Why Companies Obtain Patents

Studies have shown that the corporate objectives that motivate companies to obtain patents are remarkably consistent across large, medium, and even many small enterprises.* These include acquiring patents for:  

1. Near term competitive protection means obtaining patents in order to prevent others from making, using, or selling the company’s innovations. This is the traditional view of patents.

2. Design freedom  means obtaining patents in order to create conditions for cross-licensing with competitors. In architectures which depend on standardization and inter-operability, patents are needed not to exclude others from using the company’s technology, but to license its use by others.

3. Litigation avoidance, means acquiring patents for use in defensive legal actions. A portfolio of patents can deter companies who may have exposure from their own activities from initiating legal actions.

4. In establishing alliances and joint ventures patents represent something “tangible” to contribute. Having patents also enables the parties to identify what is being contributed - and what is not. Patents provide companies control over how their technology is used. 

In just the past five years, there has been an unprecedented emphasis on patent licensing. Many companies now see their patent portfolios as a source of cash income. The conflation of this phenomenon with the creation of new capital markets pumping liquidity into patent assets is slowly changing the rules of the game. The basic corporate objectives identified above might now be expanded to include:

5. Generating royalty income from patent licensing. Everybody’s doing it.

6. Obtaining patents to attract and secure investment capital. Venture capitalists, private equity managers, and other investors are increasingly interested to see that their investments will be secured by a portfolio of patents. For so-called “knowledge companies” like Mobeon, patents (and other IPRs including trademarks and copyrights) are often the only “tangible” asset there is to secure investors’ money. The possibility to monetize these assets through licensing or through one of emerging IPR capital markets offers the promise of significantly lower risks for investors.  

These are the typical reasons why companies obtain patents. Beyond gross oversimplifications, however, each is very difficult to assess quantitatively. How does one place a value on “design freedom”, for example? Business managers have to be careful: patents are very easy to over-value; it is important that the “objectives” do not become excuses for spending lots of money obtaining patents. Like any other business investment, the investment in obtaining patents must result in a tangible and positive return.