What are patents and why are they so important to listed companies?

If you didn’t think patents were a big deal for companies, the news out of Apple (NDQ:APPL) would make you think again. Apple opted to stop selling the latest versions of its smartwatch because of a patent dispute, right amidst the holiday season. You can see if patents can affect larger companies, they can also impact smaller companies, particularly those that are working on developing products.

What are patents?

A patent is a legal document that grants an inventor or creator the exclusive rights to produce, use, and sell their invention for a specified period of time. In simpler terms, a patent is like a contract between the government and an inventor where the government agrees to protect the inventor’s creation from being stolen or copied by others. Specifically how long depends from patent to patent although it is not uncommon to see 10-15 year patents.

Patents are important because they provide inventors with the incentive to develop new and innovative products, processes, or designs without fear of their ideas being taken by someone else. With patents, inventors can have a monopoly over their creation for a certain amount of time, during which they can recoup their investment and potentially make a profit.

Furthermore, patents also play a crucial role in promoting progress and economic growth. By granting exclusive rights to inventors, patents encourage competition among companies to develop similar products or processes, leading to advancements in technology and improvements in people’s lives.

In addition, patents also aid in the dissemination of knowledge. In order for an invention to be patented, it must be thoroughly described and disclosed to the public. This allows other inventors and researchers to learn from the patented invention, build upon it, and create even more innovative solutions.

What’s the matter with Apple?

What has occurred at Apple in recent days is the perfect example that patents really do matter. The latest models of its Watches have a blood oxygen sensor that a company called Masimo claims to have invented. The ITC ruled back in October that Apple violates Masimo payments and would have to halt sales of infringing devices. A presidential review of that order is now underway.

In a statement, Masimo said the ban “demonstrates that even the world’s most powerful company must abide by the law”. And right it is.

You can see that if it serious enough for a company like a multi-trillion dollar company like Apple, halting a product that generates US$17bn in sales a year, it can surely be a big deal for far smaller companies. Apple is planning to appeal the decision, although the decision to completely stop sales is huge. Yes, Apple has halted sales of some devices before and had conflicts before, although this is a completely new product and the dispute is with a fellow Western company. And it is unlikely that it can resolve it with a software update, it will need to redesign the devices. Talk about bad timing…the company’s sales have dropped for 4 straight quarters, the longest such losing streak in two decades.

OK, so what about smaller companies

It is rare to see patents making news when it comes to large companies. For smaller companies, it is a lot more common to see them boast about winning patents and having several ones in multiple countries.

Earlier this week, a newly listed company called LTP Pharma (ASX:LTP) caught the ASX’s attention about statements in its IPO prospectus in relation to patents it had. The company referred the ASX to one of its own documents, namely the Code of Best Practice for Reporting by Life Science Companies. This document expressed the view that the fact that a patent had been filed was seldom material and disclosures should only be made once it becomes a material asset. General information shouldn’t be disclosed unless the information is:

• Balanced and informative, and
• Does not otherwise give investors a misleading impression of the breadth of protection afforded by a patent, the likelihood of the grant of a patent or the ability of the company to enforce its rights.

So if you see a company crowing about lodging a patent, it is talking itself up more than it should. If it wins a patent, that’s good news, but not an iron-clad guarantee that the idea will ever come to reality.

Conclusion

Overall, patents serve as a way to protect and incentivise inventors while also promoting progress and advancement in various fields. Without patents, there would be less incentive for individuals or companies to invest time and resources into developing new ideas, ultimately hindering progress and innovation. So, patents are not only important for individual inventors, but also for the betterment of society as a whole. With proper protection and recognition of intellectual property, companies of all sizes can continue to drive innovation and improve our daily lives.

All this being said, you shouldn’t invest in a company just because it has a patent or two – or a dozen or two for that matter. Because there’s no guarantee that the idea protected will come to fruition.

What are the Best ASX Stocks to invest in right now?

Check our buy/sell tips