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Feature Beating the trolls
IP-based open innovation pre-empts trolls
Many companies see patent trolls as a growing threat. A new approach to innovation effectively stops the trolls in their tracks
While the number of patent infringement By Michael Kayat and Tova Greenberg lawsuits arising from PLEC actions is still a relatively small percentage of the overall Executives are now becoming aware of the number, they do generate significant growing number of IP holding companies settlement fees and royalties. Defendants in whose strategy is to target enterprises and these lawsuits often see their shareholder try to extort hefty royalties or settlements, valuations decrease several percentage using patents that may be infringed by those points, equivalent to tens of millions of patents which are being utilised by the dollars, and even suffer lost sales revenues enterprises. This emerging threat is the from injunctions placed on affected products. patent troll. The term refers to individuals or In addition to any damages that may be firms that develop or acquire patents from awarded and large fees paid for legal third parties for the sole purpose of defence, P-LECs can also present a huge asserting them against companies. financial and time sink on a company’s Peter Detkin, former VP, General Counsel already limited resources. With such a at Intel and now with Intellectual Ventures, growing threat, why do companies continue first coined the expression after Intel was to remain in defensive mode? sued by TechSearch. Acting as classic troll, TechSearch acquired a patent for Trolling for a purpose US$50,000 and then asserted it against P-LECs typically seek to acquire the assets of Intel, demanding US$5 billion to settle the individual inventors or struggling and bankrupt case. Although Intel fought and won, it still companies. According to the Administrative cost US$3 million in legal fees, which are Office of the US Courts statistics, over typical legal costs in these cases. 34,000 businesses filed for bankruptcy in IP industry veteran James Malackowski, 2005. Highly inventive companies or individual President and CEO of ICMB Ocean Tomo, investors that generate new technologies are refers to trolls as patent licensing and often lacking in development, manufacturing enforcement companies (P-LECs). and sales capabilities that make for sustained P-LECs are characterised as having innovation. They fall into the chasm. While it distinct traits, some of which pose a huge is probable that less than 1% of these threat to companies and to the very practice companies possess any patents or technology of innovation. Foremost, they exist to collect worth acquiring, the reality remains that infringement fees and royalties, typically P-LECs and their teams of attorneys and from multiple defendants in a targeted investors are continually searching. industry, by suing or threatening suit. Joe Beyers, Vice President of Intellectual Second, they do not make products or Property at Hewlett-Packard, recently stated: perform services; thus they are immune to “Few, if any, companies have the dedicated countersuits. Finally, because it is not their resources to aggressively search and acquire mission to develop and broaden continually patents of interest.” While this remains true the patents and technologies they hold, they and companies continue to stand on the have the capability to stifle innovation. sidelines and avert the risk of in-licensing
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early stage technologies, P-LECs are patent applications, compared to only 65% in becoming ever more sophisticated in their Europe and Japan. In the US, it is relatively modus operandi. A company executive, who easy to obtain patents with broad claims and spoke on the condition of anonymity, stated questionable validity, leading to an increased that his firm had recently been approached number of patent lawsuits (currently three by a PLEC looking exclusively to license, and times the number in the 1980s). not acquire, his patents for the sole purpose Recent studies show that the average of litigation. number of lawsuits filed over the life of a While P-LECs continue to build their IP patent is increasing. The more patents a arsenal and make headline news, it is no company has, the more risk there is of a longer just the corporate world taking notice. patent infringement lawsuit which may arise The US Supreme Court recently agreed to from a completely different industry. review the patent infringement case brought against eBay by MercExchange. In addition Open innovation paradigm to a US$25 million award to MercExchange, How can a large enterprise build up this PLEC obtained a permanent injunction protection against trolls? Through proactive IP against eBay’s Buy it Now feature, which management, these companies can identify allows customers to purchase an item the holes and gaps within their existing without participating in an online auction. portfolios. Typically, between 2% and 5% of The US Patent Reform Act of 2005 patents in an enterprise portfolio are utilised provides yet another strike. One of the in products, leaving a relatively large need for provisions of the legislation limits the new patents to be developed or acquired to amount of damages that can be awarded. match shrinking product platform life cycles. For example, it includes limitations on wilful Companies must be prepared to in-license infringement but, more importantly, any technologies at an early stage in technology royalties awarded will be calculated based invention and development and to out-license on the “inventive contribution” of the patent non-core IP to other partners. rather than the selling price of the product. The open innovation concept has been In addition, there would be an automatic stay developed by Henry Chesbrough of UC of injunctions while a case is in appeal (as Berkeley. To increase return on R&D, noted in the eBay v MercExchange case). successful innovative organisations must complement in-house R&D with technologies Why trolls are thriving – a call to action from outside the company. Product cycle While some IP practitioners have referred to times are faster and not all the best P-LECs as bottom feeders, like the bottom technologists work for the company. There feeders that eat the algae in the ocean – the should be networks of IP suppliers and patents that become available from small consumers, including competitors. An companies and inventors – trolls are creating enterprise that is utilising R&D processes to a clear call to action. First and foremost, create and develop new inventions from both they have caused a stir in the offices of internal and external sources will also make corporate executives, compelling them to IP available for licensing and other recognise the value that IP holds. Second, commercialisation. The boundaries of the they have helped highlight gaping holes that organisation are open between strategic, exist in the US patent system, already in synergistic partners in different markets – need of serious reform since the last major both large and small companies and even change in patent law was over 50 years ago. individual investors. Beyond patent law reform, P-LECs have The business model for the open also spurred government officials to address innovation IP paradigm comprises three the issue that may lie at the core of the components: using technology in existing debate – the USPTO. With a growing number businesses and markets; licensing technology of patent filings each year and increasingly to other companies; and launching new complex technologies under examination in ventures (spin-offs) that use core technology time periods measured in hours, the USPTO The pharmaceutical industry is a shining is hard-pressed to handle the workload as it example of in-licensing via open innovation. exists. In 2004, the USPTO received nearly Millennium Pharmaceuticals has successfully 400,000 patent applications and awarded used open innovation for IP licensing. less than 200,000 (about half to foreign Millennium retains ownership of the IP that it entities). About 25% of applications are develops and licenses it to the larger continuations; 7% are second continuations. pharmaceuticals. Exclusivity is given for The USPTO approves over 95% of all original specific markets, however each biological
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Open innovation process (after Henry Chesbrough, Open Innovation) may be hiding and can identify individual inventors and small companies with early stage inventions whose patents may be LICENSING available for licensing. The result? The enterprises acquire new core patents at TECHNOLOGY reasonable valuations before the trolls can SPIN-OFFS INTERNAL RESEARCH DEVELOPMENT acquire them. TECHNOLOGIES Online IP exchanges such as Yet2.com and Knowledge Express exist to help connect small and large companies. A few large NEW corporations have also made proactive MARKETS strides to help open the door to small companies. For example, Caterpillar has a IP IP centralised licensing department specifically designated to receive solicitations from CURRENT outside companies whose technology may be MARKETS of interest. Without a dedicated group to handle such requests, those seeking a EXTERNAL partnership are likely to be bounced around TECHNOLOGIES TIME between various business units. Companies interested in finding emerging technology still under development can utilise TECHNOLOGY INSOURCING technology transfer services firms who connect with academic, medical and research institutions. Companies such as target that results can be licensed to IBM are now using open source technology. different firms for use in different markets, IBM has not only pressed for more open with exclusivity given for each market. The source technology but has recently offered large pharmaceutical firms acquire IP they some of its own IP as open source. need at a relatively low cost. Companies in a patent pools share selected A recent notable deal is Pfizer’s in- IP with other members in the pool and licensing deal with Incyte. The collaborative provide non-exclusive technology licences to licensing and research agreement grants third parties, effectively banning trolls. Pfizer exclusive, and worldwide, development and commercialisation rights to Incyte’s Best practices for strategic IP management portfolio of antagonistic compounds, with the Industry leading enterprises can utilise the exception of two indications. Pfizer paid an real benefits of the open innovation paradigm initial US$40 million licensing fee, with an to in-license new IP and build strong additional US$743 million in milestone portfolios. These companies can find new payments due, subject to successful inventions for developing and commercialising commercialisation. In other sectors, leapfrog technologies from small companies companies such as Hewlett-Packard, Procter and inventors, before they are acquired by P- & Gamble and Shell do a similar thing. LECs in firesales. The enterprises can lock in the new technologies and build strong patent Finding new IP – pre-empting the trolls portfolios with blocking patents around core With the open innovation paradigm for IP and picket-fence patents for the new IP exchanging IP between large and small needed in new markets. companies, including inventors, an IP Some best practices for winning against ecosystem can be established among trolls and global competitors include the synergistic partners. Effective IP defence following: shields prevent P-LECs from asserting Tying IP to business strategy. The connection patents against any gaps or overlaps in of IP to business strategy is at the centre of technology platforms. a company’s success. Patents and To expedite the search for new intellectual property can provide a strategic technologies, strategic IP management firms purpose, beyond the protection of core with advanced software tools and teams of product lines. Articulating a clear business industry and technology experts can provide strategy, with intellectual property at the patent portfolio analysis and detailed IP hub, is key to remaining competitive. landscape maps. These consulting firms can Develop IP with standards in mind. When help reveal the broad landscape where trolls developing IP, companies should look at how
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that IP relates to existing or possible future Continuous open innovation standards. If the IP relates to an emerging technology standard it will be more valuable to fend off trolls and use to participate in patent pools. Executive support. Any business initiative is Individual likely to fail unless it is supported by inventor BIG COMPANY P-LEC executive management. Many executives Invention Commercialisation have only recently noted the value of IP and IP its importance in staying ahead of the curve,
some have yet to come up to speed. IP
Dedicated resources. An IP strategy $ possesses little value unless a company is willing to supply adequate resources to make $ it work. Specifically, funds need to be budgeted to allow IP managers to scope the BIG COMPANY patent landscape, identify patents and P-LEC Development and technologies of interest, and in-license or commercialisation acquire those patents and technologies. Portfolio optimisation. An IP portfolio must be continually reviewed and optimised for maximum patent valuations, high patent IP (invention) quality, broad coverage over
exclusive space, with high patent to product $ mapping, together with expedited patent to product conversion. Small company Risk factor. Be prepared to take risks. While P-LEC there may be risks in licensing or acquiring Invention early-stage technology, there is always room IP defence to put creative deal-making to work. shield David Simon, Chief Patent Counsel at Intel, recently noted that patent trolling seems “to be the business to be in”. But although P-LECs have certainly effected a stir within the IP community, companies need not view them as a threat, but rather an opportunity to gain the resources and executive support that have long been lacking and to effectuate reform in order to restore the original intention of the patent system and the sanctity of innovation.
Dr Michael Kayat is President of UTEK-EKMS Cambridge, MA Tova Greenberg is Executive Vice President of UTEK-EKMS [email protected] [email protected]
The authors would like to acknowledge the assistance of Edward Kahn in the writing of this article. Mr Kahn is the former President of UTEK-EKMS and currently serves as a consultant and strategic adviser to the company. The views expressed herein are those of the authors and do not necessarily reflect those of UTEK or affiliates.
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