While they might not agree on the timing, economists, CEOs, and TV pundits generally agree that a recession is likely coming to the United States. For companies of all sizes, this often means decreased revenue and profit, hiring freezes or layoffs, and budgetary cuts. For smaller companies and startups, the consequences can be even more dire, as a recession may bring about decreased valuations, more difficult access to capital, and, possibly, bankruptcy or dissolution. These economic effects inevitably impact the patent landscape. In turn, a company's strategic IP decisions during a recession can impact whether and how strongly it emerges on the other side of a bear market.
Recessions Reduce Patent Prosecutions and Trigger Patent Sales and Litigation
Unsurprisingly, companies tend to file fewer patents and cut prosecution costs in economic downturns. As Bloomberg previously reported, from 2000 to 2020, the number of U.S. patent application filings per year dropped only twice from the previous year's filings. Michael Gzybowski, Covid-19′s Impact on US Patent Filings, Bloomberg Law (May 24, 2021). The first drop was in 2009 during the Great Recession, and the second was in 2020 when the Covid-19 pandemic reached the U.S. The number of applications abandoned jumped in those same years.
In addition to cutting patent prosecution costs and abandoning patent applications in their pipeline, companies also tend to sell off existing parts of their portfolios during a recession to raise cash. Operating Company Patent Sales and Recessions: Breaking Down Litigation by Divestment Time, RPX (Mar. 31, 2021). Moreover, when smaller companies or startups fail, their portfolios also enter the market. Matthew Bultman, Patent Filings, Litigation May Shift in Economic Crisis, Bloomberg Law (Apr. 21, 2020). The net result is more patents in the market, often at lower prices.
On the other end of the spectrum, economic downturns also bring a historical threat of increased patent litigation. Alan Marco et al., Do Economic Downturns Dampen Patent Litigation?, 12 J. of Empirical Legal Studies 481 (2015). For example, during the Great Recession, there was "a surge in the willingness to sue competitors." Daniel Benoli et al., The Effect of Economic Crises on Patenting Activity Across Countries, 14 Chicago-Kent J. on Intell. Prop. (2015). But another reason for the increased litigation activity stems from non-practicing entities (NPEs) scooping up the excess patent inventory described above and asserting those patents against operating companies. These effects may compound as businesses trim patent portfolios, creating a market for would-be plaintiffs to expand their arsenal. Indeed, "the acquisition and assertion of operating company patents by NPEs remained a significant driver of litigation throughout 2020." 2020 Marketplace Trends: Former Operating Company Patents Remian a Strong Driver of NPE Litigation, RPX (Dec. 7, 2020).
Already, we see signs that this countercyclical trend for patent litigation may hold true in the current economic climate. Patent litigation financing is up. Rose Acoraci Zeck, ANALYSIS: Patent Litigation Financing Shows No Signs of Slowing, Bloomberg Law, Dec. 12, 2022. Law firm recruiting for IP litigation continues unabated. Jessie Yount, Big Law Makes Big Bets on IP Litigation Despite Tech Downturn, Law.com, Dec. 13, 2022. And non-practicing entity (NPE) litigation remains unaffected by a potential downturn. 2022 Patent Dispute Report: 3 Quarter in Review, UnifiedPatents (Oct. 3, 2022). Thus, this historical trend shows no signs of reversal.
Strengthening Patent Portfolios Will Help Weather the Recession
Companies can deter and armor themselves against litigation by developing and maintaining a strong patent portfolio. A robust patent portfolio creates competitive opportunities to position a company for success during a downturn both as an offensive weapon to protect key market segments and as a shield against competitor-based patent litigation. Further, for startups, patents can serve as valuable collateral to secure loans and venture capital during a recession, even as that capital becomes scarcer. Yael V. Hochberg et al., Patent collateral, investor commitment, and the market for venture lending, 130 Journal of Financial Economics (2018). Here, we outline several ways businesses can build and leverage strong patent portfolios in the face of a looming recession.
First, companies should take stock of their patent assets (issued patents, pending applications, and inventions identified for patent protection) and evaluate or rank those assets by their importance to their business and those of their competitors. There is certainly no one-size-fits all approach to this type of evaluation, but one helpful approach is to categorize those assets by business unit or product and then rank those assets using objective criteria. Here too, those objective criteria may vary based on the company's strategy but might include considerations such as: (a) criticality of the claimed features (i.e., does it cover a "core" technology, or is it merely peripheral); (b) the availability of non-infringing alternatives; (c) consumer demand for the claimed feature; (d) the ability to detect infringement by a competitor; (e) an assessment of the claims' ability to survive a validity challenge; and (f) an estimated market valuation of the patent, e.g., from past licenses.
Understanding its baseline is a critical first step for a company to determine how to move forward. It enables a company to identify the most valuable patent assets in its portfolio that must be preserved as well as identify assets of lesser importance if financial scenarios caused by the recession force the company to cut legal costs. Finally, the exercise will allow the company to identify potential holes in its current patent protection.
Second, with its baseline established, the company can continue to build momentum and even dominate a field by continuing to file and prosecute patent applications for inventions identified as high-value at a time when competitors may be holding back on such investments. Companies that invest in patent applications during a recession may position themselves at a competitive advantage over companies that do not by capturing key innovations. Conversely, not filing can lead to loss of rights if the company or inventors publicly disclose or use the invention or offer it for sale. Moreover, a company may be able to protect its innovations while deferring patent prosecution costs by first filing provisional patent applications. Provisional applications never ripen into a patent, but they serve as a place holder for a later filed non-provisional application. Specifically, a company has from one year of its provisional application filing date to determine whether to file a corresponding non-provisional application. This allows a company to defer the higher cost associated with prosecuting a non-provisional application for up to one year while still staking its claim to a priority date via the provisional application.
Third, if a company has identified holes in its existing patent protection that cannot be remedied by investments in patent prosecution, it can seek to purchase existing patents by capitalizing on the type of patent portfolio pruning discussed above. For example, startup or smaller companies that fall victim to the recession will dissolve and sell their patent assets, while other struggling companies will sell patent assets to raise capital. In that buyer's market, a sharp-eyed company may be able to identify and acquire gap-filling patents at a discount. Thus, a forward-looking company can use the recession as an opportunity to buttress patent coverage and even facilitate entry into new areas of the market that previously belonged to its competitors.
Fourth, the company's assessment of its own portfolio may reveal powerful patents that it can leverage in licensing or competitor litigation. This critical examination of an existing portfolio to identify strong patents for licensing or assertion can make the difference between surviving and thriving. Patent claims that cover both the company's products and its competitors' products provide the opportunity to increase royalty revenue, to recover for lost sales of infringing products, or to block competitors and secure a larger market share in a shrinking market. Perhaps of equal importance, such patents provide defensive value to mitigate threats of the company's competitors filing patent infringement suits of their own.
Takeaway
During a recession, companies often look to cut costs in any way possible. Sometimes, that cost cutting can have detrimental effects on a company's patent protection, which can hamper the company's future growth beyond the recession. Instead, the company should use the recession as an opportunity take a strategic look at its current portfolio and make targeted investments to improve and leverage it. Doing so will ensure that the company emerges stronger on the other side of a recession.
Originally printed in Bloomberg Law in January 2023.
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