Clara High Technology Law Journal

Is the Patent Paradox a Result of a Large Firm Perspective? - Differential Value of Small Firm Patents over Time Explains the Patent Paradox

Article excerpt

Abstract

The patent paradox is the over-valuing of patent protection by industry participants despite data showing that patents have low value, and thus must not be an efficient means of protecting intellectual property. The portfolio theory attempts to explain the patent paradox, based upon the assumption that the marginal expected gain in value from the addition of a patent to a well-crafted patent portfolio is greater than the marginal costs of acquiring the patent. While the portfolio theory unifies prior existing theories regarding the valuation of large firm patents, it does not take into account the behavior of small firms in relation to their intellectual property. This comment describes the value of patents to small firms, and explains their relation to venture capital and litigation. This comment also proposes that speculation into the value of innovation of small firms, especially by venture capital, creates an initial value in the patents of small firms.

I. INTRODUCTION

The patent paradox is the over-valuing of patent protection by industry participants despite data showing that patents have low value, and thus must not be an efficient means of protecting intellectual property. (1) Parchomovsky and Wagner propose a portfolio theory to explain the patent paradox. (2) Their theory is based upon the assumption that the marginal expected gain in value in the addition of a patent to a well-crafted patent portfolio is greater than the marginal costs of acquiring the patent. (3) The portfolio theory suggests that the patent paradox is explained through the synergistic increase in value that patents have, when added to a patent portfolio of related patents. (4)

While the portfolio theory emphasizes the real importance of portfolios as a tool for firms to obtain broad claim scope and unifies prior existing theories regarding the valuation of large firm patents, it does not take into account the behavior of small firms (5) in relation to their intellectual property. Moreover, the paradox itself is often based on information acquired from the employees and actions of larger companies, excluding data from small firms. (6) Small firms value and use their intellectual property in a different way from large firms. Much of the data that show a low value for patents are based upon the non-payment of maintenance fees and may not be able to capture the true average value of patents, or the value of the most prized patents, especially in the context of small firm patents. (7)

Section II of this comment first summarizes the portfolio theory and explains that it does not account for two factors important for an accurate valuation of patents. First, the portfolio theory does not take patent claim scope into account when it describes the value of a patent to a given portfolio. (8) Practitioners suggest that their clients create patent portfolios to increase claim scope. They seek multiple patents for a variety of practical reasons involving limitations on the scope of claims often allowed in a single given patent. (9) However, as argued below, the quality of a patent portfolio depends mostly on the scope of the claims of the patents in the portfolio, not necessarily the number of patents. (10) The possession of large numbers of patents by many large firms does mean that any patent reasonably related to a patent portfolio will synergistically gain value by being added to that portfolio.

Second, the portfolio theory ignores changes in patent value over time. Parchomovsky and Wagner cite data estimating low average patent value based on the non-payment of maintenance fees on many patents, suggesting that these patents are not even valuable enough to justify paying relatively low maintenance fees. (11) Looking at the payment or non-payment of maintenance fees only establishes the value of patents at the time the fees are due, not at times before the fees are due. Many patents have a high value early on in their lives, before payment of the first maintenance fee, because of speculation in the value of the technology that the patent protects. …

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