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Patenting as A Business Act

So you have created something innovative. Is it time to call up a patent lawyer? Maybe, maybe not.

Navigation of a labyrinth, a metaphor for taking deliberate business action. By oversnap at iStockPhoto.

The act of trying to obtain a patent — patenting — is one act among many a business can take in competition with other acts as patenting requires both time and money. For a decision-maker, acting in the present rather than evaluating past events, the best framing of patenting is as an act of investing in service of possibly attaining additional utility for the company.

But which utility? What is invested and how? And why the qualifier “possibly”?

A great deal is written about patents from the perspective of laws and the legal machinery that settle final outcomes. As so often with legal matters, there is no shortage of text, reasoned opinion, and parsing of words.

But before the convoluted gears of the legal machinery start turning, a decision is made that obtaining a patent is a worthwhile effort to spend resources on. Or at least one hopes so. These considerations are not primarily legal, rather they relate to what patents can do for the business, now, and even more so, in the future.

I will provide a framework that integrates patents and intellectual property into the central strategic plan and the set of strategic actions of smaller entrepreneurial businesses. Inevitably I omit details about interpreting case law, the many angles to litigate patent infringement, and what the tea leaves from the Federal Circuit are saying. The evolving legal details are better handled by a competent patent attorney when a decision to go ahead has been made.

However, even without considering the latest case law, stable features of the nature of patents and prevailing trends allow the non-lawyer to reason about what acts make sense and why. That is the premise from which I outline the framework that I have acquired through reading and thought, and through practice as that decision-maker with technical background suddenly dropped into the labyrinth of patents, demand letters, dense legal text, and vague legal advice.

The Story Begins With a King Who Says You Get a Commerce Monopoly If…

It happened in the past that the ruler of a land — say the divine King, the Serenissima Signoria, or the Fürstbischof — granted a privilege or monopoly over certain economic practices to a person for a set duration of time. Monopolies are attractive to businesses — no risk of competitors undercutting prices and forcing reduced profits. The promise of a so-called letter of protection was therefore used as an inducement to attract skilled craftsmen from one land to another in the politically fragmented Europe of the late Middle Ages.

Painting by Pietro Malombra of the Pien Collegio, one part of the governance of Renaissance Venice. From Wikimedia Commons.

Further evolution of the practice was to grant the monopoly to the innovator contingent on a public disclosure of the innovation. The Republic of Venice in the 15th century is usually cited as the first place where monopolies could be granted through a process governed by law. The cities that became home to the large printing houses in the wake of the Gutenberg printing press, like Basel in present-day Switzerland, developed practices in the 16th century of limited monopolies on sales of books, such that large upfront costs of printing could be recuperated. Financial backing was needed to cover the upfront costs equivalent to 4 to 10 years of the annual salary of a skilled craftsman — and Gutenberg himself got embroiled in legal fights with his financial backer Fust.

The practice of limited monopoly is a forerunner to copyright laws, another component of intellectual property.

It is out of this heady brew of disruptive technology, medieval merchants, political competition, and ancient cultural practices that laws around intellectual property emerge.

Individual Rights, Legal Rights, Natural Rights, and the Modern Patent

In the 18th century the Enlightenment ideas, especially the idea of rights, led to formulations of patents as rights to exclude others that could be granted the innovator of the recognized intangible intellectual property. Exclusion rights generally became central to property law in England and America. Arguably, the patent system we have today is founded on the same conception of why rulers and governments can grant — even ought to grant — certain protections in commerce.

For example, the US Constitution already in 1787 contains in Article 1, Section 8 a reference to patent rights and that they are intended as a means to promote “progress in science and the useful arts” — a utilitarian conception of the legal right. In the years following the French Revolution of 1789, the French patent system was created, built rather on a conception of an innovator’s natural right.

Excerpt of US Constitution, Article 1 Section 8.

The patent institutions and legal designs have spread globally along with increasing global trade and nowadays very few countries lack a patent office.

The individual patent systems differ in many minor details despite efforts of harmonizations through treaties, such as the Paris Convention of 1883 and its subsequent amendments. At their most fundamental however the patent systems define the terms of exchange:

A government grants an innovator of something useful and novel a time-limited right to exclude others from certain practices related to the specific innovation within the borders of the land conditional on that the innovation itself and the disclosure of it meet certain criteria.

The benefits of having said right will, in many cases — but not all — outweigh the benefits of secrecy the required disclosure precludes. As a result the self-interested innovator will disclose. The disclosure disperses the innovator’s insights quicker and wider into the commons for all to learn from, such that other innovators can, with less reinvention, arrive at new useful insights and innovation. The community as a whole will therefore benefit from ever better technology.

From Historical Design to Present-Day Strategy and Action

If current technological and economic conditions allow the historical ideal to come about, or if the ideal and its reality are good for us in the broadest ethical sense, can be debated. As a strategic business matter, like it or not, the patent systems that emerged from historical practices and beliefs embody a large part of the external conditions in which innovation turns into product turns into revenue.

How to practically reason about these business matters is what I turn to next.

I will outline four views of patents, two alternatives, and some headaches and cases that the self-interested innovator, or more often nowadays a research company, can use to frame considerations about patenting as a strategic business act. In a few illustrative examples, I will adopt the perspective of a smaller company in biotechnology, though the reasons I present are not limited to that industry.

Patents are at times said to be something for the lawyers. That is a superficial judgment. Patents are too important a matter to be left to the lawyers. Patent agents and patents attorneys are no doubt playing central roles as patents are drafted, filed, prosecuted, litigated, licensed, and so on. The fundamental question of if a patent should be filed in the first place, to what end, and how to relate to other market actor’s patents should be an outcome of reasoning about the business as a whole.

Considering the nature of the topic, maybe I should add: I shall not be held liable for damages or losses, direct or indirect, for advice and arguments that follow. But you know that.

This is not guarded legal advice. It is a digest of knowledge for those who, like me, have had to, or will have to, reason about patents and their proper place alongside the already formidable task of company research and development and leadership under uncertainty and time constraint. When I refer to “you” in the text, that is the reader I picture.

View 1: Patents as Shields of Our Great Product

Patents allow the owner to protect, or shield, an innovation using the courts to adjudicate infringements and disagreements. In a world of knock-offs and free-riders hoping to cash in on other’s hard-earned accomplishments, drawing abstract boundaries around the innovation and declaring it as property per se, means you can shield the property from those who did not put in the effort to create useful novelty.

But the shield analogy is imperfect. Unlike a plot of land shielded by a wall or moat, or a stack of gold bars locked within a safe to which only you have the key, a delineation of information does not lead to automatic protection. If free-riders attempt to make money off innovations that are covered by a granted patent, it is up to the owner of the patent to detect the infringement and to compel the free-riders to stop, ultimately through litigation in the courts.

That means the shield in the analogy has to be used actively. The patent owner must, so to speak, swing the shield.

The analogy is also imperfect in that patent infringements are not self-evident events (farcical counterfeits excluded), and proving infringement takes effort. A person that steps over a moat and onto someone’s land has clearly crossed a boundary. It is often debatable whether a particular protein construct and the method to produce it are infringing on another patented protein construct and its method of creation. And your granted patent can be ruled to be invalid, in part or fully, when it is scrutinized by the courts or when other institutions perform post-grant reviews — an act the competitor you swing your shield against is incentivized to promote.

So swinging the figurative shield against a presumed infringer may lead to the discovery that the infringer was not within reach and neither was the shield quite as protective as believed, maybe even entirely useless.

The shield and sword analogy of intellectual property, not quite as swift and certain as the metallic ancestors. Image by bokan76 at iStockPhoto.

Caveats notwithstanding, the defensive ability to protect sales revenue by exercising the property rights granted by patents is the core purpose and a major reason why patents are part of the strategic repertoire of research companies. Many companies use the rights to their own great benefit. One example: the pharmaceutical company Bristol Meyers Squibb was awarded in 2020 $1.2 billion in damages over an infringement on their intellectual property.

View 2: Patents as Swords Against Other’s Products Using Our Smarts

Patent-as-shield requires a degree of attack. So how about using patents to exclusively attack — as a figurative sword?

Recall that patents grant rights to exclude someone from certain practices related to the innovation. This right can be used against other people’s products. Say you have a patent for a certain key protein construct, and you learn of a company using that construct as a small but pivotal part of their product. You can then attack — even if that is not done in service of shielding revenue you make from a product of your own.

In other words, the right to exclude can be used not just to protect an innovation you commercialize, but as a sword against a product someone else commercializes.

This approach can make financial sense because patent rights can be licensed. As a patent owner, you can contractually agree not to exercise your right to exclude a particular company given that your terms are met. Typical terms are that the company that uses your innovation pay you a license fee, like a percentage of net revenue of the relevant products.

The patent owner that approached the other company (in some cases by sending a dreaded cease and desist letter) intends to compel the company to trade some valuable goods in order to be able to use the innovative protein construct. This is not guaranteed to work. As described in the previous section, granted patents can be invalidated during litigation or review. Also, if the license fee is too high, the other company may decide to redesign their product altogether, and no trade takes place — a no-win situation.

Licensing of patent rights is a big business, and the innovator and patent owner are not necessarily the ones who turn the innovation into a useful product, or at least not exclusively. IBM is the “godfather” of patent licensing, earning around one billion US dollars annually from partnerships that license their patents to other companies. Harvard University earns around fifty million annually in various patent licensing and liquidation of equity in spin-off companies, which typically are founded upon patents granted to the university. The patent battle over CRISPR between the University of California, the Broad Institute of MIT, and Harvard is a high-stakes case where two non-companies are in a fight over what is likely to become a huge amount of license revenue.

Patent owners that are not commercializing the innovations they own, like universities, are called non-practicing entities (NPEs). More about them later.

The challenge in proving infringements that both the shield and sword view share means a portfolio or family of patents is more often the relevant unit in strategy. Since product redesign is almost always possible at a cost, and some types of infringements cost more or less to establish, having multiple patents that cover different aspects of the innovation and its integration into products, means the wielder of the shield or sword is more likely to be able to strike where the cost is the highest for the other party and lowest for oneself. It is rarely evident at the time of filing what aspect of the innovation has that property, so as a hedging strategy, a portfolio of patents is built up around the particular innovation.

View 3: Patents as Equity, Future Potential As Value In the Present

Since patents can be licensed, reassigned, and traded, the right to exclude in itself acquires value because the revenue said right can protect or create in the future can be realized by someone who is not necessarily the inventor. Patents-as-equity becomes a meaningful concept.

Consider this analogy. You have, by some means, obtained a big bulky machine that combined with the right raw material inputs can create a product that people would be willing to pay substantially for. But you lack the inputs or the skills to operate the machine. Is the machine therefore worthless since it does not produce stuff?

No. The potential for the machine to produce valuable items in the right hands means the machine has present value. Ownership of said machine, the so-called equity can, in turn, be traded in part or in full, and a market price discovered. So before a trade is made and the machine is run by a competent operator, the ownership itself of the machine has value as long as there is or is expected to be, a market actor able to operate the machine.

Say you have acquired through intellectual effort and creativity the novel knowledge to build this awesome machine. With the right material and labor inputs, the knowledge can be converted into the said machine. Patents allow you to delineate that knowledge and claim at least parts of it as property. So for the same reasons that ownership of the machine, exclusive its operation, can be valuable, the patented knowledge of how to construct the machine, exclusive the actual construction, can be valuable too.

Patents, therefore, increase your overall equity. That is true even if they are not used specifically as shield or sword in the present, as long as they protect something that with reasonable probability can be used by someone to shield a revenue generating product, or be used as a sword to earn license fees within the time limit of the granted patent. The value of the patent equity is therefore an outcome of a probability-weighted hypothesis of the future.

Especially for small but growing companies that lack the capital in the present to fund serious litigation against other companies, the present value affords benefits of patents more or less immediately.

The value of patents as equity also converts into leverage in other negotiations. Cross-licensing for example is when two companies agree to grant each other a royalty-free license to a selection of their respective patent portfolios. A company with a large portfolio of patents valuable to a wide range of market actors can therefore respond to an attack by another company with a cross-licensing agreement, rather than agreeing to pay a cash license fee, or to rack up legal fees while litigating the matter in the courts.

In a knowledge economy, patents can play a major part when the terms of any exchange are negotiated thanks to their potential use beyond the present applications possible in the hands of the innovator.

View 4: Patents That Signals Your Qualities, Real or Not

So patents can protect revenue, create revenue and be tradable equity in itself. All good things if you are an innovative company applying blood, sweat, and tears to attain success or to disrupt a market.

A fourth property therefore follows: A company, especially a small one without a product ready to be sold yet (“pre-revenue”), that has filed numerous patents may look better to an investor or even a person considering to take the risk and join this new fledging company in a senior position. Patents can be a signal.

Signaling theory in economics borrows from evolutionary biology where signaling is a central concept — the peacock’s tail being the textbook example. At its most basic level, signalling is a means to alleviate problems of asymmetric information in economic exchange.

A peacock’s clumsy and very visible feathers signal their bearer’s good qualities that have enabled survival despite the adverse attributes of the feathers. Photo by Siddhant Kumar at Unsplash.

Picture two hypothetical pre-revenue companies, one a truly innovative company, the other a not-so-innovative company. They both say they have the most disruptive and world-changing technology. The critical information to differentiate between the two companies may be hidden from the investor. Under some conditions, this setup creates a so-called market of lemons. The truly innovative companies that are worth premium money are disadvantaged because the investors cannot tell the difference and do not invest more than what they are willing to put into a lower quality company. This is a textbook market failure.

A signal is a highly visible feature that in part correlates with the fundamental quality of the company — or at least is believed to be: credentials like the CEO’s education, previous employment, the top-school pedigrees of the R&D team, the scientific advisory boards’ impressive publication record, the many Big Pharma/Tech partnerships the company has and prominently displays on the website, the presence of colorful beanbags and catchy slogans in the office, or the number of patents. The investor evaluates the signal.

It is easy to ridicule other people’s cultures of signaling. Especially if a signal can be acquired at low cost (like a black turtleneck) a signal converges towards parasitic mimicry — compare with the false cleanerfish that mimics the signal of a symbiote but is the opposite.

The bigger client fish benefits from not attacking the cleanerfish, thus a signal (appearance and behaviour) and its recognition co-evolve, such that the symbiotic fishes can communicate (left). However, the false cleanerfish benefits from mimicking the signal without the symbiotic act (right). The value of the signal erodes, and new evolutionary pressures arise. I use the intentional stance in the cartoon, and do not mean the acts to be truly deliberative. Drawing by Author.

Signals serve a purpose where information asymmetries exists, and they are always in a process of cultural reinvention, inversion and mutation. A handful of patents to display on the investor pitch deck can for some be part of that signal (or not). A study appears to corroborate this for startups. The study uses the fact that some patent examiners are more lenient in their examination and therefore more likely to grant an application. The startups that received a more lenient examination for their first patent application at the USPTO went on to receive in aggregate more venture funding and public investments, and grew more by significant margins. The authors suggest that “patents facilitate startups’ access to external finance in contexts where information frictions, and thus contractual hazards, are especially high.”

It should be noted, though, that the effect was much smaller in biochemical companies, possibly due to the fact that many of those companies are founded by already credentialed academics. If true, then maybe those biotech startups that are not founded that way have even more relative benefit from patents as signal?

Patents Not The Only Way to Make Good Use of Intellect Capital

The four views of patents can help a decision-maker reason and deliberate about the further investment of filing a patent given intellectual output from the research team. But patenting is not the only self-interested act the decision-maker can take. I will describe two alternatives for the decision-maker to keep in mind.

Alternative 1: Keep It Secret, Rely On Trade Secret Protections

First, consider trade secrets. They are usually defined as information that is not generally known, has commercial value because it is secret, and the owner has taken reasonable steps to keep it secret. In laws around the world, there are prohibitions on how trade secrets can be acquired, though definitions of what constitutes acts of misappropriation vary.

In many industries nowadays, specialized third parties are contracted for certain parts and services. Consider for example the contract research organization (CRO) model in the pharmaceutical industry, which accounts for around 50% of the spending in clinical development. Trade secret laws are meant to make these relations less complicated by lowering the risk of sharing valuable, but non-patented, information.

Typical trade secret cases include former employees that copy files and documents and bring them along as they leave for a competitor or a contractor or consultant that as part of a project is granted limited access to secrets, which the contractor then uses in other business dealings. Sometimes courts find that reasonable steps to keep the information secret were not taken — a hallmark case in 2020 ruled that sloppy use of Zoom meant that sensitive information discussed on a call did not qualify as trade secrets because the measures taken on who could participate in the call were too lax.

Therefore, rather than filing a patent, the valuable information can be kept as a trade secret. It requires no drafting of documents or formal review, and there are no limits on what can be a trade secret, unlike patents. So as long as the company takes reasonable steps to keep the information secret, there are laws that grant certain legal protections against theft.

However, trade secrets are non-exclusionary, so any other company that figures out the confidential information is allowed to use it, and they might file a patent for it. Also, any benefits derived from the public nature of patents, like the signal value and to some extent equity as described above, are missing from trade secrets.

One way trade secrets and patents can be used together is to patent certain aspects of an overall innovation, while other aspects of the innovation are kept as trade secrets. For example, novel and non-obvious processes for how to make or operate the patented parts is one example, which is sensible since process infringements typically are harder to detect and prove. That can also include proprietary data and software, which are essential to the operation.

Alternative 2: Let the World Know Through Publication

Second, consider publication of technical papers or blog articles. The research organization compiles the information as a document that is published, in peer-reviewed journals, as white papers or infographics on the company website, or as blog posts shared on various social media, etc.

This is cheaper and quicker than filing patents, but also means the innovator forgoes the property rights. These rights are not just lost for the innovator, though, but to all other companies, since after publication the information is in the public domain and no longer novel as far as all subsequent patent applications are concerned. Publication in other words has a defensive quality in that no other company can be granted the property rights and exclude others from using the information in commercialization. The innovator who publishes ensures at least their freedom to operate — a matter I return to below.

As argued above, one quality of patents is signal value. Publications can be a signal to potential employees — the greatest intellectual resource of a research organization. To be (or at least appear to be) the thought-leader or the next market disruptor is not a bad thing for a company trying to recruit the very best talent, especially if one lacks the capital to win salary bidding wars. In the software industry especially, there is a residual open source culture and at least for some, a company that shares its innovation is sending desirable signals.

Content strategy is not just for consumer product companies. Publications can offer additional signal value broadcast as social content.

Publication in a separate venue can also take place after a patent has been filed. Many pharmaceutical companies publish their findings after patenting is done, see for example the hefty collection of peer-reviewed publications by Genentech. This is having the best of two worlds but at a greater cost.

The deliberative agent with valuable intangible assets considers two alternative actions, “keep secret” and “publish”, which have benefits vis-a-vis the other agents of the world and their ability to take business action. Drawing by Author.

The Please-Use-My-Tech-But-Conditions-Apply Play

Four views on patents, two alternatives, and now one play. I wish to highlight one sophisticated way patents are used nowadays that combines many of the points above: royalty-free patent pledges.

The car companies Tesla and Toyota announced in 2014 and 2015, respectively, that a very large number of their patents would be available to other companies on a royalty-free license. The signal value in doing so was certainly high since the patents relate to environmental technology. In that regard, it has the same benefits as the publication alternative.

As nice as royalty-free sounds, the licenses are not unconditional, though. For example, the Tesla license is revoked for a company if that company brings any patent claims against Tesla, or if the company makes a product that has the appearance of a Tesla product.

In open-source software, which includes patents and copyrights, royalty-free licensing is the norm, however, they often also include various additional terms. For example that licensees are not allowed to bring infringement charges against the licensed software, or that any further changes made to the open-source software must be made available royalty-free as well (“copyleft”). Certain standards, like USB and Bluetooth, are also covered by patents that can be licensed royalty-free.

In some cases, these seemingly revenue-losing decisions are ways to use patent equity as bargaining chips to protect from future revenue losses due to expensive litigation, or opportunity costs of engineers and scientists spending time helping to prepare the legal defense or being deposed.

Another explanation for this practice is that the self-interest of the research organizations is to maximize adoption and become the de facto standard. Bluetooth, originally developed at Ericsson, is nowadays ubiquitous, which in part followed from that Ericsson did not try to quickly cash in by demanding high license fees on this wireless communication protocol. Instead, the technology became widely adopted and money was made elsewhere in the value-chain, compounded by the large community of users.

Similarly, the notion of a platform business model has gained a lot of attention in web consumer services, where user adoption is the central factor in the company's equity. This business model is not necessarily limited to the web. A minimal threshold to adoption is central, and that includes minimal costs and low legal risks when licensees use the patented technology for their own products and services.

I am curious if biotechnology can adopt this play, though. Biotech is looking to become more like software through synthetic biology, programmable cells, generative AI designs, and standards are part of that discourse. But an industry that has used patents very well to shield revenue made from sales of valuable compositions of matter (antibodies, nucleotides, seeds) might have cultural hurdles to overcome in addition to technical ones as the software template is used. Business model innovations, not just technology, are part of the play.

Headache 1: Freedom to Operate and Appropriately Managing Your Industry Godzillas

In an earlier section, I mentioned freedom to operate, defined as “for a given product or service, at a given point in time, with respect to a given market or geography, no intellectual property from any third party is infringed.”

In the ideal world, before any resources are invested in a product that will generate revenue through sales, you ensure the product contains nothing that you lack the freedom to operate, or is produced by a method that is covered by a granted non-expired patent. Second-best is that any critical parts or methods for which a license is needed have been identified and accounted for in the decision.

But with around 400,000 patents granted in 2020 in the USA, and many of the patent documents being very lengthy and at times quite cryptically written, and with different patent owners more or less inclined to enforce their property rights, perfect clarity is not attainable.

This is the headache of other people’s patents. It is indeed depressing to learn after having built something great, that another company credibly can demand a hefty chunk of your earnings. It does not matter if you did not intend to infringe. If you have spent resources to reinvent the proverbial wheel, that loss is yours.

So-called freedom to operate opinion, also known as a patent clearance search, is a document a patent agent or a law firm provides after they have searched the patent corpus, and taken into account ownership, past litigations, and other trends. It is an opinion about your freedom to operate with respect to something specific, not a ruling or final judgment. It can be used to guide design decisions and the business path going forward. Cost effectiveness of freedom to operate opinions has to be considered — they usually do not come cheap.

The abundance of information in granted patents and the associated legal uncertainty can create a sizeable hurdle for a smaller company that has less capacity to coordinate its acts vis-a-vis the external environment. That is an inherent disadvantage small companies have. But disadvantages are at times best mitigated by amplifying inherent advantages: agility, low legacy costs, and fresh pairs of eyes can enable opportunities the established companies may be slow to recognize.

Industry knowledge and judicious patent research are at the sensible middle between buying numerous freedom to operate opinions and inventing purposely blind to what already is under patent protection. In most industries, there are companies known to have big patent portfolios and zealous legal departments that are trying to compel other companies to sign up for licenses — the Godzillas that can wreak havoc if they show up at your shore. Know them, research their portfolios and license programs, and if you cannot entirely avoid them, at least be prepared for the day when you are big enough to merit their attention.

Headache 2: Non-Practicing Entities Go Trolling

In an earlier section, I mentioned non-practicing entities (NPEs). They are entities that own patents, either through their own research or by acquiring other people’s patents, but they do not practice the patented innovation. In other words, they do not create products to be sold.

Universities are prime examples, however, they are not alone. One class of NPEs that have become dreaded are entities that, typically, buy up broad patents from individual innovators or companies that have defaulted, and then make their money by pressuring other companies to sign license agreements through legal tricks and threats. The derogative term is patent troll.

The troll under the bridge that demands a toll for passage is the mythological ancestor to the patent troll that requires a fee for doing basic business. Image by Otto Sinding, public domain available on Wikimedia.

Especially but not exclusively in the software industry, where patent law and practices are further from settled, it is not uncommon to receive a demand to pay a license fee for a supposed infringement from an obscure limited liability corporation. Although you may find the demand ludicrous and consider your product to barely overlap with the patent in question, or that the patent is far too broad and obvious and quite possibly something a post-grant review would overturn, it may still be rational to pay the fee.

One reason is that legal defense is a major, often unpredicable cost. In American courts, even if you win your case and are not compelled to pay damages or agreeing to license, the attorneys that represent you are paid by you, not by the losing party (referred to as the American rule in contrast to the English rule). In addition, the time spent litigating is time you could spend on innovating, so there are opportunity costs as well. If the license fee is lower than the expected costs, the financially right decision is to pay the fee, at least if the options are considered in isolation from possible future demands.

Germany is known as a patent troll paradise, since it is easier to obtain injunctive relief in Germany. If a company is accused of patent infringement, courts can quickly require the accused company, the defendant, to stop its business pending a final ruling. That further raises the cost of not immediately agreeing to a license demand. In 2021 a new law was passed that is meant to address this. It remains to see what the new equilibrium will be.

In a similar fashion, a 2017 ruling by the Supreme Court of the United States has put limits on the tools patent trolls employ in the USA.

The trend line for the last few years is pointing towards less trolling. This is a changing landscape, however, and new legislation or precedent can alter best practices quickly. One concern is that as patent trolls are stripped of their means to extract cash, claims of infringement that ought to received redress might not qualify. In other words, patent law is a two-edged sword.

What Can Be Patented in Biotechnology? Three Cases To Illustrate the Limits of Patentability

When Einstein formulated the theory of relativity in the early 20th century while working at the Swiss Patent Office in Bern, he did not file a patent for it. Nor could he. It is generally held that manifestations of nature, like a law of nature, a plant found in the forest, a mineral found in the ground, are free for all and reserved exclusively for none.

But where exactly is the boundary between what is a manifestation of nature, and what is an invention by human ingenuity? A handful of patents in biotechnology have come up against this boundary. I summarize three instructive cases next.

Case 1: The Markedly Different Oil Eating Bacterium

In the 1970s a scientist at General Electric, Ananda Chakrabarty, developed a genetically engineered bacteria capable of breaking down crude oil. A patent was filed in the USA for the particular bacteria, which at first was rejected on grounds that living things are not patentable, but following years of litigation the patent was allowed in 1980 by the Supreme Court of the USA.

The judgment concluded that “the patentee has produced a new bacterium with markedly different characteristics from any found in nature and one having the potential for significant utility.” In addition, the court noted that in patent legislation crafted in the 1930s, the distinction between what is patentable and what is not in the biological domain “was not between living and inanimate things, but between products of nature, whether living or not and human-made inventions.”

An exact delineation between products of nature and human-made invention was not provided, however. The principle that was established in this case for patents in the United States is still applied as patents are examined and litigated.

Case 2: Complex Living Things Allowed?

Mice with an altered genome are nowadays a major part of pre-clinical drug development and discovery since they enable better tests of human disease conditions in a non-human organism. But can mice with an engineered genome as a general entity in itself be patented?

Patent offices and courts around the world have arrived at different answers for distinct reasons.

The US Patent Office granted a patent in 1988 to Harvard University that claimed “[a] transgenic non-human mammal all of whose germ cells and somatic cells contain a recombinant activated oncogene sequence introduced into said mammal, or an ancestor of said mammal, at an embryonic stage.” This creature became known as the Oncomouse or Harvard Mouse and has become a museum artefact. The non-human modifier is important and in a law passed in 2011 patents “directed to or encompassing a human organism” are categorically prohibited.

The European Patent Office eventually granted a patent for the same innovation after utilitarian balancing, where the fact that major benefits in cancer treatment were expected surpassed the moral concerns. The European patent convention, Article 53, considers public morality an explicit factor in decisions on what is patentable. The same balancing of utility and morality made the EPO reject a subsequent patent application for transgenic mice meant to develop treatments against hair loss, a less detrimental condition than cancer.

After many years, the Canadian Supreme Court rejected in 2002 the claim of the mouse per se, only to allow a patent for the method to obtain such a mouse. The rejection rested on the argument that a mouse is too complex to be a composition of matter, while a lower life form, like bacteria, is not. The court did not establish where the complexity cut-off is. The foundational issue — if lifeforms are patentable at all in Canada — was not a matter the court ruled on.

Case 3: Specific Gene Isolation Not Sufficiently Human-Made in USA

The human genes BRCA1 and BRCA2 can exist as variants that are known to considerably increase the risk of a number of cancers, foremost breast, and ovarian cancer. The sequence and location of said genes were first established by Myriad Genetics Inc. They patented the two genes and synthetic complementary DNA sequences intended as diagnostics. The laboratory method of isolating said genes was however well-established and not novel in itself.

Illustration of crystal structure of BRCA1 protein containing one known missense mutation (hydrophobic methionine at position 1775 is substituted for a hydrophilic lysine). Image by Author from structure 2ING.

The patent was at first granted, and Myriad acquired the exclusive right to isolate an individual’s BRCA1 and BRCA2 genes. However, the patent was soon challenged, and indeed the Supreme Court of the United States unanimously rejected the patent in 2013.

The principle established in 1980 for the oil eating bacterium is used again and the fact that BRCA1 and BRAC2 are not markedly different from what is found in nature and that non-novel methods are used to isolate them, meant that simply being the first at characterizing the genes is not sufficient to allow the patent. So natural genes are not patentable. The information about cancer risk latent in the two genes, no matter how novel the discovery was, is judged as a natural phenomenon and therefore outside the scope of what can be patented.

However, the complementary DNA that can be used in diagnosis is engineered and thus allowed. The court notes that had the method of gene isolation been novel, or had the patent claims been limited to novel applications of the discovered information residing in the genes, then Myriad would be back in patentable territory.

In contrast, in Europe patents on isolated and characterized genes are possible to obtain. But since healthcare is mostly government-run in Europe, the economic conditions for Myriad and their patents were different. Therefore the litigation surrounding the BRCA gene patents played out differently without having to wrestle with the issue of patentability of natural genes. Patents are economic means after all, and if other factors more strongly govern an economic course of action, patents may not be contested and their merit remain untested.

Fundamentals Are Good For Debate, But It Is Important To Not Lose Perspective Of the Productive Risk That Matters

The three cases illustrate what has been up for debate. As with most legal matters, there is plenty of text and commentary available for a reader who likes to explore other cases and conundrums in patent law and social policy. And no doubt this also offers plenty of content for ethics debates, high-minded discussions about jurisprudence, and suggested patent system reform, which will try to shift the debate back to fundamentals of property and the common good — the issues at the genesis of patents as outlined in the beginning of this essay.

As innovations in biotechnology create additional capacities to reconfigure phenomena of complex natural matter or find new ways to extrapolate from data of nature, the boundaries around what is patentable will remain dynamic. Patents are bound to be overturned as the political and legal establishments try to align social policy, law, and technology.

I am doubtful though this risk should play a prominent role as research and patenting strategy is considered. Innovating calls for productive risk in the face of an uncertain future, and drawn-out management of downside legal and political risk can work against that. Let the chips fall where they may, a useful attitude to deploy at times as we engage in the prospective art of innovating rather than the retrospective review of events with the benefit of hindsight.

So Should I Patent This Stuff, Where Should I Patent It, How Do I Write These Things, And What Does ‘Comprises’ Mean?

Patents have many benefits to the owner of them, not all straightforward, and very few of the benefits can be realized in the short term. Patenting is investing: an act in the present, in service of something useful in a possible future.

As always when there are finite resources on hand, though, the time and money may be better invested in other things. The views, alternatives, and cases above support the deliberations as you weigh the options. The decision-maker should know the utilities and uncertainties, place them in relation to the business strategy, and act.

But then it is time to get the patent filed and prosecuted…

This is where the finer details matter more, and general analysis and framework come to an end. I will sketch some of the steps that come next, but ultimately competent patent advisors or patent agents are needed.

Illustration of what a patent document looks like. Illustration by Author.

It Is Not Just What You Say, But How You Say It

Patents are documents that define and delineate the technical subject matter of the innovation primarily for an audience of legal professionals. The choice of words, like “comprises”, “plurality”, “can be contemplated”, “such as but not restricted to” are no accidents. To a layperson, the argumentation among legal professionals about what words mean can be mystifying.

The innovator is rarely the best author, at least not the exclusive author, of the patent document, especially the claims, which are the legally most significant parts of patents. A patent agent or attorney will be needed at some point between drafting the text and filing the application with a patent office.

And that is the next question: which patent office? As described above patent offices correspond more or less with national borders (Europe is a special case). Each office has its rules, costs, procedures, language requirements etc. The cost of translating the dense, lawyer calibrated, English text of a patent into, say, Japanese or vice versa can become very high.

Which Jurisdictions Matter Most?

A policy is needed for which jurisdictions to file patents in. That will depend on factors, such as but not restricted to expected size and location of markets for products using the innovation, if the innovation is foundational or an add-on to previous patents, the reliability of the legal system of the jurisdiction in question, total costs of filing, which for smaller companies can include grants that offset some of the fees for selected jurisdictions.

It is still true that for many innovations, a US patent is the most valuable for the reasons above. However, anything more specific will depend on the nature of the industry, what utility patents serve and where they fit within the greater business strategy.

In this context, the PCT system should be noted. It is a means by which a patent is reviewed, and an international search report is compiled by a government patent agency. In response to the report, the innovator can adjust the claims, such that the application is more likely to be granted. However, the text filed within the PCT system is not ultimately what converts into property rights, that determination is still up to the national patent offices. Especially if the creator plans to patent an innovation in many different countries, it is usually prudent to start the process with a PCT filing, then some months later (ballpark 18 months) decide and then pay for, which national patent offices to send the revised applications to.

The Many Paths To Patents and the 3D Chess Game of Time, Space, and Cost Trade-Offs

The order in which steps are taken along the journey of turning an invention into a patent can be the subject of a great deal of tactical considerations. Do you want a granted patent fast to use for its signal value in the next year? There are ways to move more quickly if you are ready to pay some extra or simplify the patent. Do you want to defer the high costs of foreign patents, but not forgo those options for later when company finances are better? Within limits, one can slow-walk parts of the prosecution. Have you realized a really nice variation to your innovation hinted at in an earlier filing? There are ways to try to continue or divide patent prosecutions, such that the earlier priority date is retained, rather than a later one if separate filing is done.

But I illuminate these considerations rather broadly. These are details best worked out together with a patent agent or attorney who knows the current details, the specific times between different office actions, typical costs involved, the current best practices of terminology, etc.

But be aware: do not lose sight of the fundamental reasons for going down this path. Do you have the right view on why the patent application is made and the resources invested? Do you see the forest or have you lost yourself among the trees?

The process of obtaining patents is not simple and can be very important — it is not a place for trivial answers. My hope is the framework will help structure your deliberations and find a path forward.

A few more steps on the path… Image by Author.

Complements To the Patent System and the Bigger Picture of Incentives For the Useful Arts

As a decision-maker, there are many things you do not control. The patent system is what it is, and in many innovative businesses, one has to simply relate to it. I shared a framework for doing so in this essay. It is not all roses. Headaches, legal barriers to entry, and high legal fees are common.

In this final section, I will outline a sliver of the debate around complements to the patent system. Recall that the roots of the patent system are in the intentions of governments and rulers to bring about a better society (as the ruler conceives it) through increased innovation and production of intellectual goods and services — the “useful arts”. Perhaps there are more productive ways to get there?

In biotech, the US Food and Drug Administration (FDA) is another federal regulatory agency of great importance. Since 2007 FDA offers priority review vouchers. If a company develops an orphan drug product — a name given to drugs that targets rare or otherwise neglected diseases — that company receives a voucher that grants them the right to an accelerated review of any other drug. The voucher can also be sold by the company that obtained it. Sales prices around $100 million are known. The FDA review process is slow, therefore the accelerated review provides the company additional time in the market as the exclusive provider of the drug they own and accelerated the review for.

In other words, since the FDA practically controls what drugs can be sold in the large and lucrative US market, and time to market is valuable, a system that conditionally accelerates the process, effectively turns high-revenue drugs into sponsors of whatever drug products the condition applies to.

Another incentive that has become more common is prizes. This is where a government, company, non-profit, or philanthropist designs a competition with a cash reward or some exclusive contract, to facilitate a competition among innovators. The winner is determined at least in part on some performance criteria of the output rather than by a precise specification of deliverables. The innovator invests their own capital and intellect without a guarantee to be victorious, so prudent expenditure of resources is in the innovator’s self-interest. Prizes are interesting also in that they can have considerable signal value (recall the third view on patents). The hub of the US Government and the Netflix Prize are two prominent examples that have been studied.

One of the most famous prizes is the Orteig Prize that in 1919 committed $25,000 to whoever could fly non-stop New York City to Paris, or vice versa, eventually accomplished by Charles Lindbergh in 1927. Exactly what the world of aviation would look like absent the prize we cannot know, but by the considerable activity the Orteig Prize induced, it is almost certain it stimulated far more innovating than the cash reward would have if handed out as grant money.

Tax credits are another approach that governments use to shift incentives. In Canada, the SR&ED tax credit allows companies that perform certain classes of research and development to deduct some percentage of the salary payments on their corporate tax bill. The same amount of money can therefore employ more researchers, or ones that demand higher salaries than had the credit been absent.

Neither of these are replacements for patents. They may however positively shift the margins of what is sensible to an innovator to work on. It is also clear these incentive systems centralize judgment about the common good, more so than the patent system alone, and that the system designs presume the central institutions are in possession of the scarce utility the incentive is created from. This inevitably leads us to politics and questions about the division of power, quality of expert judgment, and the legitimate role of the state — meaty debate topics I am sure the interested reader faces no shortage of online opinions to peruse.

Appendix of Useful Links

In this appendix, I provide a handful of links that can be helpful to a decision-maker who seeks to apply this framework or study patents in practice further.

  • Google Patents is a very good way to search for and discover patents for those who do not work with patents full-time. Especially once a few key patents have been found, other related patents and publications are linked. The challenge is that the quality of the patent and its future significance is an elusive property, so many less relevant patents will surface from these searches.
  • The patent glossary at Wikipedia is a helpful reference to navigate and distill patent attorney jargon.
  • Virtual patent markings is a recent addition to patent practice most relevant to companies with hardware products. In order to sue a company for infringement retroactively, there must be sufficient evidence the other company could have known about their error. Marking a product with relevant patents is one acceptable way, including virtually. Blackberry’s page is a feat.
  • The World Intellectual Property Organization (WIPO) manages the PCT system and different global harmonization schemes, has quite good resources for patent search, data, and self-learning.
  • A number of blogs run by patent attorneys or academics share detailed comments on the latest developments as well as practical guides. A great deal is meaningful only to the lawyer or social policy debater, but a decent amount also helps the non-lawyer decision-maker I had in mind for this essay. See IPWatchdog, Patent Docs, Patently-O. Many law firms also have blogs with practical commentary, several of which I have linked to throughout the essay.
  • Formal educational resources in patent law, without having to commit to attending law school, includes this free textbook by Masur and Ouellette, as well as this Coursera course organized by the University of Pennsylvania.

Anders Öhrn blends atoms and bits. In a pioneering startup in Vancouver, he helped make protein structure data, statistics, AI, and grit materialize into an antibody-drug scaffold nowadays used across Big Pharma. Thereafter he has been around the world and developed consumer electronics with embedded software and explored deep learning, where the forces of atoms and bits propel each other into creation.

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Anders Ohrn

Quantitative if possible, towards first principles, pragmatic always. Innovation, biology, computation & complexity.