Patent portfolio strategy revisited

Writing in Innovation Science, Brent Edwards ("Trolls Attack Innovation: Panic in Corporate Parks!"), left, reviews an article in the June 2008 issue of the Harvard Business Review by management professors Joachim Henkel and Markus Reitzig ("Patent Sharks: Legal strategies aren’t enough to deal with these predators of the IP world. You need to rethink your approach to R&D"). Edwards addresses the authors'recommendations which he criticises as being unrealistic in that they idealise the willingness of competing companies to cooperate with each other and to forgo competitiveness in technology development in order to protect themselves against the trolls.

The first of the professors' recommendations is "High-technology firms should move away from building huge patent portfolios for the purpose of cross-licensing with competitors". On this, Edwards comments:

"The authors correctly point out that one reason companies generate patents is to trade them for patents needed from other companies. Such trading is done because the patents behind key components in complex technical products are usually distributed across all of the major companies in an industry—no one company owns all of the patents necessary to produce a product. Because no company can produce a product solely on technology from their own patent portfolio, companies trade their patent licenses for licenses to the other companies’ patents. The cellphone industry is a typical example of this, e.g., Nokia trading patent licenses with Motorola and Samsung. The authors suggest that this strategy of building a strong portfolio and trading licenses is no longer valuable to companies and should be stopped because it doesn’t protect them from trolls. Indeed, it doesn’t—it protects them from their competitors, who are ultimately more threatening than patent trolls. Just because a patent strategy does not affect patent trolls does not mean that it isn’t worth doing. If I were Nokia, however, I would certainly try to convince Motorola to follow this advice to stop building up Motorola’s patent portfolio".

It seems to be by no means clear that one's competitors are ultimately more threatening than patent trolls. By virtue of the fact that they are in the same market -- particularly where that market is technologically complex and patent-rich -- competing players becomes increasingly reliant on one another in terms of standards-setting and cross-licensing, so each has a long-term incentive to cooperate with one another. A troll, however, is an outsider; he is not interested in cooperation or developing any relationship outside that of rentier. The more rent he receives, the better able he is to defend his patents if their validity should be challenged, and the less he does apart from collect his rent and keep it, the more focused he is on his continued role as rentier.

Prizes or patents?

Never mind the patent monopoly, go for the pot of gold! Republican candidate for the US Presidency John McCain has proposed a prize of US$300 million for the development of a vehicle battery package that has the size, capacity, cost and power to leapfrog the commercially available plug-in hybrids or electric cars. The prize winner should deliver power at 30 percent of current costs. Said McCain of the $300 million:

“That’s one dollar, one dollar, for every man, woman and child in the U.S. — a small price to pay for helping to break the back of our oil dependency".

Senator Barack Obama calls the proposal "a gimmick". Click here for further comments in the Arizona Republic, Motor Trend, Las Vegas Sun, New York Times, and TPM Cafe

The proposal presumes, on the basis of the past few decades, that the patent system offers either an insufficient incentive or an unattractive means of exploitation. What do readers of this weblog think?

New tlds: more trouble ahead for the big brands?

Writing for Intellectual Property Watch, Monika Ermert ("Brandowners Warn Against Cybersquatting, User Confusion From New Internet Domains") reviews the current debate regarding new top level domains which is proving so controversial. Internet Corporation for Assigned Names and Numbers (ICANN) -- whose meeting in Paris triggered Ms Ermert's article -- has been criticised in some quarters for the length of time taken in introducing new top level names, while trade mark owners object that they expect large-scale infringement when those new names are launched.

The article quotes Susan Kawaguchi (eBay global domain name manager) as observing that brand owners are not prepared to provide income for the new generic TLD registries during the sunrise periods during which early name registrations can be made. The same sentiment was echoed by Jay Scott Evans (senior legal advisor, Yahoo), asking why brand owners should have to invest large sums of money to protect their brands because ICANN did not put their marks on a reserved list that could be blocked in all TLD zones.

It is easy why brand owners should object to having to commit substantial resources to defending their prize assets, either by acquiring unwanted and unnecessary domain names containing their trade marks so that cybersquatters cannot seize them or by taking action to prevent uses of such sites that might have an adverse impact on the goodwill in their brands. It would be interesting to discover whether, when the next batch of tlds goes live, they stimulate more commercial activity among legitimate businesses or among the parasites that feed off them.

Lex Mundi commercialisation survey published

Lex Mundi's Survey on Trends for Commercializing IP: a Lex Mundi Multi-Jurisdictional Survey prepared by the Lex Mundi Intellectual Property Practice Group, current to February 2008, is featured by its compiler, Scottish firm Maclay Murry & Spens, in that firm's current In The Know newsletter. It's 132 pages long and, with no internal links, a difficult document to handle online.

The report lists first the questions posed, then the answers, and there's a handy glossary at the end. It covers more than 50 jurisdictions (including some US states and Canadian provinces). According to the Background:

"Despite the general drive towards harmonization of intellectual property laws on a worldwide scale, there remain distinct jurisdictional differences of which every practitioner should be aware. Given the nature of global commercialization and licensing trends, such awareness is becoming increasingly important.

In order to highlight and explore areas where these differences remain, the IP Practice Group thought it would be interesting and worthwhile to survey the membership of the Lex Mundi on trends for commercializing IP in their jurisdiction.
The survey was drawn up by the leadership group of the IP Practice Group and dispatched to all members of the IP Practice Group. The intention was for the survey to concentrate on particular aspects of commercialization and licensing to determine the degree of uniformity (or not) across members’ jurisdictions. ... The level of response was very positive with a large number of different jurisdictions providing responses.

... The results of the survey are not intended to represent a comprehensive guide to intellectual property law in each ... jurisdiction, but rather provide an insight into the differing trends for commercializing IP. ...".

The survey, which includes issues such as royalty payments and remittance of licence fees, uses the term 'trends' in the sense of 'global generalities drawn from aggregated specific instances' rather than in any temporal sense, since there is no attempt to describe how commercialisation is changing over a period of time -- but that sort of information is often difficult to obtain, particularly from law firms that are more likely to be executing their clients' instructions than telling them how to commercialise their IP.

University research and funding: bridging the 'expectation gap'

The most recent e-news bulletin of Technology Transfer Tactics reports that early-stage biotech investor Carl Weissman (President and CEO of Seattle-based venture firm Accelerator) has been criticising both venture capitalists and university tech transfer offices their complaints that there is a lack of access to early-stage funding. The funding gap, he says, is non-existent -- but what there really is is an "expectation gap". He points to the era of easy money in the late 1990s as fomenting unrealistic expectations as to what constitutes technology worthy of funding. He comments:

"Academic investigators need to face facts. If you have a great technology, with reasonable and lucid proof-of-concept, addressing a significant unmet need, and that can be protected as proprietary; and, if -- and this is the big IF -- you have reasonable expectations in terms of valuation and risk-sharing, then you will be able to attract venture funding. Plenty of it".

Weissberg points to his own experiences and track record in support of this and adds:

"If you are an academic and you cannot get someone to back your idea, do three things: take a hard look at your technology (or even ask someone else to do so); take a hard look at your expectations; and, take a hard look in the mirror. Honest assessment in these three efforts will tell you why...".

The 'expectation gap' is a useful concept. Although it has probably always existed, it is bound to be more fully appreciated, and properly dealt with, now that it has a catchy name.

IP Valuation - the basics!

Jason Lessard put together this article for the readers of his Uroip site. It is quite a useful summary of the basics of IP Valuation. Thanks Jason.

"The growing importance of Intellectual Property Rights (IPRs) in business has created a need for equating the cost of obtaining these rights with the value they add to the business. A decision to invest or not to invest in patent protection, or indeed any IP registration, should be subjected to similar criteria as tangible assets.

However, IPR valuation is complex and the results can be meaningless if the wrong methodology is used to carry out the analysis. For this reason, all too often the decision of whether or not to file a patent application is based on intuition and experience. This is clearly not an ideal approach to decision making.

As with the evaluation of any investment, estimating the projected value of the resulting asset and comparing this estimate to the projected costs of obtaining and/or maintaining it will allow you to make more educated investment decisions. A well thought out and consistent approach to valuation will give you both an indication of value and a means for comparing the relative value of your innovations to decide how your R&D budget should be allocated.

Two of the more popular methodologies are the market approach and the income approach, each of which comes with its advantages and disadvantages.

The market approach is based on IP transactions involving similar technologies which have taken place in similar markets. This valuation method usually reflects more accurately the actual amount that a third party would be willing to pay for the asset. However, it is generally difficult to obtain accurate information as the results of such transactions are rarely published.

The income approach is based on an estimation of future income attributable to the particular IP asset in question. The relief-from-royalty method is a subset of the income approach, wherein the value of the IP asset is calculated based on notional royalties that the company is relieved from paying as a result of owning the assets. The royalty rates can be estimated based on industry standard ranges in the relevant field of technology, but these should be adjusted using pre-defined criteria indicative of, for example, the strength and/or scope of the IPR in question. This will provide more accurate and consistent results.

While this approach is somewhat superficial, the value obtained by this methodology is reasonably accurate in most cases. More importantly, it is a consistent indicator which allows you to compare relative values for decision making purposes."

US internet radio royalties hit further obstacles

In a feature carried by Lexology ("Does the Copyright Royalty Board exist? Internet radio appeal proceeds and new issues arise"), David Oxenford (Davis Wright Tremaine LLP) reviews the current role of the US Copyright Royalty Board in the light of its position on the royalties paid for the use of sound recordings by internet radio stations. In an appeal against one of its decisions the Department of Justice (which represents the Board before the Court of Appeals) maintained that the submissions of the webcasters -- who naturally wish to minimise their exposure to copyright royalties -- had provided insufficient factual basis upon which to establish that the Board's decision was arbitrary, capricious or otherwise contrary to law.

The Board's constitutional status has however now been called into question by Royalty Logic (which seeks to establish itself as an alternative collection agency to SoundExchange). If the Court of Appeals decides to hear that issue and agrees that the Board was not properly appointed, we can expect re-appointments, fresh hearings and possibly even legislative intervention, all of which seriously delays the ability of rights holders to factor their royalty income into their business plans.

US patent licensors face $4 billion loss in Brazil

Bloomberg's Carlos Caminada reports on a situation that may be hugely adverse to the financial interests and cash-flow expectations of patent licensors and concerning which they may be quite powerless. In anticipation of the condemnation by the World Trade Organization of the subsidies paid to US cotton farmers, the Latin American cotton-growing giant proposes to retaliate by pursuing a $4 billion grab against US patents and business services. The piece reports that Brazilian officials from several ministries are already considering which patent payments to suspend and which services may face restrictions.

Viewed from Brazil's point of view, the patents are just "US patents". But each is an integral part of a business strategy that was conceived at the R&D stage in the distant past and from which the patent licensors expect a predictable royalty flow. Does any reader of this weblog know (i) what steps a licensor of technology into Brazil might take in order to minimise damage and (ii) whether patent licensors have resort to the law in the US in order to recoup any losses suffered?

Will risk aversion stymie R&D into new drug development?

Risk aversion from investors is posing a serious threat to drug development according to the Biotechnology Report 2008, brought out by giant UK-based patent and trade mark attorneys Marks & Clerk under the direction of Dr Gareth Williams. The research identifies unique challenges currently facing the biotech sector which adversely affect investment, stemming in particular from growing caution in the granting of marketing approval for new drugs by the US Food and Drug Administration (FDA). This caution places added pressure on the patent life. The report suggests that drug modification or late-stage development will become increasingly popular, at the expense of genuine innovation.

The international research is based on the views of 484 executives across the biotechnology and pharmaceutical sectors, principally in the US and UK markets as well as Europe and Asia. 83 per cent of respondents feel that the pressures currently facing biotech make it less attractive in the eyes of many investors. 90 per cent believe secondary and further funding will become increasingly difficult to secure as market conditions deteriorate, and that investors will focus on less risky, latter-stage drug development in a bid to limit their exposure to risk. Correspondingly, 83 per cent think that biotech companies will themselves focus increasingly on drug modifications as well as more mature drugs in the pipeline.

Where capital is available, the terms for funding may become simply uneconomic. 80 per cent of respondents believe key investors will either take a greater equity stake, or may seek to secure their capital against the drug-makers’ IP assets. This reflects a trend gathering momentum within the industry where investors focus increasingly on the strength of IP rights. Overall, 78 per cent agree that the climate for enabling biotechnology innovation has deteriorated within the past year, and 89 per cent believe some small and/or early stage companies will either fail or be bought out at unattractive levels.

The genesis of the funding issue is not solely attributable to current economic fragility. A much more cautious attitude from regulatory bodies (specifically the FDA), is making it considerably harder for biotechs to get the marketing approval they need for drug development. This, in turn, is affecting investor sentiment. 68 per cent of respondents believe that the drug approval process must become much less risk-averse if investment levels are to be maintained, with 72 per cent viewing this as essential to the delivery of future drug pipelines.

One of the most important consequences of sluggish drug approvals is its impact on the lifetime under which a new drug is protected by its patent. 91 per cent of respondents feel that the time it now takes for drugs to get through the system is eating into the time those drugs enjoy the rewards of patent protection. 78 per cent warn that there is a danger of biotech companies bringing more "me too" drugs to market, rather than investing in real innovation, if the threshold for approving new drugs is set too high.

The patent system emerges as a key tool in overcoming the barriers faced in the current crisis. 84 per cent believe that recognising secondary patents is an important means of encouraging and rewarding drug development. This “evergreening” process helps shore up new patent protection for later modifications to an existing drug, and may cover anything from dosage to form. Extensions to the existing patent term are also advocated by 73 per cent of respondents to promote more R&D investment, whilst 88 per cent would like to see patent approvals secured more quickly.

The research finds that perceived weakness in foreign intellectual property systems and the difficulties posed by competition, are adding to concern about profit margins. Whilst 72 per cent agree that investors and biotech companies see a lot of potential coming from new super-economies, 85 per cent believe weak IP protection in the world’s largest emerging markets (China and India) is a threat to future margins.

Price reduction on a global scale is viewed as a “serious threat” as a result of parallel trading – the importing of drugs at a cheaper price from a lower-cost area. 79 per cent view parallel trading as a “significant” or “very serious” threat to the industry, with 91 per cent believing this threat will only increase as global trade continues to grow. 73 per cent think it likely biotech companies will reduce the availability of drugs in some territories if parallel trading begins to threaten profits in key, high-margin markets.

The report also finds that biotech margins are facing certain pressure as generic competition emerges among the biotechnology sector. 76 per cent of respondents believe that the enforceability of patents against generic competitors is proving much harder than in the past, although 58 per cent feel confident about the validity of patents being upheld in the courtroom. 89 per cent feel that the promotion and approval of cheaper copies of biologics, or copycats, is likely to result in more “me too” drugs coming to market. Yet 74 per cent recognise that competition will have a positive impact on drug affordability.

Copies of the report may be obtained from Marks & Clerk (London office), via Joanna Colton, +44 (0) 207 420 0000.