Expiring Patents: a Primer for CFOs

When patents expire, finance chiefs must alert their peers that the company must find new sources of profit or cut costs.
Brennan Swain and Rod S.BermanFebruary 14, 2017

Patents are valuable assets that can create and protect market share. But they expire after a certain period of time. Therefore, at the expiration of a patent’s term, a patent owner must be ready for others to enter the marketplace, and the owner needs to recognize that any royalty income from licensees will likely cease.

Rod S. Berman

Rod S. Berman Patents

A patent provides a set of exclusive rights granted by a government or territory to the patent owner (the inventor(s) or their assignee) for a period of time in exchange for a detailed disclosure of the invention. For the patent owner, a granted patent allows the owner to stop third parties from making, selling, using, or importing products covered by the patent, thereby helping the owner protect its market share.

There are three types of patents that can be obtained in the United States: utility, plant, and design patents.

Utility patents, the most common type, are issued for the invention of a new and useful process, machine, manufacture, or composition, or a new and useful improvement of any of those kinds of inventions.

A plant patent is granted to an inventor who has invented or discovered and asexually reproduced a distinct and new variety of plant. The terms of utility and plant patents are 20 years each from the earliest filing date of the application on which the patent was granted.

Brennan Swain

Brennan Swain

If the U.S. Patent and Trademark Office delays its examination of a patent application beyond certain deadlines, the patent term may be extended beyond 20 years from earliest filing date. This type of extension is known as a patent term adjustment. A patent term adjustment can also be provided for some pharmaceutical inventions if pending U.S. Food and Drug Administration approval holds up marketing.

A design patent protects the ornamental appearance of an article of manufacture. The ongoing Samsung versus Apple case presents a well-known example of the value of design patents. Design patents have a term of 15 years from the date of grant and aren’t subject to patent term adjustment.

During the life of utility and plant patents, maintenance fees must be paid 3.5 years, 7.5 years, and 11.5 years after the issue date of the patent to keep the patent in force. Fees range from $1600 to $7400 during the life of the patent. If the maintenance fees aren’t paid, the patent expires. Therefore, a utility or plant patent can expire at the end of its term or during its term if the maintenance fees are not paid. Further, when a patent expires, there are no more maintenance fee costs incurred by the patent owner.

The Right to Stop Others

When a patent expires the owner loses the right to stop others from making, selling, using, or importing products covered by the patent, thus allowing competition to enter the marketplace. Competitors can then copy the patented invention without fear of a lawsuit.

In the pharmaceutical industry, for example, once a drug patent expires, generic competition typically sets in. The expiration may thus result in increased competition, loss of market share, a drop in prices and a loss of royalty income from licensees, among other things.

Nevertheless, after the expiration of the patent, if the patent owner learns of infringing activity that occurred before the expiration of the patent, the patent owner can still sue to recover damages up to six years before the date of bringing suit for infringement (minus the time between expiration and bringing suit).

If the patent owner has licensed some or all of its patent rights, any royalty income tied to the patent rights will cease upon expiration of the patent. It’s against public policy to require a licensee to pay a royalty based upon a patent after the patent expires.

Revenues Will Drop

Knowing the date that a patent will expire, CFOs must appreciate that revenues will decrease. Finance chiefs must plan ahead for that drop by advising the rest of senior management that the company needs to find alternative sources of revenue or cut costs to maintain profitability.

For example, Bristol-Myers Squibb and Otsuka’s drug Abilify reportedly represented $2.3 billion sales, and expiration of the patent for this drug will dramatically decrease that number. Companies in the situation of Bristol-Myers Squibb and Otsuka recognize that costs must be cut, including payroll.

On the other hand, anticipating the loss of patent exclusivity may stimulate the patent owner to invest in research and development of alternative revenue sources. The CFO should recognize this anticipated cost from at least a balance sheet and profitability standpoint.

Mitigating the Loss

The good news, however, is that there are strategies for mitigating the loss caused by patent expiration.

In anticipation of the expiration, for instance, the patent owner could acquire rights to patents offered by third parties, which may have a longer lifetime and which would be infringed by the sale of the patented product. So if a competitor waits until the patent owner’s patent expires, it may still infringe the newly acquired patent.

Since the expiration date of a patent is generally a fixed date, the patent owner should regularly file additional applications for improvements to the patented subject matter. This way a continuous stream of patents will be issued covering the improvements and thus continuing to challenge competition.

If the patent rights are licensed, the patent owner may include a trademark license and a requirement that the patent licensee use the patent owner’s trademark even after the patent expires. In that way, the patent owner can continue to develop goodwill in its trademark after patent expiration.’

Further, in the area of patent licenses, a license of trade secrets could also be included. So as not to run afoul of public policy, the royalty rate post expiration, in general, should be less than the royalty rate during the lifetime of the patent.

If the patent covers a product with a shape, the patent owner could try to develop trade dress rights in the shape. Trade dress rights, if properly protected, can have a perpetual lifetime. For example, if the patent owner owned a design patent for the appearance of a Coca Cola bottle, it could also protect the appearance by trade dress, since the shape of the Coca Cola bottle is so associated with the Coca Cola company in the minds of consumers.

Licensees can be required to pay for the use of a trademark to help make up for revenue loss. Likewise, the patent owner might develop a strong brand name and plan to use it to battle generics.

Thus, the expiration of a patent, either naturally after its normal term, or intentionally from failure to pay maintenance fees, can have a significant impact of the market share and finances of the patent owner. Recognizing this can help CFOs provide corporate patent owners with the best guidance.

Rod S. Berman is chairperson and Brennan Swain is a partner in the intellectual property department of Jeffer Mangels Butler & Mitchell LLP.