Patent Squatting

Shares in Eastman Kodak have risen 10% on the news that the company has persuaded the US International Trade Commission (ITC) to reconsider its patent infringement case against smartphone manufacturers Apple and Research In Motion. According to Bloomberg Businessweek, the company thinks that it can negotiate royalties worth $1 billion or more if its patent rights are recognised.

Investors have not given the news an unequivocal welcome, however. “Even if Kodak receives the $1 billion in cash, what could it possibly use it to do?” asks InvestorGuide, suggesting that “Kodak has no other game plan except to sit on its patents and sue violators to receive licensing fees to generate capital.” “There is a clear problem with the company’s current patent-squatting strategy – it simply cannot be sustainable,” it notes.

"However, if Kodak invests wisely in research and development to strike back at its currently crippled Japanese camera rivals, such as Sony, Fujifilm, Panasonic and Canon, it could reestablish itself as a formidable camera manufacturer. Kodak has a strong brand name which has been synonymous with cameras for decades, and it wouldn’t be too late to stage a late game comeback."

Does this mark a change in investor attitudes from the early noughties when books such as "Rembrandts in the Attic" and "Edison in the Boardroom" lauded the $4 billion in royalties earned by Texas Instruments (TI) from licensing its patent portfolio? Or is it an acknowledgement that, in 2010, the lion's share of TI's operating profit came from the design and manufacture of semiconductors, with patent royalties being lumped together with "smaller semiconductor operating segments", ASICs and calculators under the heading of "Other" in the 2010 accounts?

How much should you invest in patents?

How much should you invest in patents?” ask Kelce Wilson and Claudia Tapia Garcia in a recent edition (XLV, No. 1) of the Licensing Executives Society journal LES Nouvelles. The authors are Senior Patent Attorney and IPR Counsel at Research in Motion, makers of the BlackBerry smartphone.

“Should you spend more, spend less, or keep things constant?” they ask, noting that “Only a few organisations have a system for objectively evaluating whether they are allocating the right amount of funding. Unfortunately, most seem to be at risk for spending either too much or too little on IP protection.”

In the same way that economic theory suggests that the optimal market price is to be found at the intersection of a supply curve with a demand curve, the authors suggest that the optimal IP protection budget can be found at the intersection of “Value” and “Effectiveness” curves.

According to the article, the Value curve represents “the actual economic value achieved by reducing the risk of IP loss”. The authors suggest that an IP owner should be able to identify the economic value associated with a given level of risk reduction by analysing the expected impact on profits, brand image and other business or marketing considerations. They note that the value assigned to a particular risk reduction target is the money that the IP owner would be willing to pay to achieve that target.

The Effectiveness curve corresponds to the actual costs incurred in achieving a given level of risk reduction and is determined empirically. “For example, patent applications filed for a moderate cost may be shown to deter infringement by most small competitors, but perhaps not large competitors that are willing to devote sufficient resources to attempt invalidating the patents” the authors note. “However, if a greater amount were to be spent on patent application preparation and prosecution, the resulting patents could have a higher quality that is sufficient to deter even large, well-financed competitors”.

The devil is in the data – how does one quantify, for example, the extent to which low cost applications deter small competitors? No such data is contained in the article. Nevertheless, this “Protection Valuation Tool”, as it is called, does represent another way of looking at the IP cost/benefit question that may be easier for investors and financial directors to understand.

NORTEL's LTE Patents

There's a lot more going on about Nortel's patents and a lot of confusion about whether they have been sold or not. The latest message is that they have not been sold. The author erroneously picked up the story from another source and has since been corrected. The auction that took place after NSN's initial approach. The approach from Nokia Siemens Networks was a stalking horse and under US bankruptcy law any other bidders must bid for the same "package of assets" - which did not include the patent rights, as NSN did not want them.

There's a report over on seeking alpha that Canadian company Research in Motion are arguing that the LTE patents are a national treasure and should be kept in Canadian hands.

There's more about stalking horse bidders in US Chapter Bankruptcy over here.