Risk Management

A Company’s Mind is a Terrible Thing to Waste

Most companies only use 30 percent of their patents. Here's how to avoid spending big bucks.
David KatzJuly 26, 2001

Too often, companies let their bright ideas soak up costs, moldering in the drawers of legal departments.

Old patents go unused, incurring millions in maintenance fees. A company spends time and money researching a new technology, only to find that a small competitor has already patented it. Neglected inventions fail to generate the revenue they could have.

But if companies start to actively manage their intellectual assets, those assets can become profit centers rather than mere sources of costs.

That theory, promoted by human capital consultants and put into action by Dow Chemical and a growing number of other companies, is gaining ground as companies grapple with how to account for and make better use of their intangible assets.

The area is one that’s crying out for systemization, say consultants Julie L. Davis and Suzanne S. Harrison, the authors of Edison in the Boardroom(John Wiley & Sons), a new book that looks at ways companies can invigorate their intellectual assets and profit from them.

CFOs, in fact, could very well become the intellectual property (IP) “czars” who propel such efforts, says Davis, co-managing partner of intellectual-asset consulting with Andersen in Chicago. (Davis and Harrison define IP as ideas that can be legally protected by means of patents, trademarks, and copyrights.)

It’s “up to somebody like a CFO” who comes from the profit-making side of a company to manage company patents “like an asset” rather than a legal risk, she adds.

In their roles as corporate idea czars, CFOs should make sure their companies come to grips with their IP portfolios. That means taking an inventory of the ideas and inventions a company owns, “catalogued by technology,” Davis says.

The inventory should detail “how much of the portfolio is currently in use,” she says. Davis notes that 30 percent is a common figure for corporations, with the remainder consisting of patents on such things as obsolete technology and products that are no longer being sold.

With such information in hand, CFOs can decide how much of their companies’ IP portfolios to lop off. If a big chunk of the portfolio is useless, a company can save a great deal of money simply by not paying the maintenance fees and letting patents and trademarks expire.

Randy Stauffer, director of intellectual asset management for Performance Chemicals, a business unit of Dow Chemical, tells CFO.com, that it’s easy for Dow to spend as much as $250,000 in maintenance fees for a typical patent filed in the United States and eight to 10 other countries.

Dow typically pays $60,000 to $70,000 of the total fee for the first three years of the life of a patent, which lasts for 20 years, Stauffer says.

In fact, Dow was able to save $40 million from 1993 to 1998 just by letting the maintenance fees on patents lapse, he says. About 10,000 patents were cut in that period. The company now has about 14,000 patents, including those of recently acquired Union Carbide, according to Stauffer.

Before 1993, when Dow started the process of actively managing intellectual assets, “patents were all over the company,” he says. “No one was really watching.”

One change Dow made was to tighten up its accounting of patent costs. Before 1996, “the cost of maintaining patents was just an account kept at corporate level and spread across the business,” Stauffer recalls. By 1997, however, the costs of each patent were being charged to an appropriate business unit.

In a legal sense, patents aren’t as easily defended as ownership, Stauffer notes, adding that litigation also produces patent costs for business units.

In Dow’s assessment of a proposed invention or idea, “the first check is, ‘Is it relevant to the business?’” he says. Then researchers search patent literature and other sources for recent advances.

Stauffer also assesses the degree of legal protection suitable for an idea. For instance, if the product is likely to be made obsolete by another product in only two years, “you would not spend a lot of money to get patent protection,” he says. “You may spend money on research, but not apply for patents.”

In fact, Stauffer says, “the vast majority of patents are of minimal value.”

Too Many Lawyers

But coordinated IP operations like Dow’s are far from the norm, Davis and Harrison contend, pointing out that the roost is too often ruled by lawyers.

While corporate lawyers are most often the officials responsible for intellectual assets, they’re “not charged with responsibility for managing them,” Davis notes. “They file them away in a drawer and that’s all.”

In fact, she adds, “nine out of 10 of the companies we visit with can’t tell us how many patents they own.”

The risks of such ignorance can be considerable. A company unaware of a valuable patent or trademark it owns may fail to pay the required fees and end up losing it.

Davis tells of a client of hers—a chemical company she wouldn’t identify— that pursued a joint venture in which each party would have to contribute one or more specific patents to the deal.

The agreement collapsed when “the one patent [the chemical company] needed to do the deal had lapsed” because it had failed to pay maintenance fees on it, she says.

Davis also says a defense contractor she worked with had failed to pay fees on 10 percent of its 1,000 patents without knowing it. As it happened, the company was able to save the patents. But if it had allowed them to lapse, competitors would have been able to sell the products legally, she says.

At the same time, a company can waste big dollars by failing to monitor competitors’ activities. For instance, Harrison, a partner with ICMG, a small Palo Alto, Calif.-based intellectual property consulting firm that has an alliance with Andersen, tells of an adhesives manufacturer that found itself suddenly outflanked by a small competitor.

The manufacturer, a client of Harrison’s that she refused to name, had been researching a product. “Out of the blue, a patent came from a mom-and-pop shop,” she says.

As a result, the bigger company found that it had spent tens of millions of dollars on research and development for naught, Harrison adds.

Had the manufacturer done an adequate technology check, it might have been able to stop its research much earlier and spend a good deal less on R&D, she says.

Like the many other companies that fail to make the best use of their brainpower, it seems, that manufacturer could have used a czar.