To Patent or Not to Patent?

Inventors and innovative business owners ask me this all the time. My response is this:

Are you even ready to ask this question?

Far from a dodge, I believe this is the correct process that produces the best, most cost-effective outcome in the long run. Too often the question of whether and how to patent is regarded as the central issue around which the entire project revolves. I believe this is a mistake.

Your Intellectual Property (IP) strategy, once it is formed, may or may not include patents, copyrights, trademarks, registered designs, trade secrets, moving targets and other tactics. The decision to patent is just one little component of an overall IP strategy.

Your IP strategy is in turn just one little component of your complete Business Plan. The Business Plan must summarize and outline how exactly the idea or invention is going to bring money in the door. How much money? From where and from whom? For how long? When you have realistic answers projected for these questions, you are now prepared to think critically about the IP strategy. How does the inventive step actually contribute to the business' income and how critical is it? How long does the novel element of the product need to be protected?

Once these questions have been addressed in your written IP strategy, you can think about how to accomplish those objectives. Consulting with a patent attorney is a good step. Be aware that many are qualified to advise you on whether or not the IP is patentable, but not necessarily on whether or not you should do it. Usually they can advise you on what form the protection will take and whether a given form of protection will meet your known IP objectives. The better you know your own business objectives, the better the patent attorney will be able to help you.

That is why I suggest that you start with a business plan, develop the IP requirements, and only then are you and your patent attorney prepared to answer the original question.

One major misunderstanding of patents was summarized in a question asked by a backyard inventor: "I now have a patent, so when does the government start paying me for it?"

Oooh. Sorry to burst your bubble, mate. A patent is not a golden ticket to wealth. Only a successful new business resembles that vision, and only faintly. Patents are not enforced by governments, but by YOU the patent holder, and your team of lawyers. It will be your responsibility to be on the watch for, to seek out, track down and prosecute any infringers in civil courts. It will also be your responsibility to defend your patent against others who claim it infringes on THEIR patents. These kinds of lawsuits are common, and many are nuisance threats hoping for a quick easy payout from you. But each one costs you money in the form of billable hours every time your attorney takes your phone call or responds to an email.

Is it possible to manage without patents? Yes, I know of instances, and some very successful ones. If the product's innovative step can be concealed, or is actually part of the manufacturing process that someone purchasing the product would never see, then you can simply keep it a secret. It will take competitors a few years to work out how you do it, but by then you're onto something else and improving your process further still.

It is also possible to be first to market and establish a respected brand image. Cheap imitations will crop up, but there will still be a market for higher-margin original products. Consider Swiss watches, for example. A high quality mechanical watch can fetch tens of thousands of dollars, even though a cheap $2 digital watch is actually far more accurate. Establishing such a desirable brand can take decades, however.

Or, why not simply make money on a new product for the 6 - 12 months it takes for cheap copies to show up, then switch to the next innovative product, or offer your customers some new innovative advantage? If a product's total return on investment over the life cycle is not significantly larger than the cost of obtaining and defending a properly-written patent, then it's simply not worth doing. My estimate is that you should initially set aside $200,000 for your patent attorney should you choose to patent.

To patent or not is the wrong question to start from. First ask, "How exactly will this invention make money, and how much?"

A Nuclear-Powered Argument

On 4 March 2010 the WA Business News published an opinion piece I wrote about the hidden costs of nuclear energy to the taxpayer, and about whether nuclear energy was a good choice for Western Australia.

I received a very rude email from a politician who had taken great offence at my stance on the issue. Among the hidden costs I highlighted was the cost of decommissioning a nuclear plant at the end of its service life. The cheapest way is to simply lock the doors and go away. But even that strategy is expensive, usually to the taxpayer, because SOMEONE has to maintain the site, and SOMEONE ends up owning the property without the possibility of doing anything useful with it for quite some time to come.

Dr. Dennis Jensen, MP, was outraged and reminded me that many old nuclear sites have been rehabilitated over the years. Well, duh! I don't disagree with you, Dennis. There most certainly are many more expensive ways to decommission a nuclear plant besides just locking the doors. The point is that it costs money, and it's a cost usually borne by the unsuspecting taxpayer.

Dennis provided ample data to support his belief that nuclear power is actually quite cheap. The data comes courtesy of the manufacturers of nuclear power plants, so we know they aren't biased or anything.

Cheap for who? For the energy companies, maybe. But not for the taxpayer. The costings based on best-case scenarios do not include the cost of financing, overseeing, administering, providing security, building infrastructure and a host of other functions that governments habitually do in relation to nuclear energy. Interestingly, Dr. Jensen had nothing to say on that subject.

But the real point ignored and sidestepped, in typical politician fashion, is whether nuclear energy is a good fit for Western Australia.

WA is a state of around 2 million people with a land area of about 2.5 million square kilometers. That's about 1.7% of the Earth's land area, with less than 0.03% of the population. Half of that population is centered around Perth, leaving large swaths of the rest of the state virtually uninhabited.

WA does not have a large industrial base, and is by no means a "24-hour economy," since most businesses including large supermarkets must, by some ludicrous outdated law, close by 6 PM nightly. There are many mine sites are spread out around the state, and most do not have access to the integrated electricity network. They often rely on diesel generators.

Nuclear energy is primarily a baseload supplier of electricity. The economics of nuclear energy rely on scaling up. In other words, it's more affordable when you build the biggest power plant that you possibly can. As long as you're going through all the expense of making a nuclear reactor anyway, you may as well make it huge so it can pay down the mortgage faster.

WA's energy consumption consists of mainly peak power with a relatively low baseload requirement. Why, then, should WA consider installing massive baseload electricity generation capacity in the form of massive nuclear generators? Even if it were cheap, it would be a bad idea.

Another essential factor is geography. Nuclear power economics rely on the ability to sell excess electricity on an open energy market at a spot rate. On a large interconnected grid system,there will always be some energy provider somewhere having a problem meeting their own needs and will effectively have to buy electricity for their customers elsewhere.

In WA, there is only one energy retailer. WA doesn't have any close neighbors to whom it can sell electricity. The WA electricity network is tiny by international standards, and is completely stand-alone. It therefore has no capacity to buy or sell electricity, but must use all it can make and make all it can use. Nuclear energy just doesn't make sense for a market like that.

I am neither pro-nuclear nor anti-nuclear. It might be right in some situations, it might not be in others. Some technologies and reactor designs might be safe, others might not be. But the factors that help make nuclear power cheapER are objectively absent in Western Australia. For WA then, nuclear energy would be an expensive and wasteful exercise. Of this, there is little doubt.

How to Avoid another Firepower

The backstory here is a complex web of companies known collectively as Firepower which has, for at least the last 10 years, been claiming they have a "fuel pill" technology that decreases a car's fuel consumption, decreases emissions and increases performance. No credible proof of these claims has ever been tabled, while hundreds of investors cluelessly shelled out up to $120 million Australian dollars.

The following is a synopsis of a Guest Column published in the Jan 28, 2010 issue of the WA Business News.

How to Avoid another Firepower

The Firepower story was possibly the first Australian newspaper article I read upon arriving on these shores nine years ago this March. I was deeply annoyed by it then, and continue to be so today.

Hadn’t we learned from the Dot-Com bubble and the Enron disaster that a business based on fiction is simply never a good investment at any price? Aren't such businesses and their claims worthy of harsher scrutiny in the press?

Without individual “sophisticated” investors handing over at least $120 million to fast-talking promoters without any proof that the product actually worked, there never would have been a first Firepower.

Properly-conducted tests that would demonstrate conclusively whether the product worked could easily have been performed, and should have been insisted upon by investors. In one week and for $3000, we could have tested two identical hire cars using two drivers, locking fuel caps, and a properly-designed double-blind experiment. But for investors to realize that this is both necessary and possible, they must possess at least some basic science literacy.

Then, for the work to be carried out, a person is needed who has the right training, experience, and understanding of the basics of commercial research.

When science has a more prominent place in our everyday social discourse, then fewer people are taken in by jargon, wild claims, or fishy statistics. It’s not a matter of being super brainy, either. We can easily agree on what constitutes a fair and conclusive sports contest, but are unaccountably fuzzy on what constitutes a fair and conclusive scientific test. There’s really not that much difference.

Another consequence of greater scientific literacy in the community would have been less media indulgence of Firepower’s claims without proof. Newspapers balk at printing anything even remotely technical-sounding for fear of alienating their readership. Yet in their pages we regularly read quite sophisticated financial, legal and political information that is just as demanding intellectually. If that irrational fear of science were set aside and if editors and reporters were themselves more scientifically literate, then patent rubbish like perpetual motion, cars that run entirely on water, and magic fuel pills (not to mention a whole host of health-related mumbo-jumbo) would not be reported as though it were factual.

When the public reads those sorts of naively credulous articles in print without expert comment or mention of proven facts, the unchallenged claims become endowed with authority and legitimacy that are undeserved. As a result, the public becomes even more confused about the facts of nature, and even more money gets wasted on nonsense.

But who can the media turn to for reliable information? Who can perform the kind of independent testing investors need? In places where more businesses have the foresight to invest in their own internal R&D operations, reporters, managers and investors have closer relationships with experienced research specialists. Engineers and scientists who are especially trained in for-profit commercial research and product development are available to respond to questions with straight, plain-English answers. One such question might have been, “Does this fuel pill thing have Buckley’s chance of actually working?”

Universities and the business community are worlds apart in terms of culture, goals and incentive structures. This means that technology research expertise is not always well integrated into the business and investing community.

Because of this, businesses and investors may remain unfamiliar with ideas which are standard best practice in R&D. An example is the R&D third-party review (see an earlier post). Someone who is neither the customer nor the vendor and who possesses the relevant expertise provides an independent, confidential assessment of R&D plans, progress and results. Where I come from, managers and investors absolutely insist on having these at regular intervals. They do it because in the long run it’s cheaper than not doing it.

Far from being unique, Firepower is only the latest case of money lost on a fictitious product wholly unable to back its claims. In the 1970’s, an investor friend of mine lost a lot of money to a man who claimed his special device could produce unlimited free energy. When I explained to him in detail why that sort of thing doesn’t work in this universe, he said after a few choice words, “Where were you in 1975? You would have saved me $300,000.”

Sadly, this sort of scam will almost certainly happen again. Rather than more laws and greater policing by the State, I suggest that a higher level of science literacy in the community would go a long ways towards protecting the life savings of everyday mums, dads and grandparents. It begins with an earnest investment in science education in schools at all levels, and is helped along by greater acceptance of science and its language in the news media.

If the ultimate outcome of the Firepower saga is that we learn these lessons, then it may have been money well invested, after all.