The number one online magazine for innovation management practioners Feature Article # 3-2010

Improving Innovation ROI with Early Stage Patent Expertise

by

Jackie Hutter, MS, JD

Chief IP Strategist of The Hutter Group LLC

Ymer&Partners AB All rights reserved.

www.innovationmanagement.se ISBN: 978-91-86829-05-6

EXECUTIVE SUMMARY
Innovation teams are often removed organizationally from a companys patent matters. This can mean that corporate innovation processes move forward with little or no consideration of whether competitors can legally knock off the resulting consumer offering. Companies may then not attain expected ROI because competitors can legally copy the innovationbe it a product, technology or otherwisewithout incurring legal liability. It may not always be necessary to protect innovation efforts with patents, such as where a product has a short shelf-life or where the company may desire to maintain trade secret protection for the technology. However, for innovation endeavors where go-forward nancial models assume exclusivity, companies often require patent protection. Also, the absence of patent insights at an early stage frequently means that innovations are not properly scoped for potential infringement risk until signicant efforts are expended, a fact which can further limit innovation ROI. It follows that companies can realize nancial benets by including patent information at an early stage. A key to successful inclusion of patent information in early stage innovation processes is the realization that not all patent experts can operate in this environment and that corporate leadership must competently manage the situation. Nonetheless, companies that effectively include business-focused patent counsel on innovation teams can improve the ability to obtain innovations protected by patents as well as reducing legal risks to improve ROI.

KNOWLEDGE IN PRACTICE
The innovation team of a consumer packaged goods (CPG) company undertook a preliminary assessment of an opportunity that would require signicant (> $75 Million U.S.) investment and substantial change in business focus. The team understood that patent issues could be highly inuential to any long-term ROI. They therefore asked their corporate patent counsel, an unusually business-savvy lawyer, to perform an early-stage assessment of patents existing in the general technology areas of the proposed product. The counsel reviewed relevant patent data to assess whether the company could gain patent rights to the new product of sufficient breadth to justify the innovation investment and whether it appeared likely that patent infringement liability could occur when the product entered the market. At the time of the review, no product had been developed; rather, the patent counsels review dealt only with a general description of the proposed product innovation, which allowed the patent counsel to provide only directional information regarding potential patent ownership and risk. The review showed that, given the number of patents owned by others in the vicinity of the innovation opportunity, it was highly doubtful that the company could obtain patent rights of broad enough scope to prevent others from directly competing and that patent infringement liability would likely occur if development was pursued as planned. Largely as a result of the patent assessment, the innovation team decided not to pursue the new product opportunity due to the likelihood that the desired ROI from the investment could be readily obtained.

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Improving Innovation ROI with Early Stage Patent Expertise

ABOUT THE AUTHOR

JACKIE HUTTER, MS, JD
Jackie Hutter is one of the pioneering ranks of Intellectual Property (IP) Strategists. She is Chief IP Strategist of The Hutter Group LLC, a consultancy providing IP-related business and investment counseling to innovation-driven organizations of all sizes that seek to maximize their greatest assetintangible assets. She has over 15 years experience counseling all types and sizes of organizations in all facets of IP creation, protection and enforcement. Jackie was named one of the 250 top IP Strategists in the world by Intellectual Asset Management magazine for 2009 and 2010. Jackie was named a SuperLawyer in IP in Georgia in 2004, and she is a frequent speaker on IP strategy. Jackie was previously Senior Counsel at a multi-national corporation and a partner at a wellknown Atlanta, GA law rm.

Improving Innovation ROI with Early Stage Patent Expertise

Innovation requires substantial corporate resource investment. Moreover, decisions made regarding innovation typically dene a companys direction, by way of products, technology, business processes and otherwise, for the foreseeable future. Many managers now realize the importance of innovation and have modied, or even revolutionized, their management processes. However, few of these managers have made comparable modications to how they address patent matters. The failure to rethink how they integrateor more precisely: fail to integratepatents into their processes means that they are likely limiting their ability to fully capitalize on innovation investments. Such siloing resulted in patents being too narrow to effectively prevent competitors from knockingoff a successful consumer offering. The absence of patent expertise from business decisions also resulted in surprises when the company discovered that its consumer offerings infringed third party patents. For many companies, this standard model of patent counseling made it difcult, or even impossible, to attain the desired ROI on innovation processes.

NEW MODEL
Today, forward-thinking managers increasingly realize that patent issues permeate innovation decision-making and therefore must be considered at an early stage. These organizations introduce corporate patent experts into the front end of their innovation processes. These experts can then provide real-time counseling as the innovation team identies and validates new product and technology ideas for inclusion into the companys consumer offerings.

OLD MODEL
Corporations traditionally viewed patents as primarily R&D and legal functions. While business teams certainly provided input into patent decisions, such involvement was typically minimal, at best.

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Improving Innovation ROI with Early Stage Patent Expertise

VALUE PROPOSITION
By including patents as a component of information gathering at the earliest stages, a company can better ensure that a new product or technology will provide the durable competitive advantage needed to validate innovation investment. That is, for one or more innovation pathways, patent data can provide insights into whether the company is likely to obtain patent rights of a broad enough scope to prevent competitors from legally playing in the same market space. Incorporation of patent information at the early stages also provides a signal of whether one or more innovation pathways are likely to lead to costs and business uncertainties resulting from patent litigation, both of which will

make it difcult or impossible to fully capitalize on innovation investment. Put simply, incorporation of patent insights into go-forward nancial models can improve the probability that a company will achieve the expected ROI on its innovation.

PATENTS AS SOURCES OF INNOVATION DATA

A primary way to introduce patents into the front end of innovation processes is to utilize patent information, also called patent landscaping or patent analytics, as a source of data used in decision-making. As shown in Figure 1, the number of U.S. patent lings has increased dramatically in recent years and, as a result, a wealth of competitive

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FIGURE 1: U.S. patent lings from 1965-2008. Source: U.S. Patent Ofce.

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Improving Innovation ROI with Early Stage Patent Expertise

data is hiding in plain sight. The specics of the selection and use of patent data are beyond the scope of this article, however, it will be useful to discuss why such information can provide signicant insights at the early stage of innovation processes. Patent information, which includes both issued patents and published patent applications, comprise two substantive sources of information: 1. technical details as required by applicable law; and 2. the specic property right(s) owned (or sought to be owned) by the patent ler as set forth in the claims. (See Figure 2.)

Disclosure Technical Information

Patent Document
Claims Ownership interest
FIGURE 2: The relevant parts of a patent document.

The technical data in patents can generally be viewed as the neighborhood in which others have previously developed innovations considered signicant enough (at least in the eyes of the patent lers decision-makers) to merit the effort and expense of seeking patent protection. Similarly, the claims of a patent conform to the specic property boundaries that the patent ler sought to own. Both the disclosure and claims can provide relevant and actionable insights for innovators, most notably whether sufcient space exists for someone else to obtain patent rights and whether someone else already owns rights to a certain product or technology. For many innovation projects, the number of patents identied as potentially relevant may be quite large, especially when the early stage idea deals with broad concepts, as opposed focusing on a specic product or technology idea. Analyzing a large number of patents can add signicantly to the cost of early stage innovation assessment, and the typically-uid nature of the project can make it difcult to develop an accurate opinion about the actual risks each patent will pose in the nal consumer offering. Fortunately, a number of patent data collection and analysis products have entered the market in recent years that can help streamline the process.

However, innovation teams should not embrace any commercial patent information product without validating the methodology used by the vender, as many of these products are based upon awed data collection and analysis techniques. Use of faulty insights extracted from such products will invariably lead to the innovation team making incorrect assessments that could cause them to focus their efforts in the wrong direction. One way to avoid selecting a awed product is for the team to work with a patent expert in validating the methodology, such as by conducting an analysis for a product or technology in which the general result of the patent landscape is already known. Notwithstanding the costs and risks associated with incorporating patent information into early stage innovation processes, as shown below, the rewards of doing so can be signicant.

CASE STUDY OF PATENT USE

A CPG company successfully incorporated patent information into the front end of its innovation processes to decide that pre-existing third party patent rights likely prevented the desired ROI on its innovation investment and that it therefore did not make nancial sense to proceed with a new green

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Improving Innovation ROI with Early Stage Patent Expertise

product. The total corporate investment estimated for effective technology development, infrastructure improvements and product launch was at least $75 Million U.S., and it was expected that the product would serve as a platform for future innovation and growth. Recognizing the need for awless execution of this expensive, but potentially game-changing, project the innovation team integrated their corporate patent counsel into decision-making. This corporate patent counsel, who was an unusually businesssavvy attorney, conducted a detailed analysis of the relevant patents at the same time the innovation team was collecting more traditional innovation metrics for us in the preliminary go-forward decision. By including patent information in the front end, the innovation team was able to conclude that the green product did not constitute a good business risk. Specically, the presence of third party patents

in the vicinity of the likely innovation pathways made it doubtful that any resulting product would allow patent rights to be obtained of suitable scope to effectively prevent competitors from introducing a product that the consumer found equally desirable. This fact alone substantially reduced the probable long-term competitive advantage resulting from the innovation investment. It was also highly likely that the resulting product would incorporate technology owned by third parties, which made it likely that the CPG company would need to obtain one or more patent licenses and/or the company might be sued for patent infringement. While patent information did not serve as the sole basis for pulling the plug on the new green product, the infringement risk and low ownership potential identied by the patent counsel was instrumental in the teams decision to invest its innovation resources elsewhere.

Managerial implications
PICKING THE RIGHT TEAM
Critical to the CPG companys ability to bring patent information into the front end of the process was the fact that its patent counsel was able to communicate effectively with the innovation team and vice versa. In other words, the patent counsel got innovation and understood how to work in the often ambiguous area of early stage product development. This is not always the case, however. Why can it be so hard for patent counsel to adjust to the world of innovation? The short answer is that patent counsel, and lawyers in general, are rewarded by proper management of risk. But, innovation, especially at the earliest stages, is inherently risky. This means that when faced with a risk-laden situation, many attorneys will naturally react to stop the activity perceived to create risk and be opposite to their incentives. They may thus perceive their roll as a trafc cop to stop activity that might conceivably cause risk. This positioning is counterproductive to any innovation process and having such a risk-adverse person in a decision-making capacity is no doubt undesirable. To obtain the benets of including patent data in innovation processes, the patent expert included on the team must possess a personality that can set out guard rails within which the company should maintain their innovation activities. As long as the business team stays within this specied range, risks can be managed and potential opportunities maximized.

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Improving Innovation ROI with Early Stage Patent Expertise

With regard to successfully integrating corporate patent experts into the innovation realm, Figure 3 provides further guidance to the reader. Specically, it is critical to recognize that even though the patent expert functions as a member of the corporate innovation team, the business team should nonetheless retain decision rights as to whether to proceed in a particular innovation pathway. If decisions do not reside with the business team, it is likely that the inherently conservative nature of many patent counsel could reduce the overall effectiveness of the innovation processes. The corporate patent expert should also be rewarded for providing advice that may amount to no more than an educated guess, as opposed to the dotting the Is and crossing the ts type of advice that most legally trained people are more comfortable in providing. Further, those who make the organizational management calls should recognize that not all

patent experts will function comfortably and effectively in the ambiguity of innovation processes, and that the company may need to go outside to nd the appropriate patent expert to play well with their innovation team. Some companies have seen success when they introduce their corporate patent counsel into the formal reporting structure of the business, as opposed to having lawyers reporting intoand being incentivized bycorporate legal management. Lastly, the ambiguity of early stage innovation processes typically gives rise to less discrete questions and, as such, more complex analysis which, in turn, will likely result in higher costs than the company is used to paying for patent-related advice. Corporate decision-makers must therefore be willing to absorb this cost increase in exchange for the opportunity to generate markedly improved ROI on their innovation investment.

Guidelines for Including Patent Experts in Front End of Innovation Processes

Business leaders must make ultimate call regarding innovation pathways Align patent expert incentives with innovation, not just risk mitigation and cost control Realize that not all lawyers will operate well in the innovation space Consider Recognize introducing that costs patent experts may initially into formal increase when business addressing reporting patent structure matters early in innovation process

FIGURE 3: Steps for successfully including patents in corporate innovation processes.

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Improving Innovation ROI with Early Stage Patent Expertise

Lessons learned
Corporate patent counsel do not traditionally participate in the early stages of the innovation processes. Rather, they typically become involved to provide legal guidance only when a consumer offering has been generated and is headed for internal development to be followed by market introduction; . This can lead to several issues regarding expectations relating to the team members roles and responsibilities: 1. Management must realize that front-end patent counseling cannot fully prevent patent infringement risk because the actual consumer offering has not yet been identied. Patent clearance efforts must therefore be conducted on an ongoing basis to ensure that the nal consumer offering is free of patent infringement liability. 2. Innovation professionals must accept responsibility for including corporate patent counsel on their teams. This is a paradigm shift at many companies, and may require personnel that do not normally play well together to become part of a cohesive team. Additionally, to enable them to competently address patent issues, innovation professionals must be prepared to obtain at least a working knowledge of relevant patent principles. 3. Corporate patent counsel must be able to reorient their counseling to provide directional-as opposed to absolute--advice regarding infringement and patentability. In other words, they must view their role not as trafc cops, but as placing guardrails along the innovation pathway within which the innovation teams can safely operate. 4. Legal costs will necessarily increase when patent issues are addressed on an ongoing basis in innovation processes, as opposed to the typical situation where they comprise discrete tasks having predictable budgeting events.

Concluding remarks
Organizations that substantively include patent matters in the front end can markedly improve the return on their innovation investment. Specically, by determining at an early stage whether products likely to result from innovation efforts can be effectively protected from competition and that they will not likely infringe existing patent rights, innovation teams can develop a more rened decision-making process when selecting potential innovation pathways. Care must be taken, however, to ensure that the appropriate processes are put in place to allow innovation processes to operate appropriately after the addition of a patent expert to the team.

Feature article #3-2010 brought to you by InnovationManagement,

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Improving Innovation ROI with Early Stage Patent Expertise

Further reading
Suggestions of further reading to help the interested reader explore the presented knowledge further. For more information on how patent expertise can enhance the ROI of innovation processes, business professionals should consult: The Invisible Edge: Taking Your Strategy to the Next Level Using Intellectual Property, Mark Blaxill and Ralph Eckardt (Portfolio, 2009).

Feature article #3-2010 brought to you by InnovationManagement,

Ymer&Partners AB All rights reserved. To order please visit www.imstore.se.

The number one online magazine for innovation management practioners

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