If You Can't Beat 'Em, Join 'Em: Patent Strategy as a Business Model

In the May 12, 2008 New Yorker Magazine article (linked here: http://www.newyorker.com/reporting/2008/05/12/080512fa_fact_gladwell/?yrail) , Malcolm Gladwell posits that there is no shortage of ideas. Rather, he indicates that what is needed is disciplined processes centering on invention and execution of those ideas through into the marketplace. Mr. Gladwell's article (which I believe is a must-read for those of us in the "innovation game"), goes about proving his hypothesis by reporting on the inventive processes of the principals of Intellectual Ventures. (Intellectual Ventures website is linked here: http://www.intellectualventures.com/).Intellectual Ventures is a new type of company. Its premise is that highly skilled scientists, engineers and other types of "big thinkers" can learn enough about a technical or human problem, such as a common medical condition, to invent possible solutions when in a "brainstorming session" with other high level thinkers of varying disciplines. Intellectual Ventures then files patent applications for the most promising of those solutions, and the team goes on to the next problem. As an IP business strategist and consultant (more info here: www.jackiehutter.com), what I find fascinating about the Intellectual Ventures team is that it appears that the problems being addressed are more often than not, outside of the realm of expertise of most of the invention team members. Instead, solutions for heart conditions, for example, are addressed by someone with a Ph.D. in computer science or electrical engineering. The result of this set-up guarantees "outside of the box" solutions to problems that likely have been "beaten to death" by experts in the field. The payback for Intellectual Ventures is in potential licensing of its inventions if the patented solutions turn out to be viable in the marketplace.

Has this model paid off? Although Bill Gates is a major investor in the company, it remains to be seen what the success of this venture will be in the long term, but there is certainly no shortage of ideas from which Intellectual Ventures can potentially profit. Mr. Gladwell reports that it was originally expected that Intellectual Ventures would file 100 patents a year; instead, it is currently filing 500 a year. There are 3000 ideas waiting in t he queue to be evaluated for patenting. While the vast majority of the team's ideas are likely worthless, Intellectual Ventures' business model is based upon the premise that if a few ideas payoff big, the percentage of successful ideas is irrelevant. Such a model is not innovative in itself; indeed, this the payoff model under which venture capitalists have profited for many decades.

Intellectual Ventures is not the only company with a payback model focused on patent strategy. There are many companies that acquire patents for the express purpose of obtaining licensing fees. One example of this is NTP, the company that sued Research in Motion for patent infringement of the BlackBerry PDA device. (After being threatened with shutdown, Research in Motion settled with NTP for over $ 600 million in 2006.) Companies that have engaged in patent strategy (through licensing and litigation) as the sole source of corporate income have often been referred to with the pejorative term "patent trolls." However, established companies, such as Proctor & Gamble, GE and Dow Chemical have adopted patent strategy as a significant source of corporate value. It would be incorrect to refer to these companies as "patent trolls" because they have other sources of corporate income.

In short, patent strategy has become a legitimate way for companies to generate profits, and in view of this, I prefer to call those who engage in this "patent entrepreneurs."You may be wondering what the patent strategy efforts of Intellectual Ventures and other patent entrepreneurs mean to your company. Well, the efforts of patent entrepreneurs represent both bad news and good news to companies that rely on innovation for a significant portion of profits.

The bad news is that patent entrepreneurs have realized that there is a huge potential payback in obtaining patents for solutions to technological and human problems. In obtaining patents to solutions rather to than existing products, they could be blocking your company's freedom to innovate in your commercial spaces. And, this modern patentee is not motivated by altruism: to the contrary, their legal departments have personnel in place to determine whether the company's patents are being infringed. If your company infringes their patents, a license or expensive litigation or both will be required. As a result, prior to embarking on any innovation program, your company must be aware that such patent entrepreneurs seek to obtain rents from your company if you get too close to their existing patent rights.

The good news is that with foresight and discipline your company can benefit from the efforts of these patent entrepreneurs. You can readily avoid stepping on their patent rights (and the resulting expense of lawyers and possible liability) by integrating patent analytics into your innovation processes. Application of business-focused patent analytics to innovation questions will let your company understand at an early stage whether your innovation efforts could be derailed by an earlier patent filing.

Further good news is found when your company emulates these patent entrepreneurs by developing robust patent strategies for your innovations that are directed toward maximizing your company's payback. It is worth noting that such robust patent strategies should be compared to the more traditional model of obtaining patents to, for example, products only. The conceptual difference between the new model and old model of patenting is that the new model is directed toward ensuring freedom to compete and the old model is directed primarily toward freedom to operate.

When your company recognizes the value of embracing patent strategy at an early stage in your innovation processes, you will be more likely to have freedom to compete in your desired market. As a result, your company will be less likely to be stopped by a patent entrepreneur, and you will have the added benefit of being a patent entrepreneur yourself. With regard to the new business model of patent entrepreneurs: if you can't beat them, join them.