Building the Patent Fence

The practice of IP management is a recent discipline. Traditionally, IP departments have been run by members of the legal profession. Often, they are under the supervision of General Counsel. As such, their role has historically been defined from a risk management perspective. ‘Help the firm stay out of trouble and your job requirements were kind of met,’ states one legal professional who prefers to stay anonymous.

Patents were either used to build a fence around a product or seek to avoid stepping into another firm’s fenced territory. This made the invalidation of patents or the filing of oppositions to someone else’s patents a principal activity of patent professionals.

Rarely did such activities catch the attention of senior management.  At best, the Chief Financial Officer had to deal with the red numbers produced by the IP team. Such activities were usually seen as a ‘costly, but necessary evil.’

Costs significantly increase if in house counsel requests the support of outside counsel. Why a host of lawyers in a company, require a host of lawyers outside the firm to be functional, may seem to lay people a bit of a mystery. For sure, it does not help to mitigate cost.

Over the course of the 1990s a series of litigations resulted in important damage awards. These caught the attention of the public at large and IP started to become known beyond expert circles.  A more recent of these cases is probably Apple vs Samsung, where more than a billion dollars were at stake.

The Business of Licensing

At the same time, U.S. companies started to try out new business models and sought to understand what else to do with their IP.  Some inquisitive minds launched the Licensing Executive Society, which focused on the commercialization of IP. Large tech companies, such as IBM experimented in the mid-1990s at a large scale with new revenue generating models such as licensing and selling IP.  In the early ‘noughties’ also a new generation of IP mangers were brought into Microsoft to solve their ‘IP problem’ of having no collaborations. This was done by changing the IP protection from copyright to patents.  Generating income from IP allowed these IP departments to revisit their standing within as well as outside the firm.

Core to these changes was a change in the way these early IP managers looked at IP and how they defined themselves. In other words, IP departments started to understand themselves as IP management practices, rather than simple IP administrators. This triggered a change in perspective and gave way to defining a novel business model for intellectual property.

In particular, companies discovered that they do not only have the potential to generate income from selling products, but also from licensing their intellectual property. This constituted a separate value proposition to firms. Rather than do everything in-house, invest in production facilities, warehouses and sales channels, a major short cut became possible. You could just simply license the rights to the underlying technology and conquer a market without devoting yourself to building a physical infrastructure.

This was an important stepping stone towards building an economy driven by intangible assets rather than physical infrastructure. The further sophistication of economic exchange meant that rights to a technology could be potentially more valuable than ownership of extensive production facilities.

Such trends were accompanied by an overall integration of global economic activity and a further specialization of firms. Rights in a technology were invariably easier to ‘ship’ around the world than the actual technology itself. Vast markets could be established without bothering too much about the ‘tangible stuff’. Interestingly, this created more rather than less work for lawyers, as the licensing of IP required sophisticated contracts and qualified licensing professionals.

Yet, and here lies perhaps the pitfall, these activities have also been compromised by anti-competitive behaviour and forced companies to pay significant sums in damages for such behaviour.  The interaction between the IP and anti-trust legal teams is now a vital part of many IP-rich companies.

Patent Assertion Entities have also entered the arena. Other undesirable side effects are that licensing transactions have been interwoven with litigation and the risks associated with injunctions.

Overall, the licensing of IP has not established itself as an instrument of open, collaborative exchange of technology. Rather, it has remained a rather disputed area, which has left some firms to argue that the good old times were more preferable than the current IP monetization era.

Creating the Future

The leap from ‘patent fencing’ to developing markets for licensing was accompanied by a further differentiation of business models. As companies continued to specialize in a given area, the need to license technology from other firms increased. At the same time, the patent space itself saw an important revolution of its business model. Astute managers sought ways to work their IP harder. Being lawyers by trade, their understanding of their business model remained strongly interwoven with the instruments of their trade. Litigation has massively increased.

Against this background, the important question to ask, is what direction the practice of IP management will take in the future. For me, it is a shift in the motivation for licensing that will be the greatest game changer. I predict that better technology will allow to improve the quality of patents and enhance validity rates.

At the same time, I expect the IP business model to undergo further innovation. The current litigious practice can be replaced by Open Innovation perspectives, where IP forms the cornerstone of mutual exchange, joint ventures and transfer of technology. Across the board, new technologies will change humanity. The underlying rights to these technologies will continue to play an important role.

But how we think about these rights and how we construct their function is likely to change in the future. Litigation is not exactly an instrument of IP management; it is a last resort in case companies can’t resolve a conflict. Instead, I expect that we will see increasingly more firms in the market that will make the commercialization of intellectual property the core of their business. In this novel world order, IP will take up its role as the currency of the knowledge-based economy and its value proposition will be strongly interwoven with business practices, which are consistently driven by Open Innovation. In this era, the valuation of IP will play a critical role.

Dr Roya Ghafele is the Managing Director of Oxfirst Ltd, a law and economics consultancy She has held Lectureships (Assistant Prof. in the US Academy) in international IP law and international political economy with Oxford and Edinburgh University and served as an economist to the United Nation’s World Intellectual Property Organization, the OECD and McKinsey.


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6 comments

  1. Nice article and very interesting thoughts on the past and future of IP. One critical note though, citing: “I predict that better technology will allow to improve the quality of patents”, as a patent attorney and former examiner I argue I see more of the opposite happening: customers wanting to spend less and less on proper drafting of applications is not exactly beneficial to quality. The patent offices (does the EPO come to mind?) cutting corners on their search and examination work does not inspire much confidence either. I guess the quality improvements are meant to take place in a more distant future then (one can always hope).

  2. Licensing is nothing new in the IP world. I remember the time when Texas Instruments had more income from licensing its technology than by selling its products. Dolby never manufactured end products and only sold licences. Dolby is also a good example: it moved from analogue to digital technology at the right time.

    The problem of licensing has been polluted by NPEs and some companies having very aggressive politics when it comes to patents in general and SEP in particular.

    For the rest, I agree with Nordic Observer. The quality of applications is going drastically down. Quantity seems to replace quality. Applicants appear to save at the wrong place, but this has deleterious effects when later it comes to opposition or litigation.

    It is nothing new to consider that the patents which have an influence on the market are the tip of the iceberg, and the rest is below the surface. Those patents never make it to the market. But as a former president of the EPO said: a patent is an insurance in case of success. As it is not possible to say at filing which patent will be the pearl in the oyster, one has to keep filing. Multiplying filings is something necessary, but this is not a reason to be filing anything at any cost and as cheaply as possible.

    It is nice to license patents, but only solid patents can or should be licensed. When one looks at the number of oppositions at the EPO, the number as such seems quite low, of the order of 5% of all granted patents.

    Two comments: first, only patents which can disturb a competitor or push him out of the market are subjected to opposition. Secondly, in 2/3 of the cases the patent comes out either badly maimed or even destroyed after an opposition.

    The reasons are that in most of the cases of maintenance in amended form or revocation, the prior art revealed by the opponent was to be found in the EPO search files, but it has not. It is in a minority of cases that oppositions are mainly based on prior art not available at the EPO, e.g. on a lecture or public prior use.

    But quality at the EPO has steadily been increasing since 2010….. And it is not by saying that AI will revolutionise drafting, searching and examining of applications, that the problems of today will be solved. Generations of representatives and examiners will have come and gone before this utopia becomes reality…

  3. Sigh, for one who qualified as a patent attorney in the 1970’s and has worked with clients in both engineering and chemistry, so much to write in reply. Where to start?

    Licensing? Not so prevalent back in the days when most of the patent litigation was about a single molecule and a single patent covering it. Much more nowadays in, say, telecoms, where bundles of hundreds (or thousands) of patents apply to any one product. Many are Standards-essential and patent issues are managed on FRAND terms. Licensing is an integral and fundamental and indivisible part of the patent business, these days, for technology reasons.

    Quality. Try attending webinars on patent drafting, and compare the difference, across the Atlantic Ocean. We in Europe have the EPO’s “Problem-Solution Approach” to patentability, which keeps the drafter “honest”. How come?
    Well, if you don’t say in the application as filed what combination of tech features delivers precisely which tech effects, your patent application is going to go down and not even get to grant. Quite the reverse in the USA, where (lowly) drafters are castigated by litigators (perceived to be more sophisticated, a higher form of patent life) should they ever come to the idea of revealing in the patent application as drafted what the client’s “invention” actually is. This is not good for the reputation of the patent system at a political level.

    Thank goodness that, in 1973, when the EPC was set up, no patent-ignorant Supreme Court was set up in judgement over the specialists at the EPO. This is what counts. You doubt me? Just look at the grotesque mess the Supreme Court of the USA is making of patent law. Best I say nothing about the CJEU. That’s for another thread.

  4. One more thought: that in the past it mattered how skilfully drafted was the patent to be litigated. Nowadays, what matters is how many patents you have got in your portfolio. Quantity is wat counts, more than quality. As a competitor, one is faced with not so much a thicket as an entire rainforest of patent rights, if you have the temerity to fancy your chances, competing with the established players.

    This, by itself, is enough to explain the decline in patent drafting skills. In the words of the carpet salesman in that old UK sitcom “Never mind the quality: feel the width”.

    And then there’s that (by now quite old) anecdote about the business guys from IBM. They write to an upstart competitor, enclosing 6 IBM patents which they suggest are being infringed. Upstart asks for a meeting. The suits from IBM arrive and look bored all the time Upstart explains on the whiteboard why no valid claim is infringed.

    OK says the lead suit. But you do understand, don’t you. These 6 are but a small part of our portfolio of a thousand patents. Should we send you another 6 to look at? Or would you not rather take a licence on the attractive terms we are for the time being offering?

    It’s hardly rocket science, why patent licensing is so prevalent, these days, and set to get even more prevalent.

  5. I wish to complement the previous commenters’ reactions by sharing thought sbased on my experiences as a corporate IP & contracts manager in large companies and as an IP & legal advisor to startups/very small companies.
    I see no need to stay anonymous when I recall that the motto in one of these large companies was « keep the company out of trouble », and this applied to all lawyers, not just IP lawyers. Thsi makes full sense from the senior management’s standpoint. « Trouble » means lawsuits or threats of litigation for infringement or theft of trade secrets, and it may imply the need to make reserves in the financial reports, write off R&D investments, stop commercial deployment of new products/services or find costly, less advantageous non-infringing alternatives, pay legal fees and possibly transactional license fees. No wonder such a situation is seen as a fiasco. Patents are useful in this respect as an insurance aimed at minimizing risks.
    The positive side is the need to set up preventative policies, which includes primarily patent watch and freedom-to-operate analysis. This generates the beneficial by-product of spreading within the company patent information from the outside players, which has technical value in itself (let’s not reinvent the wheel).
    In addition to this defensive aspect, patents and patent applications may be extrelely valuable to their owner in many different non-adversarial contexts linked to the company’s business (relationship with R&D partners, clients, suppliers, investors).
    As to licensing-out and its prospects, a distinction must be made between technology licenses and bare patent licenses. In technology licenses, the major value for the prospective licensee is the commercial value of the technology, which implies the transfer of confidential information, technical training and assistance, access to critical suppliers. Patents are effective to transfer information at an early stage, dissuade third party infringements and police the agreement against violations by the licensee including post-term violations.
    There are success stories of patent licensing-out campaigns but as the saying goes, history is written by the victors. Failures are less documented and are given scant attention. The major reason for the failures is that the proposed licenses are typically limited to bare patent licenses and do not include transfers of confidential technology information and technical assistance – generally because the patented inventions had not been developed enough or the prospective licensor was not willing to transfer information to competitors or to devote resources to such transfers. This highlights the ambiguity as to the scope of « IP ». Confidential information must be considered a critical component of IP, both for a company to protect the value of its R&D investments and its position in the marketplace and for licensing-out prospects.
    This leads to the conclusion that our vision of IP must not be patent-centric but holistic. There is in particular a clear shift towards seeing data per se as a major component (this is obvious for training data in AI applications).

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