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Why Patents Matter


Why Patents Matter CrownoverLaw > Solutions > Patent Solutions > Why Patent


Although it is well known that intellectual property – specifically patents – is a necessary part of a complete business plan, few understand why investors place so much emphasis on IP and why large companies regularly acquire small companies solely for their IP portfolio. 
Understanding how patents protect investment requires an understanding of how markets operate with monopoly forces at play. 
How Patents help Business Entities by protecting product differentiation and market advantage.

In a purely competitive market, every seller can simply take the best ideas available and sell them for the highest price a market will bear. This commoditizes products and exposes prices to the harsh laws of supply and demand.

A patent is the primary tool for securing: markets, product differentiation, and monopoly profits.
As a seller is able to safeguard product differentiations, increase the barriers to entry, and preserve profits the seller moves from a perfectly competitive market to a market with monopolistic forces. As a seller captures more market share by safeguarding meaningful product distinctions and keeping potential competitors from entering the market, the sellers demand curve becomes less elastic translating into greater profit maximization and market dominance. 

A well-constructed and well-designed IP portfolio is a primary tool for moving a business from pure competition toward a perfect monopoly. Large companies, the world over, rely almost exclusively on patent laws to protect product differentiation, push competitors out of markets, and maximize profits.

In many cases, individuals, startups, and small businesses do not directly compete with large companies for market share; however, this can change rapidly when officers of large companies recognize the profits, growth potential, or disruptive nature of these markets.

When large corporations are placed in this situation they will have three choices: 1) develop a competing product in-house; 2) acquire the other business; or 3) refrain from competing in the market. When markets are considered strategically important it is almost always cheaper to use internal resources to develop a competing product if the IP is not protected. And, since officers and board members are bound by a fiduciary duty of profit maximization. These officers are obligated by law to steel ideas whenever it is legal and cheaper. If they do not, they can be sued by the shareholders. 
Not protecting your idea is like building your house on land you do not own.

On the other hand, large business entities loath the bad press and legal judgments that accompany lawsuits alleging patent infringement by a small inventive entity. These type of "David and Goliath" legal battles usually go very badly for larger corporations because juries are sympathetic to inventors especially when the infringer is a large corporation. When large companies are given this choice acquiring a smaller entity is very desirable. 

That said, ideas are usually the bedrock on which startups are built. Not owning these ideas is like building a house on land you do not own. Investors get very nervous about funding these ventures because they understand how large companies are required (by law) to operate. 

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