Patent

What Is a Patent?

A patent is a legal right granted by a government that lets an inventor control a new invention for a set period. The holder can stop others from making, using, selling, or importing the invention without permission. In return, the inventor must describe the invention publicly in the patent application, so the knowledge becomes available to others. Patents are issued by national patent offices, such as the United States Patent and Trademark Office, and they apply only in the countries that grant them. Patents are one form of intellectual property.

How Patents Work

To qualify, an invention generally must be new, useful, and non-obvious compared with existing knowledge. A patent examiner reviews the application, searches earlier work, and may reject or narrow the claims. If the patent is approved, it usually lasts about 20 years from the filing date for most utility patents in the United States. Once it expires, anyone may use the invention without paying the holder.

A patent does not guarantee the right to sell a product, since other patents or regulations may still apply. It only gives the right to prevent others from copying the invention. Owners can sell their patents, license them to other companies in exchange for a royalty, or use them as security for loans.

Why Patents Matter to Investors

For a company, patents can be valuable intangible assets that protect products and support pricing power. A company with strong patents may face less direct competition for a period, but that protection is limited in time and scope. Investors often consider how long key patents remain in force and whether rivals are likely to develop alternatives.

Accounting rules affect how patents appear in financial statements. A patent purchased from someone else is usually recorded on the balance sheet at cost and written off gradually through amortization. Patents a company develops internally are often expensed as part of research and development spending, so the books may not fully show their worth. Research spending can therefore be a useful clue to a company's patent activity.

Enforcing patents can also be costly. Patent litigation may take years, and its outcome is uncertain. Courts or patent offices can also weaken or cancel a patent after it has been granted.