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Patent Portfolio Incentives

I thought you may be interested in a summary about patent portfolios and incentives to patent owners, based on the paper “Patent Portfolios” by R. Polk Wagner and Gideon Parchomovsky of the University of Pennsylvania Law School (March 1, 2005)

A patent portfolio is a collection of related patents held under common control. In contrast to stock portfolios, where broad diversification is typical, patent portfolios are focused within a technological field. Expertise about a technology or industry allows a patent portfolio owner to focus the collection of assets. Whether process-based, problem-based, or product-based, the unifying concept of patent portfolios is their aggregation of related patentable inventions in a coherent design and direction.

The scale features of portfolios allow a well-conceived patent portfolio to act as a “super patent”. By aggregating the individual value of a number of closely-related patents, the patent portfolio enables owners to realize power in the modern marketplace to a degree impossible using individual patents alone. The diversity features of patent portfolios reflect a purposeful combination of distinct-but-related individual patents. No single patent determines the complete value of the patent portfolio. By distributing the importance of the total portfolio across the constituent patents, a patent portfolio allows owners to hedge against the risk and uncertainty of innovation in the modern economy.

A portfolio owner is an attractive partner for companies dedicated to improving or extending existing technology. The strong market position established by a significant portfolio both improves the chances for success of follow-on products, as well as diminishes the likelihood of advancement when no agreement is reached. This marketplace advantage also gives the portfolio owner an improved position with respect to others in the product chain, such as suppliers and distributors.

Innovation is an uncertain business. Companies operating in an innovation-driven environment understand that future technological developments can make or break their research and development (R&D) efforts. Patent portfolios ameliorate the uncertainty by allowing owners to secure protections across a broader swath of the technological development path. Also, potential uncertainty about the validity and scope of particular patents further increases the benefits of patent portfolios.

In the modern innovation environment, the significant benefits of patent portfolios may explain the value gap of the so-called “patent paradox”. The addition of patents to a portfolio at some point yields diminishing returns, as the acquisition cost outweighs the marginal value. This inflection point occurs later than the marginal value of the patents would explain. An inverted link exists between patenting intensity and the average value of individual patents. While the isolated value of an additional patent declines, a portfolio strategy may increase in prominence and promote patenting intensity.

A major advantage conferred on portfolio owners is a reduced need for litigation to achieve marketplace ends. For accurate assessment of a company’s position within a certain industry, third parties need to examine the company’s patent portfolio as a whole. Simply accumulating patents is not enough to gain a strong defensive position. The scale and diversity features suggest that effective patent portfolios be carefully crafted affairs. On the one hand, the individual patents in a portfolio must be interrelated and concentrated in certain areas of research. On the other hand, the portfolio theory cautions against confinement to a single line of research or technology. The R&D division that succeeds in creating and maintaining a viable patent portfolio is a department with positive overall performance.

Owners of strong patent portfolios have an inherent advantage over competitors that hold a small number of individual patents. If portfolio strength correlates directly to company size, then one should expect large companies to play a dominant role in shaping the future of innovation. New entrants are more vulnerable to the threat of litigation and face a higher cost structure in producing additional innovation.

While patent portfolios give large companies an inherent advantage over smaller competitors, small and start-up companies will not disappear from the scene. Small companies will continue to innovate and thrive even in a portfolio-dominated environment for two principal reasons. First, small companies can develop innovations to complement and fill the gaps of the portfolios of large companies. Second, small companies can outperform established rivals by focusing their inventive efforts on disruptive technologies.

I hope this summary is helpful.

July 9, 2007

Text Copyright © 2007 Bob Brill

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