Patent Pools for Small Businesses & Independent Inventors – An Idea Whose Time Has Come

Frequently when I speak to inventors and small companies, I run across an issue which is painful to discuss with the larger IP community. How can I prevent other companies from infringing on my patent? How can I successfully license and monetize the good IP that I have?

I think the patent process is inherently unfair to the independent inventors and small businesses. That’s a bold statement to make as we work with both large and small businesses. However I know plenty of IP professionals that recognize this problem and want to work on solving this.

The key issue is that inefficiencies in the patent process limit innovation by creating an uneven playing field for small inventors. While 70% of patents are issued to small businesses and independent inventors, their ability to benefit is thwarted by the rising cost of enforcement ($4 million on average) and the inability of companies to efficiently license their inventions. The stats cited by Inventionstatistics.com are mind numbing. See http://www.inventionstatistics.com/Patent_Litigation_Costs.html.

I recommend that we ask the Federal government to be pro-active. A new Patent and Trademark Office division focused on small business and independent inventor patents should create “patent pools” based on voluntary participation. These pools, which would be similar to those created by the largest corporate patent owners, should have (1) a common licensing and enforcement process and (2) standard market based royalty rates.

Three hundred fifty thousand patents are annually issued to independent inventors and small businesses – double the number issued to large corporations or ones prosecuted by top 300 IP firms. But it is presently difficult for small inventors to benefit from their ideas because of high enforcement costs and a difficult licensing environment.

In 1997 it cost $300,000 to enforce a patent (Tomima Edmark, “Rest Insured,” Entrepreneur Magazine, November 1997 based on AIPLA’s 1997 Economic Survey). Managing IP pegs the costs today between $3 to $5 million dollars based on appeal to over $4 million. I know from personal experience that to be true. Small inventors cannot afford these costs and therefore do not protect their patents. The market for their inventions is further constrained by the difficulties that companies have in licensing from small inventors. There are simply too many inventors out there for a licensor to deal with effectively.

A potential solution is to adapt a structure developed by the most innovative large corporations. Some companies like GlaxoSmithKline (GSK), the pharmaceutical giant, and Alnylam have put this patent pool idea to good use. Earlier this year, they created a patent pool to focus on treating 16 neglected tropical diseases. The goal is to find treatments for infections and parasitic diseases. These diseases mainly impact the poorest nations of the world. This pool allows access to 800 patents and another 1,500 patents of Alnylam for finding the cure. However, the majority of patent pools are focused on technology where standards have either, not developed, or the risks of litigation and the cost of cross-licensing is too prohibitive. I believe the same principles can be applied here.

As large technology companies have pooled thousands of patents together in order to lower litigation and transaction costs. These pools have standardized licensing and enforcement procedures in critical technology functions. While this mechanism is not available for small inventors today, it can easily be adapted to their needs.

The creation of an effective patent pool would require several critical steps:

• Setting Royalty Rates: Royalty rates do not vary significantly over time and only large companies and the Government have access to these rates. An established minimum rate by technology would allow inventors to successfully understand the possible returns from licensing their patents.
• Creating an Enforcement Mechanism: The creation of a patent pool would allow for enhanced enforcement efficiency. First, the pool could itself manage a “small claims” type patent process for patent rights that are in the pool. In addition, cost sharing of litigation expenses across small inventors should be possible.
• Contributions: The participation of small inventors in a program of this type should be voluntary. Given my own experience managing an intellectual property business, I believe there would be tremendous demand. I believe the pool can set up a vehicle for assessing the quality of the patents and test out the basic validity of the patents. We at Legal Advantage perform validity prior art search studies. We also rank the relevance of these technologies for our clients in search studies like infringement analysis or FTO clearance. I can see these studies being easily applied by experienced IP professionals for such patent pools.

By creating such patent pools, the PTO and the government should interfere in this free markets to correct for market failures. The establishment of small inventor patent pools would correct a systemic bias in the licensing and enforcement process, and in so doing potentially unleash a new wave of American innovation and creativity.