Archive for August, 2012

Pricing a Product

Tuesday, August 21st, 2012

Pricing a ProductPricing a product can be stressful and confusing. In many ways, it’s like walking a tightrope. Price it too high, and you fear scaring customers away. Price it too low, and your profit margins sag no matter how many you sell. What you really want is the “Goldilocks price”, the just-right price that enables you to sell as many products as possible as profitably as possible. So how do you get there?

The first step is to review our previous article “Estimating The Cost to Produce Your Product” if you have not yet done so. In this article, we advise researching your material and labor costs to determine what it costs in total to produce one product. At bare minimum, any price you assign to your product must incorporate this cost.

Of course, the goal of business is not to simply break even – it’s to make money! Then again, we already established that you cannot just add any old arbitrarily high amount to your price and hope to succeed. Here are some questions whose answers will tell you what price to settle on.

1)      What are your competitors charging? Don’t say that you have no competitors. You’re either not looking hard enough or (worse), there’s no market for your product. In all likelihood, you do have competitors. Even if they only sell a similar product, this can be used for comparison purposes. Once you determine who they are, find out what they are charging. No, this does not mean you have to automatically adopt their price as your price. That would be mindless and probably inaccurate. Rather, use the prices of your competitors as a starting point. At this stage, it may help to average your competitors’ prices together and use that as the starting point.

2)      How is your product different and better than your competitors? One of the biggest deciding factors in price setting is differentiation. In what ways is your product meaningfully better and different than that of your competitors? Too many inventors rush to say “we’ll charge less, and that’ll be our difference.” But unless you are in a true commodity market (like screws or lumber) this is a losing strategy. As the old saying goes “live by the cheapest price, die by the cheapest price.” A product whose only or primary selling point is “it’s the cheapest” will be displaced by anyone who comes along and undercuts you. Who wants that? As the developer of a specialized, difference-making product, you should be able to emphasize at least one meaningful attribute or quality that competing products lack. The more of these you have, the more you “de-commoditize” your product and can justify charging an appropriately higher price.

3)      What part of the market do you envision reaching? Different segments of customers often comprise and co-exist within given product category. For example, the broad category of “cars” includes economy cars, luxury vehicles, heavy-duty trucks, corporate fleets, etc. The category of “food” includes junk food, basic fruits and vegetables, frozen TV dinners, fine organic delicacies, and the like. The category your product falls into is probably divided along similar lines. There are products like yours for cheap/economy use, mid-range use, and premium/high-end use. Which segment your product occupies is largely a function of your product’s quality and desirability to that segment. If you say “I want to go after the high-end segment of the market”, you need a compelling reason(s) why that segment of people will pay a premium for your product. Lacking those reasons, you may fall into the mid-range or economy segments. Which one you settle into also influences what your price should be (and which competitors you should be comparing yourself to.)

4)      Do you want to sell a lot of your product for a low price, or a little of your product for a high price? Neither strategy is inherently better. What should determine your choice, again, is the nature of your product. If you are selling, say, a new kind of garage door opener, you will probably need to sell more openers to more people, at a lower price, to make a profit. But if you’re inventing a new laser engine turbine for factories, you will probably want to price this highly and focus on selling to a handful of big, long-term customers.

Should you strive for a low price?

We’ve already cautioned you against competing on price. But should you, in general, strive to have as low a price as possible? Probably not. Many entrepreneurs assume that since their product is new, unproven, or “beneath” an established brand, they should charge less. After all, how could they expect people to pay more? However, this is generally inaccurate. A product’s price changes people’s perception of it. If you truly see your product as being on par with or better than a competitor’s, the price needs to reflect that. Otherwise, the consumers you are trying to reach will equate your lower price with lower value or quality.

Concluding Thoughts

If this all sounds like a lot to consider, it is. Truth be told, pricing a product is one of the trickier tasks in business. There is no universally accepted “formula” or system for doing it. However, questions like these will get you thinking about the real and pressing factors that demand consideration in pricing.

Inside the United States Patent and Trademark Office

Saturday, August 11th, 2012

united states patent and trademark officeThe USPTO is The United States Patent and Trademark Office, an agency of the Department of Commerce that is responsible for patent and trademark rules, regulation, and oversight.   Located in Alexandria, Virginia, the five interconnected buildings that comprise the office employ over 8,900 workers (www.uspto.gov).  Recently, the USPTO opened a satellite office in Detroit, Michigan.  There are also new plans to open four regional U.S. patent offices in Dallas, Denver, and Silicon Valley to spur on growth in the American economy as well as to create jobs.  The opening off these satellite offices will also help to speed up the process of obtaining patents and trademarks.

The U.S. Patent System

To start a discussion of the U.S. Patent System, it is important to understand how the process of obtaining a patent works.  There are three types of patents for which an applicant can file.  These include: Design patent (ornamental characteristics), utility patent (useful process, machine, article of manufacture, composition of matter), and a plant patent (new variety of asexually produced plant) (www.uspto.gov).  If the invention has not been patented, the correct application is filled out.  If international protection is needed, the inventor will file globally.  Paperwork for the United States is then filled out, and an inventor can either file by themselves or use the recommended route of using a registered attorney or agent.  Electronic filing is also an option.  From this point, the United States Patent and Trademark Office will review the patent application.  If the patent is allowed, the applicant will be charged an issue and publication fee, the USPTO will grant the patent, and there are maintenance fees due 3 ½, 7 ½, and 11 ½ years after the patent is granted.

The maintenance fees that will be incurred must be paid in full in order for an inventor to keep their patent.  These fees are subject to any patents that were filed on December 12, 1980 and after.  If an inventor fails to pay the maintenance fee, they will receive a Notice of Expiration and their expired patent will be posted online under Official Gazette Notices and “Notice of Expiration of Patents Due to Failure to Pay Maintenance Fee.”  Maintenance fees can be paid online, by mail, or by fax by using a credit card, deposit account, or EFT account (or check/money order if by mail).

USPTO Revenue

The USPTO’s earned revenue is “derived from the fees collected for patent and trademark products and services” (www.uspto.gov).  There has been a steady incline of earned revenue for the USPTO, as seen from the yearly figures from 2004-2007.  In 2007, the total earned revenue was $1,735.7 million, whereas in 2004, it was $1,230 million.  The percentage charge in patent earned revenue has fluctuated, from 8.8% in 2004, 9.6% in 2005, 15.6% in 2006, and 8.9% in 2007.  The percentage of change in trademark earned revenue has also varied during that time.  It was 7.2% in 2004, 19.5% in 2005, 20.1% in 2006, and 8.8% in 2007.

Ideally, the more patents that are filed, the more revenue the USPTO will receive each year.  Since inventors have to pay for their patents initially and at three other marked intervals, the USPTO is capitalizing heavily off of inventors in the States.  Below is the USPTO’s table for 2007 Patent Revenue by fee type (www.uspto.gov).

One can see from the chart that the maintenance of patents is the largest slice of revenue for the USPTO.  Together, maintenance fees, initial application fees, search and examination fees, and issue fees make up over 83% of total patent income (www.uspto.gov).  In 2007, maintenance fees were up 10.4%, or $51.1 million more than they were in 2006.  The USPTO notes that due to patent renewal rates slightly increasing from years 2004 to 2007, the increased revenue trend is likely to continue.

With the rise in USPTO total revenue, it is also no surprise that the number of patent applications filed in the U.S. have raised steadily over the past decade.  For example, in 2001, 345,732 patent applications were received by the USPTO.  By 2010, that number skyrocketed to 520,277 filed patent applications.  From year to year, there has been a steady increase of applications, but there was an especially high increase from years 2009 to 2010, where numbers of applications jumped from 482,871 to 520,277 (www.inventionstatistics.com).

Patents Issued by the USPTO

Of course, the number of patents issued by the USPTO is not the same as the number of patents applied for by inventors.  As of February 2006, a total of 7 million patents have been issued by the USPTO . To put this in perspective, 244,341 patents were issued of the 520,277 applied for in 2010.  This figure is under half of the filed applications that the USPTO received.  Patent applications can be turned down for a variety of reasons—copyright infringement standing high atop the list.  However, there is a steady gain in the amount of applicants and patents.  The USPTO is in the process of opening satellite offices in hopes of reaching out to more inventors and making their services more accessible.

The number of patents created in the United States varies from state to state.  For example, California’s inventors have had a grand total of 60,830 patents between the years 2010 and 2011, with a 2.2% increase in patent numbers (www.uspto.gov).  Smaller in number is South Dakota, with 188 total patents in the two year span, but with a 29.3% increase in the number of patents issued.  Vermont had 668 patents in 2010 and 536 in 2011, showing a 19.8% decrease in the number of patents obtained.  These are just a few examples to show the largely uneven distribution of patents that occur from state to state.

The USPTO has a well-developed website, where inventors have access to a wealth of patent and trademark information.  There is everything from public users’ meeting minutes, web fillable forms, to intellectual property law and policy information.  Perhaps one of the most useful tools is the website’s ability to search for patents and trademarks.  This is invaluable for inventors and can help them tweak or rethink their inventions before spending money on the patenting process.  In the long run, this feature will save inventors money, but may make create less revenue for the USPTO.  However, it will also boost the efficiency of the ever-expanding organization.

JOBS ACT

Friday, August 10th, 2012

JOBS ACTThe American Jobs (Jumpstart Our Business Startups) Act, also known more simply as the Jobs Act was a series of bills that were formally proposed to a joint session of Congress to jumpstart the economy, presented in a televised speech that aired in 2011. The legislation, written by the Obama administration, was supported by many Democrats and Republican legislators. The Jobs Act recieved support from both the Senate and House of Representatives and was signed into law in April of 2012.

This bill, which totals in $447 billion in provisions, does many things in an attempt to boost the American economy. The Jobs Act will cut $245 billion in payroll taxes, boost spend of $62 billion to expand programs whose purpose is to put people back to work, continue to offer unemployment benefits for 6 million people who have been out of work for a long term period as well as providing an $8 billion dollar tax credit for those who fall into the long term unemployment category. In addition to these crucial items, the Jobs Act will pay $5 billion into the Pathways Back to Work Fund, $50 billion into infrastructure, $30 billion in job protection for teachers, police officers and other civic workers, $30 billion into school modernization, and $15 billion into hiring construction workers to refurbish foreclosed homes.

The National Infrastructure Bank

The Jobs Act, monetary goals aside, also looked to establish the National Infrastructure Bank, which serves the goal of funding infrastructure projects, the creation of an wireless network to expand high speed service, stricter regulations against businesses who discriminated against those who had been unemployed for the long term, and making it easiter for small businesses throughout the country to implement crowdfunding.

JOBS ACT and the SEC

The American Jobs Act is crucial for the economy, hit hard by the recession and the housing and financial collapse of 2008. The ability to crowdfund, making it easy for small businesses to go IPO and providing modernized more relevant rules for established private companies are just a few reasons why this piece of legislation is so important. From the date of signing, the American Jobs Act gave 90 days (or until July 4th) to implement changes that were made to the Securities Act Rule 506 and other advertising and security legislation, which was a deadline that was not met, but is a work in progress. The SEC, the Securities and Exchange Commission, is looking t0 release the first slew of rules that target solicitation of investors for small businesses, which is said to be completed in the middle of August of 2012.

The larger, more comprehensive set of rules on crowdfunding are the next big deadline markered in the legislation, and are due in January of next year. By all reports, the SEC has stated that they will be able to meet this larger deadline. Until the upcoming January 2013 deadline, no other major dates in the legislation are upcoming. One piece of the Jobs Act that will directly impact small businesses around the country, which will be finalized in 2013, is the cap on public investment and who is allowed to invest in startups. Prior to this Act being passed, it was very difficult for companies to seek investors. Now, more people who are considered accredited investors, or most of the general public, will be able to invest and provide funds to startups that need every investment that they can get.

JOBS ACT and Crowdfunding

As a business owner, one of the biggest benefits that this legislation will provide you, is the power to crowdfund. What is crowdfunding, you ask? Well, crowdfunding is when individuals, in this case startup business owners, tap into their resources and industry networks using social media and the web to raise funds for their business. Crowdfunding is used in many contemporary fundraising efforts, including disaster relief for Hurricane Katrina, political campaigns and even software development. With the small business owner in mind, legislators looked to create a list of Crowdfunding Rules, which will allow business owners to implement this method to generate much needed capital for their businesses.

SEC Approved Crowdfunding Platforms

Once finalized, small business owners will be able to use SEC-approved platforms to crowdfund, which allows money to be donated by anyone who believes in the business. Through crowdfunding, according to the bill, these business owners will have a cap of $1 million per year that can be raised via crowdfunding, will looking to minimize financial risk. To minimize this risk, the amount an individual donater can invest will be determined by their income. For investors in the income bracket of less than $100K will be able to donate up to 5% per year and for those who make more than $100K, they will be able to invest up to 10% per year. To further protections within this $1 million dollar cap, small businesses will be required to post consumer protection materials on their crowdfunding sites. In terms of company stock, the Act also eliminated the shareholder rule, which stated that only a company could only have 500 shareholders, before it registered with the SEC. Companies will now have the opportunity to sell up to $50 million in shares, and have more than 1,000 investors before going public with the SEC.

Intellectual Property

Thursday, August 9th, 2012

Intellectual PropertyDo you have any intellectual property? And, if you do how much is it worth?  Most of us have ideas or at least thoughts about how we might do something either differently from how it’s done today or how we might do something totally new.  When you go through a formal process of describing what it is you have in mind, how to do what you are thinking, and write it all down, that final form of your idea can be considered intellectual property.  The idea behind intellectual property – especially as it relates to patent laws and processes – is to capture your ideas in a more formal property sense.  Patents are then designed to protect your rights to that intellectual property.

Comparable Intellectual Property Valuations

Another way to think about intellectual property is in relation to real or physical property. If you own a house or piece of land, you are a property owner. That ownership comes with certain rights and privileges according to current property law. You are free to lease, modify, sell, or otherwise use your own property as you see fit, and no one can take those rights away without due legal process.  The same applies to your intellectual property. You own it and have the right to lease, sell, modify or use it as you want. Once intellectual property is protected by patent, you also have the right to exclude others from making or creating something the same as or similar to what you have generated.

Type of Intellectual Property

Is your intellectual property creative or related to an invention? In other words, what type of intellectual property do you own?  One of the current distinctions in intellectual property law, according to the World Intellectual Property Organization (WIPO), is between industrial property and copyrights. Industrial intellectual property most often pertains to “inventions (patents), trademarks, industrial designs, and geographic indications of source” while copyrights apply to “literary and artistic works such as novels, poems and plays, films, musical works, artistic works such as drawings, paintings, photographs and sculptures, and architectural designs”.  For the most part, patents and patent law along with the implied protection of intellectual property rights that go with patents applies to industrial property. It’s difficult to imagine a patent being awarded for music, plays, films, or artistic works.  These creative and artistic properties are typically unique and individualistic. However, equipment, tools, and other things used by artists and musicians have received patents – for example, the Stratocaster electric guitar from Fender received a patent award in 1960.

What can you do with your intellectual property? Just like most other forms of property, you can rent it, sell it, keep it, or use it just about any way you like. Most intellectual property can be thought of as an asset, like most other forms of property.  Putting a value on that asset can sometimes be a challenge, but finance professionals can be engaged to help assess the true market value or worth of your intellectual property. Once you have the intellectual property documented and protected (or patented), you can begin to use it like any other asset. Banks will sometimes lend money based on the value of intellectual property.  Investors will often use intellectual property to evaluate alternative investments or stock purchases.  And, assuming you created the intellectual property in the first place because you had a good idea about how to do something, you can use it as a basis for new products, new companies, or new innovations.

Follow Proper Steps to Avoid Theft, Intrusion, and Misuse

Your ideas and creative thinking are the beginning of your intellectual property. Documenting and describing your ideas, how they work, and what you want to do, all need to be done to capture the idea in a usable form.  Building the intellectual property should be a formal and detailed process just like you would use if you were building a house. You wouldn’t use a poor foundation, cheap materials or leave the roof off of your house if you wanted to have value in the property you are building. The same applies to intellectual property – build it to the best of your ability and use the best materials or inputs you can find.  Once you are finished with the building and have your intellectual property defined, protection and valuations can be addressed. Valuations and the worth of your intellectual property can be properly assessed and estimated, just as if you had an inspector look at a house you built.  And, patents and the patent aware process are there to help protect your rights to the property you have created – protecting you from theft, intrusion and misuse.

How Much Is A Patent Worth?

Thursday, August 9th, 2012

Patent WorthHow much is a patent worth? What is the value of the idea or invention covered by the patent? One way to think about the value of the patent is by considering the intrinsic or underlying value of the product or idea.  For example, before the company actually made one or sold one, how much was the Apple iPhone patent worth?  Putting a value on the patent has to recognize the value of the underlying product.  How much is the patent worth on the next new light bulb (several patents have been granted in the U.S. recently for new LED light bulbs)?  The intrinsic value of the bulb may be less than an iPhone, but if more light bulbs can be sold, perhaps the patent is worth more than other patents that have been awarded.  So market size plays a role in determining the value of a patent as well.  As an inventor or product creator you may believe that your patent is worth a lot of money, and it may well be, but there are several objective criteria used to establish how much your patent is worth.

How Important Is Your Idea or Invention?

How important is your idea or invention? The answer to this question can be a clue to how much your patent is worth. For example, a new patent on a new breakthrough cure for cancer may be more valuable than a patent on a new broom handle.  Typically, breakthrough patents or patents that explore whole new areas of technology are among the most valuable.  In addition, if a patent is awarded to an invention or idea that is the first to find an answer to a long-standing problem, then that patent has more value as well.  These types of patents may well be worth billions of dollars because they provide the owner with what amounts to monopoly power in a market, niche or segment.  By having the right to exclude others through patent protection, the inventor or patent owner can command higher prices and effectively increase the value of the patent. One good way to think about how much your patent is worth – especially if it’s a breakthrough – is to ask the question, “How much would my competitors pay to use my protected product or service?”

How Big Is Your Market?

How big is your market? This can be another clue to helping establish how much a patent is worth.  For example, there are about 30 million small businesses in the U.S.  About 21 million of those are single-owner or sole proprietorships that do not report payroll.  The remaining 8-9 million are and businesses with fewer than 10 employees.  If the new product or invention can be used by all 30 million, that is a relatively large market.  By comparison, there are about 300 million households in the United States.  If you have an invention that can be used by most of these households or used frequently by homeowners that is an even larger market than the business sector of the economy.  When you think about how much a patent is worth, consider how large the market is where the idea or invention will be used.

How New Is Your Patent?

How long has the patent been in effect?  Unlike wine, generally speaking, the newer a patent the more it will be worth.  As the protection term expires (typically 20 years) or as the patent reaches the end of its enforcement period, it is likely to be worth less.  One of the key functions of patents and patent law is to spur innovation and creativity.  Once a patent is granted, even though the inventor or creator has the right to exclude others from his or her intellectual property, others in the same field and the competitors of the original patent holder will begin to evaluate the patent and create products or services of their own.

Without violating any intellectual property rights, the publicly available information in the patent, including design and uniqueness, can provide a basis for even newer innovations and creations. These too may then be patented, but when they are the first patent no longer has as much value.  Over the 20 year life of a patent, there may be several competitors who become more innovative and create new products of their own. By doing so, they dilute the monopoly control of the first patent as well as limit how much the patent is worth.  When patents are new, the intellectual property owned by the patent holder may still provide enough market control over what’s produced and how it’s produced to create more value in the patent before competitors can react.

With many categories or types of patents, it may take years for competitors to come up with new ideas or inventions of their own to effectively compete with the new patent.  Along those same lines, if there are more patents granted within a particular type of product or category, a patent will be worth less than in markets where there are fewer patents. There are fewer patents for innovative medical devices than there are for computer technologies according to the latest statistics from WIPO, the World Intellectual Property Organization.  Patents in computer technologies may be worth less as a result, apart from the underlying value of the product or new idea, which also suggests that the significance of the idea being given a patent has something to do with the value of the patent as well.

Summary

How much is a patent worth?  There are objective markets for and legitimate ways to determine the dollar value of a patent.  These are best handled professionally, through patent attorneys or objective financial analysis firms.  Several factors go into determining how much a patent is worth. The underlying value or significance of the product or invention, the size of the target market, how competitive the market is and who competes with the patented idea, as well as the amount of time the patent has been in effect.  These all play a role in establishing the value of a patent. To determine how much a patent is worth, though, ultimately it comes down to how much someone will pay.

Famous Inventors

Thursday, August 9th, 2012

Will you be the next famous inventor?  We know famous figures from America’s past like Thomas Edison, Alexander Graham Bell, Henry Ford, and others.  Thomas Edison, for example, was one of America’s most prolific inventors and he held close to 1,100 patents for his creations and inventions.  Alexander Graham Bell invented the landline telephone, but do you know who invented the first cell phone?  There is some discussion about who exactly it was, but a lot of the early development was sponsored by Bell Labs as that company grew and explored new communication inventions.  So you can be a famous inventor by yourself or as part of corporate innovation.

Among the most famous inventors of the 20th and 21st centuries, Steve Jobs is well-recognized.  He is listed first on the patent application for what became the Apple iPhone. (There are four other co-inventors on the application filed in September 2007.)  But, do you know the Hollywood actress who pioneered wireless communications in the 1940s?  Hedy Lamarr – a popular movie actress at the time – also invented wireless radio communications to help the USA during World War II.  The work she and her co-inventor George Antheil created was known as “field hopping, spread-spectrum” radio communications granted in 1947 as US Patent 2,292,387.  Her work was originally designed to help the US Navy jam signals of enemy torpedoes.  Practical use and implementation of the invention, though, did not occur until 1962 when the Navy used the technology during a blockade of Cuba.  Ms. Lamarr’s contributions to electronics and related communications were recognized in 1997 by the Electronic Frontier Foundation, about 50 years later. So you can be a famous inventor, but unless you find a way to market or use your idea, fame does not necessarily guarantee financial success.

Other famous inventors have created products that have changed the world and most of our lives, as well as business and financial success for their owners.  For example, the steam engine (James Watt), the printing press (Johannes Gutenberg), the modern light bulb (Thomas Edison), the airplane (Wright Brothers), and other products were created by people who had some measure of fame and success during their lifetimes. Other inventions have been created but were implemented by others.  The barcode was invented by Bernard Silver and one of his students at the Drexel Institute of Technology, granted in 1952.  But, commercialization of the barcode invention required separate creation of tracking and control systems known as UPC codes about 10 years later.

Likewise, many inventions and the people famous for them are cooperative efforts.  The invention of the Internet was a joint undertaking, even with Al Gore’s assistance.  The original design and transmission protocols were developed by Vinton Cerf in 1973 with backing from the U.S. Department of Defense.  Once the specifications were published, it took about 10 years to fully develop what we know today as the World Wide Web, giving us the “www” at the beginning of any website address or URL.  Many times, famous companies support employees who invent and create patented products.  The company in the US that holds the most patents is IBM.  According to recent totals, nearly 3,000 patents are registered to IBM, most in computer design, engineering and manufacture.  Companies and groups of individuals can be famous for their inventions too.  As with the individual inventor, though, for companies it is still true that collective efforts are often required to commercialize an invention by bringing it to market.

Do you have to be famous?  Or, do you have to work with a group of people to make your idea or invention a reality?  The inventor who holds the most U.S. Patents is Japanese inventor, Shunpei Yamakazi with 1,851. Most of his inventions are related to memory chips and LCDs (liquid crystal display).  These are used in famous or familiar TV brands like Samsung, Motorola, General Electric, LG and more.  Even though Yamakazi is not a household name, his inventions and the intellectual property he has created have an impact on millions of households around the world.    In the case of Steve Jobs, yes he’s famous.  And he was a prolific inventor.  Apple Inc., though, would not exist as a successful company without the support and efforts of all the people who work with him and help develop his ideas. To have a viable, marketable idea or invention, you don’t have to be famous or connected with others but it helps.

Patent Trolls

Thursday, August 9th, 2012

Have you heard of patent trolls? No, it’s not a new animated movie character but rather a real class of businesses and individuals who use today’s patent laws and systems to aggressively acquire significant patents in software, computer and technology areas.  The process starts when a shell company – known as Non-Practicing or Non-Performing Entity or NPE – buys rights to patents or licenses. The NPEs are also called “patent trolls” because they exist only for one reason – to buy patent-protected designs and inventions.

To understand why patent trolls exist, we need to know more about patent law and recent awards.  According to recent U.S. patent office statistics, about 60% of all patents awarded in the last 20 years have been granted for computer software.  When added to other patents granted in computers and communications technology, the total rises to 75%.  So, the NPEs and patent trolls know that these areas are the most active when it comes to acquiring or buying patents or patent rights. These market segments are also made up of some very large companies and corporations – Microsoft, Google, Oracle, Apple, Dell and many others.  Because the market is large and continues to grow, acquiring or purchasing patent protected products and services in these segments can be profitable.

Most patent trolls – and there are close to 400 in the U.S. alone according to Patent Freedom – an organization that tracks these companies and their activities – expect that the patented products they acquire will be popular and useful enough to generate revenue.  Potential conflicts can arise, though, when an NPE purchases a patent or group of patents that the larger companies try to work around.  The NPEs typically will challenge the larger corporations and many times, these conflicts result in lawsuits.

Why would NPEs be successful and why are they called patent trolls? To begin with, software patents in particular, but also many computer-related patents have 3 issues which some observers believe open the door for NPEs.  Many times software patents can be written and approved in vague language.  By contrast, chemical, engineering or drug patents for example must be written with much more concise and defined terms.  Trying to buy a drug patent, and then challenging a major drug maker for patent infringement would be very difficult.  The NPEs have a much easier time of buying or licensing computer and software patents, then challenging large, publicly traded companies because of the vague language used.

Patent TrollsA second factor that contributes is application continuation rules.  According to current patent law, a company or inventor can file patent applications and keep them on file as applications rather than awarded patents. As technology or software changes, these applications can be modified and re-filed.  As an NPE changes its patent applications to adjust for technology changes, that can at times result in additional conflict with larger companies.

Finally, the cost of renewing patents is relatively small compared to their value or worth on the open market. Today a patent can be renewed for approximately $1,000.  To protect their interests, even if a patent troll pays a high amount initially to buy or license a patent, they can renew that patent for a relatively small amount.  Compared to many recent settlements of these patent infringement lawsuits – in the millions of dollars – the cost to renew a patent is trivial.

The patent trolls and NPEs have one advantage that keeps them going in today’s market.  When large companies like Microsoft, Google and many others acquire patents – and most of these large companies have tens of thousands – they know that infringement lawsuits against the other large companies will only be met with return lawsuits.  If Microsoft sues Google for a patent infraction, chances are Google will turn around and sue Microsoft for something similar. To avoid this kind of back and forth in the patent arena, stockpiles of patents are usually seen as a deterrent.  And, unfortunately, the software, computer and technology markets have seen increasing usage of patent stockpiles among most large companies.  For the smaller NPEs, though, who also provide revenue to small company inventors and individuals by purchasing their patents, when conflicts arise larger companies tend to settle rather than start reverse lawsuits. The NPEs typically have few resources and larger companies realize the futility or suing these companies.

Patent trolls do exist, yes. Most of the negativity surrounding the name comes from outside observers who believe that NPEs exist only to sue big corporations. However, like some of the movie trolls you’ve seen recently, there is a good side to these companies as well. They do provide revenue and payments to smaller companies and inventors who might not otherwise be able to realize financial gains from their patented products and services.