SEMA eNews Vol. 19, No. 32, August 11, 2016

Taking the Mystery Out of Patents

By Jeffrey Banyas

Every company must do at least one thing better than its competitors in order to survive and grow. This is the company’s competitive advantage. This competitive advantage might come from a special formula, a unique part, a cheaper manufacturing process or simply a better quality product.

SEMA companies of all sizes must identify and protect their competitive advantages or risk losing their position in the market. Applying for and obtaining patents represents one way for a company to protect its competitive advantages.

Unfortunately, misconceptions about patents are prevalent in many industries. These misconceptions often cause companies to forego patent protection, leaving key competitive advantages virtually unprotected. In fact, in 2015, less than 10% of the more than 2,700 SEMA manufacturer members were issued a U.S. patent.

patent

Experience shows two significant misconceptions about patents. First, many believe that patents are only for “big businesses” or revolutionary inventions. In reality, companies of all sizes can obtain patents for even minor improvements to a product or process. In 2015 alone, more than 4,100 U.S. patents were granted to SEMA manufacturer members with less than 60% of those patents being granted to industry giants such as Goodyear, Cummins and Federal-Mogul. Those 4,100+ U.S. patents include patents for a wide variety of products covering nearly every field in the aftermarket automotive world.

Second, many are unaware of the value that patents provide to a company. All patents, even those for minor improvements to existing core products, can enhance the value of a company in a variety of ways. In fact, the simple step of filing a patent application provides value to the company before the patent even issues by deterring competitors from copying the “Patent Pending” product or process.

The Who and What of Patents

When thinking about patents, many people might think of Carl Benz’s patent for the automobile (German Patent No. 37,435) or any of the hundreds of patents issued to Ford Motor Company, and come to view patents as reserved for “big businesses” or revolutionary inventions. These beliefs cause smaller companies to allow less dramatic improvements to their products and processes to go unpatented.

In reality, patents can cover a revolutionary core product in an industry (such as Benz’s automobile patent), but they can also protect improvements to a core product (such as an improved spark plug or shock absorber). In an ideal world, SEMA companies should patent both their core product and any improvements they make to that core product. However, patenting the improvements becomes even more critical when the company does not have a patent on the core product, or when the patent on the core product is close to expiring. Patenting the improvements is often the only way for the company to continue to protect its competitive advantage in the market.

SEMA companies can patent even minor improvements to a core product. For instance, while the wheel has been around for centuries, every year the United States Patent and Trademark Office issues hundreds of patents for wheel improvements, including improved wheel designs, improved wheel bearings and improved wheel manufacturing techniques.

At this point you may find yourself wondering what exactly is patentable, and how can I tell when I have a patentable idea? Simply put, a patentable idea represents a new and non-obvious solution to a problem. Here are a few indicators that a patentable idea may be on the horizon:

The Competing Theories Test

In any research and development endeavor, business leaders need to keep their eyes and ears open for potential patents. One way to do this is to follow the conversations of the experienced scientists and engineers on the project. When two experienced scientists or engineers heatedly debate the cause of an observed phenomenon or the solution to a problem, a patent could be on the horizon. Think about it this way—if the experienced scientists or engineers cannot even agree on what happened, why it happened and how to solve it; how can the solution be anything other than new and non-obvious?

The Lunchroom Test

Like the Competing Theories Test, this test requires business leaders to stay engaged with research and development staff. When the business leader notices the research and development staff having an excited conversation (often held in the lunchroom or at the watercooler) about a problem they were able to solve and how they solved it, there is a good chance a patent is on the horizon. Remember, at its core, a patentable invention represents a new and non-obvious solution to a problem.

Lack of Awareness about the Value of Patents

Many people believe that the value of a patent only occurs when it issues because of the ability to prevent a competitor from actively copying a product or process. In reality, patents enhance the company’s value in several ways.

Deterrence

While issued patents prevent a competitor from copying the patented product or process, simply having a patent application on file can deter a competitor from copying. You may have seen the words “Patent Pending” on a product. “Patent Pending” means that the maker of that product has filed a pending patent application. What those words really say to a competitor is, “Proceed at your own risk. We don’t have an issued patent yet, but we could some day in the future.” In the U.S. between 40%–50% of patent applications will eventually issue as U.S. patents. As a competitor, do you flip the proverbial coin and copy the “Patent Pending” product hoping that the patent never issues?

Capital Investment

Anyone who has ever raised capital, or watched an episode of ABC’s hit show “Shark Tank,” is familiar with this concept. A company seeks money from an investor in exchange for a return on the invested money. The investor routinely asks what the company has done or is doing to protect its products (the company’s competitive advantage). The investor’s fear is simple and well founded. Without proper protections in place, a competitor can copy the product, cutting into profits and reducing return on investment. Companies that have invested in patents can answer quite simply: “We have a patent on that.” The patent helps to reduce an investor’s fears about copying, making it more likely that the company will receive an investment because the company’s competitive advantage is protected.

Increased Price

Some retailers and distributors will increase the manufacturer’s price for a product when that product is covered by a patent or patent application. For instance, a retailer may allow the manufacturer to increase the price of a product by 3% if the product is the subject of a patent application or 5% if the product is covered by an issued patent.

Licensing and Royalties

A company may seek to license their patents for a variety of reasons. For example, a company may have a patent on their process to manufacture a particular product. In some instances, that process may also be used to manufacture other products outside of the company’s core business. When this happens, the company may license the patent to manufacturers of those other products outside of its core business in order to generate additional revenue from the patent. In another scenario, the company may have a patent in several countries, but may only make and sell its own patented products in one country. In order to increase revenue from the patent, the company may license the patent to manufacturers in other countries. Regardless of the reason, licensing the patent can add value to the company by generating revenue from license royalties.

Selling the Patent

On occasion, companies develop and patent technologies only to find that the technology does not really fit into their business model. When this happens, the company can still realize value from the technology. Instead of licensing, the company might offer to sell the patent(s) on that technology. The company can negotiate a sale directly with a buyer, or use any of the variety of available patent brokerages and auction houses such as ICAP Patent Brokerage or Ocean Tomo.

Patents as Collateral for a Loan

When a company needs cash quickly, a loan may be the only option. However, the company may not want to use their physical facilities or equipment as collateral to secure the loan.

Some lenders accept intellectual property holdings, including patents, as collateral to secure a loan. Be careful though. If the company defaults on the loan while still using the patented technology, ownership of the patent transfers to the lender who can freely sell the patent to a competitor. If the company that took out the loan continues to use the patented technology after defaulting, they could find themselves subject to a patent infringement lawsuit.

Increased Valuation

Patents also increase the value of a company if and when the owner sells the business. The revenue the company can generate heavily influences the value of the company. Whether from reduced competition, deterrence, investment, increased price, licensing, sale or loans, patents can help a company generate more revenue, thereby raising the value of the company at the time of sale.

Conclusion

SEMA members of all sizes should incorporate intellectual property protections, including patents, as part of their broader business strategy in order to protect key competitive advantages. Patents should not be viewed as a tool reserved for “big businesses” or revolutionary ideas. Failing to incorporate intellectual property protections, and specifically patents, as part of the broader business strategy does a disservice to the company’s owners, employees and investors and can result in lost value when key competitive advantages are left virtually unprotected in the market.

Jeffrey Banyas is an attorney with the law firm of Edwin A. Sisson, Attorney at Law LLC, based in Ohio.

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