A patent is the legal right to specific intellectual property.  A patent is granted by a government to an inventor and excludes others from making, using, selling, or importing the invention for a limited time.  Patents are granted in exchange for public disclosure of the invention when the patent is granted.1  In the United States, there are three general types of patents: (i) utility patents, (ii) design patents, and (iii) plant patents.  Patents are also granted in many other countries.

For anyone unfamiliar with the process, the decision to file a patent can be overwhelming.  As a consequence, many good ideas remain unpatented.  Next, we consider the consequences of patent protection, how to value a patent, and all the necessary information for making a fully informed decision about whether to apply for a patent.

The Advantages of a Patent

The most obvious advantage of a patent is that it enables the owner to exclude others from profiting from a particular invention for a specific amount of time.  A patent restricts competition and is essentially a temporary monopoly granted by the government in exchange for disclosing the innovation publicly.  While governments generally oppose monopolies, the monopoly caused by a patent allows the creator to benefit from his or her innovation.  This incentive motivates research and development that benefits society as a whole.  Once the patent expires, the monopoly ends and the innovation is in the public domain.

In addition to manufacturing or selling products that rely on the patent, patent holders can generate revenue passively from licensing.  Companies that want to make use of your patented technology can license the use of the patent from you, typically in the form of an up-front fee and ongoing royalties.  Patents are also highly marketable and can be sold outright.  There’s no doubt that you’ve heard thousands of salespeople boast about how their products are patented.

Patents are also an excellent way to improve how marketable you are to employers, and they can be particularly impressive on the resumes of engineers.  Like other assets, patent rights can be sold, mortgaged, and even inherited.  Only when a patent finally expires or otherwise is made invalid does its value to its owner cease.

Applying for a patent is one of the best ways to protect the rights to your invention.  When you publicly disclose your invention, you prevent others from filing a patent on that idea.  If your business depends on your ability to use that idea, obtaining patent protection is critical.  However, by patenting an idea or invention, it is immediately made public, which allows potential competitors to use it in jurisdictions beyond the coverage of the issuing government, such as in another country.  Competitors can also attempt to infringe the patent secretly, or make a very slight variation and claim it is separate from the patented invention.  The up-front cost of obtaining a patent, the difficulty of identifying patent infringement, and the costs and uncertainty of litigation to enforce patents cause some inventors to forego patent protection.  All of these factors come into play when determining whether it is worth obtaining a patent, and what the patent is worth.

How to Value a Patent

There are several approaches to determining the value of a patent.  One of the most common is the income approach.  Using various methods, value is estimated as the present value of the future cash flows to be derived due to the patent, including potential licensing royalties.

In the market approach, the prices paid between buyers and sellers for similar patents indicate the value of the subject patent.  It’s important to examine patents that are similar in content, industry, market share, and growth prospects to get an accurate estimate of value.  Identifying terms of transactions for similar patents can be a challenge.

A third approach is to consider the patent’s replacement cost, which is the amount of money necessary to replace the protection rights on an invention with something of equivalent utility.  How much money would it take to entirely replace an invention with a substitute?

Valuation is incredibly complex and shouldn’t be entered into lightly.  If you find yourself in possession of a patent and want to know how much it is worth, it’s always best to contact a professional appraisal expert who can help you determine the value.

Other Forms of Legal Protection for Intellectual Property

In addition to patents, which protect inventions and processes, there are other forms of legal protection for other types of intellectual property.  Trademarks protect words, names, symbols, devices, or any combination, used or intended to be used to identify and distinguish the goods or services of one seller or provider from those of others.  Copyrights protect works of authorship, such as writings, music, and works of art that have been tangibly expressed.