A shield and a sword: developing a successful patent strategy

Patents are a one-size-fits-all legal right for inventions across every technology field. The varied fields create different legal necessities, so that diverse industries are often at odds over what they attempt to accomplish with patent rights.

This is demonstrated by comparing the industries of bio/pharma with mobile telecoms. With bio/pharma you have the requirement of massive, long-term, front-end investment to develop a few long-lived products that require minimal numbers of patents to protect, whereas mobile telecoms are characterised by an ever-changing environment in which a single product, like a smartphone, can incorporate inventions that are covered by hundreds, if not thousands, of patents.

It is therefore no surprise that strategic licensing plays out differently across different technical fields. With bio/pharma companies, patents tend to be used to exclude all competition on a blockbuster drug. In the mobile telecoms space, however, the “right to exclude” approach is rarely feasible.

It is impractical to attempt to map claims of hundreds of patents to particular mobile telecoms products, for example, especially when those products can change faster than the courts can exclude them from the market. In addition, a potential target is likely to have its own set of patents with which it can counter-sue.

In the latter part of the 20th century, a common, big company solution was to broadly cross-license portfolios so that major industry players had substantial freedom to operate without the cost of right-to-use analysis and obtaining individual licences. This has been compared to a ‘cold war’ strategy, and in-house counsel were often incentivised to obtain patents in bulk, and then cross-license rather than enforce. This strategy is often referred to as building a ‘defensive portfolio’.

"The modest number of patents retained in the company's portfolio should be the smallest number which will deter competitor lawsuits due to fear of a countersuit."

At times, cross-licences were so prevalent, and the defensive portfolios were so large, that some corporations did not even keep close track of them.

Quality of patents took a back seat to quantity, and the true value of a patent portfolio was superseded by a kind of industry average value. That left enormous amounts of potential intellectual capital out of play.

A few decades ago the view of the value of patents, and the monetisation of patent portfolios, slowly started to change. Companies are increasingly focused on obtaining a reasonable return on investment from their patent portfolios. In some cases, such as with Nortel and Motorola Mobility, the IP that the company owns is worth several times the value of the rest of the company.

Some pundits attribute this paradigm shift to the rise of non-practising entities (NPEs), but that blurs cause and effect, and does not take into account the ever-increasing value of technology in our society.

In the late 1980s to early 1990s we entered the ‘Information Age’. The assets of this age are intangible, and are protected by IP laws, so as technology continues to evolve, the value of the IP will invariably rise. NPEs might have been early to realise this, but the situation was inevitable.

Gain a competitive advantage

So, how can a company use patent licensing to its competitive advantage? For a bio/pharma company the traditional model of excluding competition is probably its best solution. Let us assume, however, that many other companies fall closer to the mobile telecoms side of the spectrum. A common approach to monetisation is to put patents into a pool with other companies.

In a pool, a company mixes its standard essential patents with those of other companies, and can even be compensated by members of the pool who have made less of a contribution. While there may be overriding business concerns for doing this, such as pushing through favourable standards, patent pools are only an incremental change from the portfolio-wide cross-licences.

Patents, by definition, are a form of legal monopoly. When they are infringed, then someone is using a property right without permission. To obtain value from a patent, you need to exclude. The exclusion can be absolute, or constructive, in that you can apply a cost of doing business on your competitors.

If you license a patent and receive cash, it is easy to quantify the value you have received. No less important, though, is gaining a competitive advantage. If your competitor has to pay an additional $0.10/unit, then your product has a $0.10/unit advantage. The more (legal) disadvantages you put on your competitor, the better situated your company will be.

Some companies do not wish actively to license. This can be an understandable business decision to avoid countersuits, or even just to keep the focus on producing a product. If that decision is made, however, then there should be no reason to keep large numbers of under-used patents in its portfolio.

To maximise the value of its portfolio, the logical decision to be made is to retain a modest number of defensive patents and then to sell the rest. Ideally, the ‘modest number’ of patents retained in the company’s portfolio should be the smallest number of patents which will deter competitor lawsuits due to the fear of a countersuit.

The business entity that buys a company’s excess patents is likely going to enforce them and obtain licences from infringers. The net result is that a company which sells its excess patents has both increased its bottom line and its competitive position in the marketplace. Further, free-riding on the company’s innovation has stopped.

Some people might be concerned that by selling patents their companies will somehow be pulled into litigation. There are a few ways to minimise and mitigate this. First, have a policy that all files relating to a patent are turned over to the buyer.

Better still, retain no documents pertaining to a patent that are not part of the public record. Second, insist on compensation for employee time in future litigation, and have this compensation run with any transfer of patent rights.

Third, do not try and retain any decision making rights on how the patents are handled post-sale. It is unlikely that any savvy patent buyer would allow this in any event, but when you are uninvolved with the patent buyer, you will not be pulled into the suit as an essential party to the litigation.

This scenario might seem over-simplified, since there is the task of determining what the minimal number of retained defensive patents should be. What you can do here is actually sell more patents than might be prudent, but retain rights on some of those patents to license to specific companies.

This is actually a more strategically sound choice, since you can tailor your portfolio to be stronger against your more threatening competitors. Therefore it is possible, for instance, to sell 90 percent of your portfolio, but retain 30 percent of it by way of a grant-back licence to retaliate against specific concerns.

One concern with selling a patent with grant-back licences is that the patents could be irrevocably damaged by the new patent owner. The patent could be held invalid or unenforceable and the grant-back rights could be rendered useless. While this could happen, it should not be viewed as a risk so much as an opportunity to let someone else test the strength of your patent using their money.

Any patent buyer will be motivated to keep the patent from being invalidated, and they are as likely to do as good a job as you in keeping that from happening. In any event, if the patent does end up becoming invalid or unenforceable, it is better to know prior to having relied on it yourself.

Additionally, the marketplace for patents is bigger than ever before and continues to grow. This works to your advantage in selling patents, but if you happen to find that you have sold too many, then it is likely that you can buy patents yourself when you need to. So instead of holding on to too many patents to cover all eventualities, you can obtain patents when you need to as the situation arises.

Ultimately, patents have an expiry date. If patents are not used during their effective lifetime, they are a wasted asset. Ideally, your patent provides you with both a sword and a shield with respect to your competitors.

Brad Close is the senior vice president of transactions at Transpacific IP. He can be contacted at brad.close@transpacificip.com