The numbers are staggering. In 2017, IBM obtained almost 9,000 U.S. patents. If you consider the fact that IBM obtains patents all over the world, you realize that this company consistently spends incredible amounts of money in order to secure intellectual property protection.

IBM has numerous strategies in place in order to obtain patents as cost effectively as possible. Nevertheless, huge investments are being made. Why would an organization spend so much money on patent protection? The reasons vary, and will depend upon particular business models.

Patents provide value in numerous ways. Here is how:

Damages

A U.S. patent provides an exclusionary right. The owner(s) of a U.S. patent can exclude others from exploiting (e.g., making, using, selling, etc.) that which has been patented. The value of a good patent policy depends not only on the market where a company desires to operate, but on the market from which competitors should be excluded. During the time period that this exclusionary right is in effect, a patent owner can assert that right by collecting damages for unauthorized use of patented technology.

Patent damages are governed by 35 U.S.C. Section 284, which states that upon finding infringement, a court shall award the patent holder “damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer, together with interest and costs as fixed by the court.” While the statute does not define the word “adequate,” two theories of damages that have emerged are “lost profits” and “reasonable royalty.” The Panduit test (Panduit v. Stahlin Bros. Fibre Works, 575 F. 2d 1152 (6^th Cir. 1978) may be applied to determine whether lost profits may be recovered: demand for the patented product must have existed; noninfringing substitutes were not available; the patent owner must have had the marketing and manufacturing capacity to exploit demand for the product; and the amount of profit without the infringing conduct is quantifiable. If the four part test cannot be met, then the patent holder is only entitled to reasonable royalties. Reasonable royalties may be determined using the lengthy list of Georgia-Pacific factors (Georgia-Pacific v. United States Plywood, 318 F. Supp. 1116 (S.D.N.Y. 1970), 446 F. 2d 295 (2d Cir. 1971). Regardless of whether the patent owner can recover lost profits or a reasonable royalty, the ability to recover damages provides a patent owner with significant advantages over the competition.

Injunction

Competitors need to respect the patent rights of others, but when infringement occurs, a permanent injunction may be available. In order to obtain a permanent injunction, a patent holder must prove the eBay factors (eBay v. MercExchange, 547 U.S. 388 (2006)): the plaintiff will suffer an irreparable injury; the remedies available at law are inadequate to compensate for that injury; the balance of hardships favors the plaintiff; and the public interest would not be disserved. The ability to pursue an injunction can give a patent owner a significant advantage over competitors within a particular market.

Deterrence

Patent owners seek to have a monopoly on the market space covered by their patent. While marking a product with a patent number is important for collecting damages, actual or constructive notice that a product is covered by a patent may deter a competitor from making and/or selling a similar product. Knowledge that a competitor may have to pay damages for patent infringement is a strong deterrent to patent infringement. Further, if injunctive relief is obtained, significant losses may follow as a result of products that have been manufactured, but cannot be sold.

Licensing

Patent licensing is a fundamental business practice that enables businesses to be in the marketplace with technology developed by others. The patent owner benefits by receiving licensing revenue which may translate into profit, a return on the investment to develop the patented technology, or both. On the other hand, the patent licensee benefits by being able to use the patented technology in products or processes. The patented technology may translate into increased sales in the marketplace if the technology plays a role in driving demand for a product. At the same time, simply using the technology with a license enables products to be manufactured or sold without the up-front costs of research and development, and without the risk of the initial investment to create the patented technology.

Company Valuation

Estimates are that 90 percent of the combined value of the Fortune 500 is based on intellectual property. The ability of a company to safeguard its intellectual property translates into much of the value of that company. A company with intellectual property that can be “knocked off” without consequences has far less value than a company that can monopolize what it has patented. Company owners and shareholders rely on good patent protection to safeguard the value of the company.

Negotiating power

Patents play a significant role in cross licensing. A company accused of patent infringement is in a significantly better position to fight or settle the suit if it has patents that can be asserted against the accuser. An infringement suit might be settled by agreeable cross licensing. Furthermore, companies that seek to license patented technology from their competitors can offer cross-licensed patents as a way to “close the deal,” and reduce (or eliminate) licensing fees.

Expertise

Having patented technology shows the world that your company is technically advanced with sharp business skills.

IBM was not alone in its success to obtain thousands and thousands of patents last year. Other companies in the multi-thousand patent “club” include Samsung, Intel, Canon, LG and Microsoft. Each one of these companies is constantly developing technology, and understands the value of protecting their respective investments. Significant budgets enable these organizations to obtain patent protection, not only in the United States but in other countries where they (or their competitors) are conducting business. Armed with patent protection, these companies are able to achieve the various objectives described above.

Lawrence E. Ashery is a partner in the Philadelphia office of Caesar Rivise. He focuses his practice on all aspects of intellectual property law. He can be reached at [email protected].