How to develop and control your intellectual property budget for a competitive advantage Featured

11:32am EDT October 4, 2011
How to develop and control your intellectual property budget for a competitive advantage

Companies everywhere are going over their budgets with a fine-toothed comb. So where does intellectual property fit in?

Your IP assets are one of the most valuable parts of your business and you should treat them as such, says Steven M. Haas, a partner with Fay Sharpe LLP.

“The overriding factor to keep in mind is that your intellectual property budget should not be considered overhead,” Haas says. “It should be considered part of your overall strategic plan, generating assets for the company.”

Smart Business spoke with Haas about how companies should evaluate the budget for their intellectual property.

What should companies keep in mind when developing an IP budget?

Your IP assets can slow down your competitors and increase their cost and uncertainty, and hopefully provide you with a proprietary market position. Another thing to consider is that banks and financial institutions love to see IP assets for financing, and for mergers and acquisitions. Patents, trademarks and copyrights are all critical assets. Also, by being proactive with your IP you can prevent problems down the road.

Your IP assets can be not only a sword but a shield for you, relative to your competitors.

How should companies determine how much should be allotted to their IP budget?

As your company develops new products and as you work with an outside counsel, it’s important to develop a plan to protect those innovations within whatever budget you can afford. Your outside counsel can certainly help you prioritize. There is no rule of thumb for how much you should be spending on your IP, like a certain percentage of total sales or something similar.

Businesses should keep in mind that these costs are often cyclical. For small and medium-size companies, it’s common for IP costs to ramp up when new products come out. But over time, things even out. There will be a cycle with fewer fees. The costs follow your product innovation cycle.

There are trends in industries where technological advances and customer-driven improvements contribute to a cycle with more fees. The budget for patents in particular is very cyclical for small and medium-size businesses.

What are some tips for controlling your IP budget?

There are several strategies companies can use. First, it's important to have a patent committee or person at your company responsible for interfacing with outside counsel to make sure that you are protecting what you need to protect and not wasting money on things that are no longer important. Depending on the size of the company, most companies have a person or committee that will interface between inventors, engineers and the business units on one hand and outside counsel on the other. That way you have a single point of contact with the firm, preventing mistakes, duplication of effort, and funds being spent where they shouldn't be.

With high turnover at today's companies, it's not uncommon for the patent lawyer/outside counsel to have been there longer than many others at the company, as a constant presence over many years and stages of the company. Rely on that experience.

Another tip: maintaining old patents is very costly. Once you receive a patent you have to pay maintenance fees four, eight, and 12 years after the patent is granted. The fees increase each time, so if a patent is no longer relevant to your product mix, you should cull your portfolio and make sure you are not spending your budget on these items.

Small companies — defined as companies with fewer than 500 employees — can receive a small entity discount from the U.S. Patent and Trademark Office.

What should companies do about international patents?

Foreign patent costs are very expensive. You have to be rigorous in terms of deciding to pursue patents and other intellectual property in other countries. The decision has to be justified by your sales or distribution in that country. You also must have a realistic ability to enforce the patent in that country, because the maintenance costs are so huge.

Most foreign patents require yearly fees, known as annuities, to keep them in effect. Many companies spend too much on foreign protection and ignore new projects, a decision that rarely makes the most business sense.

What are some other tips for patent budgeting?

Try to eliminate layers. Work with the lawyer at your outside counsel who is directly responsible for your matters. If you eliminate layers, you eliminate cost.

For some companies, using the provisional patent application can reduce costs. It is a less formal patent application, with a lower expense, but it can preserve patent rights — temporarily at least.

It's important to be proactive and avoid litigation, which can be extremely expensive from a direct cost aspect and because of the time involved. Work with patent counsel to avoid IP conflicts with your competitors. It can save you tons of money and headaches down the road. The earlier we see these issues, the more we can do to help you design around someone else's patent, invalidate the patent or come up with an alternative way forward.

All companies are very focused on budget right now. Outside firms are very willing to work within a set budget and to provide and build target billing estimates or fixed fees. We are very flexible about working with company's budgets, because that is what companies demand now. So don't be afraid to discuss budget issues with your outside counsel. There is always a plan that works for both the client and the lawyers.

Steven M. Haas is a partner with Fay Sharpe LLP. Reach him at (216) 363-9149 or shaas@faysharpe.com.