IAM ISSUE 16_TEXT 27/1/06 19:10 Page 43 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 www.iam-magazine.com Intellectual Asset Management February/March 2006 43 IAM ISSUE 16_TEXT 27/1/06 19:10 Page 44 Beating the trolls 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 44 Intellectual Asset Management February/March 2006 www.iam-magazine.com IAM ISSUE 16_TEXT 27/1/06 19:10 Page 45 Beating the trolls 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.