Friday, January 22, 2010

What An Engineer Needs to Know About Patent Laws? I: Background

Intellectual Property Values

On August 9, 2000, CNN Money reported, a U.S. appeals court set a sooner-than-expected end to Eli Lilly and Co.'s reign as the sole marketer of Prozac, the popular antidepressant drug, a development that sent the pharmaceutical company's stock down by more than 30%. [“Eli Lilly gets Prozac blues “, CNN ] It is about $36 billion in Lilly stock value, roughly a third of the pharmaceutical giant’s then market capitalization. On June 7, 2002, New York Times reported that royalties from inventions earn an estimated $150 billion/year worldwide and are expected to grow 30% annually over the next 5 years. [“Trying to Cash in on Patents”, New York Times] From 1993 to 2003, IBM alone was reported to earn well over $10 Billion in revenue from licensing out its patents and be awarded over 22,000 patents, more than the 10 largest U.S. IT companies combined, including Intel, Microsoft, Sun, Dell and Apple. Meanwhile, Microsoft was reported to spend about $8 billion on R&D and filed about 3,000 patent applications each year in US. Obviously intellectual property is becoming a key asset of modern corporations. From a recent British survey, 40% of  a company's value is not shown in any way on its balance sheet. For some big corporations, including Walt Disney, Microsoft and P&G, more than 80% of their market value is said to be in intellectual property assets.

U.S. Patents granted, 1790–2008. Source:  and

Patent Rights

In US Constitutional Authority, Article 1, Section 8, Clause 8, it states, “The Congress shall have Power ... to promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries”. The former US Presidents Thomas Jefferson said that “The issue of patents for new discoveries has given a spring to invention beyond my conception.” and Abraham Lincoln said, “The patent system added the fuel of interest to the fire of invention.” World Intellectual Property Organization states, “Under such regional systems, an applicant requests protection for the invention in one or more countries, and each country decides as to whether to offer patent protection within its borders.”

US Government grants a right to exclude, which means a US patent provides its owner with the legal right to prevent unauthorized making, using, selling, offering for sale in US and the importation into US, of the invention set forth and claimed in the patent. In exchange, the inventor must disclose how to make and use the invention. However,  it is Not a Right to Practice. It does not grant patent owners the right to practice the invention. ( e.g., government regulation may interfere ) From a business perspective, with the right to exclude, the granted patent rights may permit setting prices at a level not possible without patent protection and help erect barriers for entry into a market. They can also bring in more revenue through licensing or assignment.  On the other hand, if defensively used as part of a patent portfolio, they can be used to trade ( cross license ) rights to exclude, maintain product differentiation, develop reputation as innovator and help with credibility as well as advertising.