I recently became aware of this patent litigation analysis prepared by PriceWaterhouseCoopers (“PWC”) (hat tip: Marcus Malek of the Intangitopia blog). The report appears to be rigorously prepared from data obtained from a large number of reported patent litigation cases dating from 1995. I read this report with interest and think that anyone who is interested in the ROI of patent enforcement should read it also. The data provide a wealth of information for anyone even thinking about bringing a patent case or who is involved in defending against claims of patent infringement.
Although the data in the PWC provides informational value, I nonetheless have a big problem with the following assertion that is prominently presented on page 18 under the title “What This Means for Your Business”:
"In light of the findings in this study, patent litigation appears to continue to be an effective protection and monetization path for patent holders." (emphasis added)
This unqualified statement gets a big “WHAT?!” from me.
The PWC data indicates that patent holders prevail only 37 % of the time, with the breakdown of wins being 19 % at summary judgment and 57 % at trial. (page 8) The median damage award for patent holders is $3.8MM, measured over 7 years from 2001 to 2007 (page 2). Notably, the median damage award varies substantially among technology areas, with some areas such as pharmaceuticals, consumer goods and automotive resulting in damage awards significantly lower than the median value. (p 3) The values are further skewed because the award figures include the $1.5 B award against Microsoft that was later markedly reduced (but was current as of the time of the PWC report).
While the $3.8MM figure might initially seem somewhat impressive to many patent owners, notably missing from PWC’s assertion that patent litigation is an “effective [] monetization path” is the cost to the patent holder to obtain that median damage award of $3.8 MM. At best, this assertion presents a "starry eyed" view of how patent owners can extract value from their patent assets. At worst, the assertion is misleading. (But, in any event, it is not necessarily surprising because PWC derives significant revenue from patent litigation.)
With regard to these costs, recent estimates of the cost of fairly non-complex patent litigation through trial is about $5 MM for each party. This means that a prevailing plaintiff will likely spend significantly more to obtain its award than it will ever receive. Moreover, the PWC report does not appear to indicate that a patent owner that loses at trial is likely to obtain a higher damage award, even after undertaking the additional substantial expense of appealing an adverse decision.
And, it is not just actual cost that the prevailing plaintiff owner will incur in the process of winning its patent lawsuit. The median time to trial, as measured from 1995 to 2007, is stated to be just slightly over 2 years. (page 11) This delay means that during the pendency of the lawsuit, a patent plaintiff’s business, technical and legal staff will be diverted from tasks that are likely to bring substantially more concrete revenue into the company today and in the future than that which might be obtained by a litigation win. The opportunity costs of the patent owner's favoring of litigation over more reality-based revenue generation opportunities can thus be substantial and should not be overlooked.
Taken as a whole, I do not see how the PWC data show that patent litigation is an “effective [] monetization” strategy as contended by this report, especially when chances are that a patent owner will spend more on the litigation--both in actual dollars spent and in opportunity costs--than it will likely obtain in a damages award.
This is not to say that I am totally against patent litigation in the proper circumstances. Countless situations certainly exist where it makes sense for a patent owner to enforce its rights in a court of law. There are also many good examples of where patent owners have won substantial damage awards against an infringer. However, the PWC data show that the median damage award is actually fairly modest in most industries, especially given the high cost generally involved in conducting patent litigation.
So, unlike PWC, I do not believe that patent litigation is a good bet for patent owners to monetize their patents. Rather, it seems more like a crap shoot to me. But I do not make my living from patent litigation anymore, which may "cloud" my perspective that litigation should be perceived as a source of revenue generation. In summary, I think there much better ways for a patent holder to view the value provided by patents.
UPDATE: After posting, I realized that a clarification was needed in regards to patent monetization as a business model. Of course, for non-practicing entities (aka "patent trolls"), patent litigation may not only be a viable strategy, it might be the only strategy. Nonetheless, NPEs certainly do not form the core of PWC's client base. I therefore concluded that PWC's report is directed toward leaders of the corporations that it counsels, not NPEs. For corporate-type patent owners, patent litigation is not a viable patent monetization strategy for the reasons set forth in this post.
Wednesday, April 29, 2009
Thursday, April 23, 2009
50% of Venture Capital Investment is Lost: How Your Clients Can Improve These Odds by Using the Right Patent Analytics
THE SKINNY ON THE QUALITY OF VENTURE CAPITAL-RELATED INVESTMENT DECISIONS
If you are a counselor of venture capital firms or entrepreneurs who owning start-up companies that are targets of venture capitalists, you might already be familiar with the high rate of failure associated with such investments. Nonetheless, you may be surprised to find out that 50% of all money invested in venture capital is a loss. This figure, which is based upon separate research projects by a Chicago Graduate School of Business (“GSB”) professor and a former Chief Economist at the Securities and Exchange Commission, indicates that the actual return on venture capital investment is not much different from the average annualized returns on the smallest NASDAQ stocks. In particular, the return on venture capital investment from 1987 to 2001 in these smallest stocks was 62% as compared to the 59% mean return of venture capital funds.
This 59% figure certainly does not reflect the investing public's general perception that venture capital return on investment markedly outweighs what one can obtain on the stock market. And, it is this apparently erroneous assumption of perceived higher return that presumably justifies the higher risks your venture capital and entrepreneurial clients associate with venture capital. Investor perception certainly does not match investment reality for your clients who play in the venture capital space.
Why this disconnect between perception and reality on venture capital returns? Professor Cochrane, the Chicago GSB professor, posits that, in effect, traditional methods of measuring venture capital return do not take into account the fact that ventures that are a total loss disappear and are not measured. Because these losing ventures are not around to be measured for calculation of rate of returns, Professor Cochrane states that this survivor bias significantly skews the rates of return on venture capital. His simple explanation of the effect of these missing numbers is telling (quoting from the Jacobius article): "They collect the returns for everybody that is around," he said. "It is like collecting data from everyone still in the casino: They're not asking the people on the bus … who are on their way home.”
HOW YOUR CLIENTS CAN IMPROVE THE QUALITY OF THEIR BUSINESS DECISIONS
From the Jacobius article, it appears that there is much room for improvement in your venture capital clients’ investment decision-making, as well as the quality of entrepreneur's decisions regarding their start-up companies. As an IP Business Strategist and Consultant, I am a strong advocate of using knowledge and information to reduce risk and improve the rate of return on investment. I firmly believe that venture capitalists, and entrepreneurs who are seeking venture capital investment, can improve the quality of their business and investment decisions by collecting and analyzing business information available in published patent data.
When one knows how to extract and analyze the right data in patents, significant business insights are effectively "hiding in plain sight." In short, valuable business information is available for the taking by smart entrepreneur and investors. And, why wouldn't your client seek to gain knowledge that could reduce the strategic uncertainty of her investment decisions to better manage decision-making risk?
In particular, before your venture capital firm client invests in a new business idea for a new venture, why wouldn't she want to know whether the business idea is ownable in the long term or whether she will possess the opportunity to innovate freely in relation to that business idea? Or, why wouldn't she want to know whether another firm has invested $100K or more in patent rights alone in the new business idea that she is investigating for investment? This, and other, valuable business insights and information are embedded in published patent filings.
For your start-up entrepreneur client, patent filing information can also provide valuable insights to provide enhanced long term business value and raise the value of her start-up company to venture capital investors. For example, patent filing information can reveal where the entrepreneur should focus her patenting efforts beyond the parameters of her specific inventive concept. By undertaking a competitive review of what others have sought to protect in her relevant product or technology area, your client can better understand the full breadth of patent rights obtainable. This can allow your client to gain enhanced patent claim scope that can serve to prevent competitive knock-offs of her product or technology concept. As a result, her start-up company’s value to venture capital investors can be significantly increased.
YOUR CLIENTS DON’T JUST NEED PATENT ANALYTICS, THEY NEED PATENT ANALYTICS THAT PROVIDE THE RIGHT BUSINESS INSIGHTS
However, it is not enough for your clients to collect and graph published patent data to obtain insights that will improve the odds of making the right investment decisions. Rather, specific business-focused data collection and analysis methodology is necessary for successful use of patent data for use by your clients. This is easier said than done.
In my experience as an actual purchaser of patent analytics costing upwards of $20K per single business question, I found that the vendors that collecting and analyzed the patent data generally had no basic understanding of the business questions that my company required answering. As such, these patent analytics vendors’ products were effectively useless to answer our business team's investment and innovation questions. Put simply, these vendors’ products did not provide my team with actionable business insights. I thus learned an expensive lesson about patent analytics: the data collection must be based upon the right foundation for the results to have any value. In other words, with patent analytics it is "garbage in, garbage out."
As one example of patent analytics “garbage,” one vendor, who offered a patent analytics product for $25-30K for a single business question, presented example data to us in his sales pitch regarding complex patent portfolio where the business conclusions were based upon published patent assignment information. The analytics vendor affirmatively stated that because the primary inventor named on this portfolio’s moved from Tennessee to Arizona, we should be concerned because he likely had gone to work for a major competitor of ours. He further stated that our company should be concerned that our major competitor was entering a new technology area in which the inventor was a renowned expert.
These conclusions seemed reasonable because they were supported by Patent Office assignment data, as well as other signals informally observed by our marketing team. We therefore considered investigating this competitive threat more thoroughly and addressed making preliminary steps toward evaluating a new product introduction in our competitor’s apparent new technology area. Before doing so, however, one of our team members contacted a former colleague of his who had worked in the same department as the inventor who now worked for our competitor.
Our team member found out that the inventor moved to Arizona not to work for our competitor, but to tend to his ailing mother. This intelligence revealed that the inventor was working in a wholly different product area at our competitor than he had worked at while being a prolific inventor at the Tennessee company. The technology area did not pose a competitive threat to our company. Fortunately, we found out this was the case before investing significant time and effort into the patent analytic vendors’ conclusions from patent assignment data.
Interestingly, the patent analytics vendor did not consider any alternative reasons for the inventor’s change of residence, other than that he presented. In his view, if the data revealed by his analysis said it, it must be true. But, it wasn't the data that was the problem, it was the conclusions he presented to us. If we would have been more credulous about his conclusions, we would have wasted considerable corporate resources chasing his erroneous assumption about our major competitor’s activities.
HOW YOUR CLIENT CAN SELECT THE RIGHT PATENT ANALYTICS
In the world of start-up company management and attendant venture capital investment, information is undoubtedly power that can fuel your clients’ decision-making processes. But before your client spends good money on patent analytics to improve the payback from her business decisions, she must ensure that the data and insights she obtains are based upon methodology that extracts actionable business insights from patent filings. As shown above, selection of the wrong analysis methodology could be worse than her not conducting patent analytics at all because her investment decisions could be influenced by information that provides the wrong business conclusions. Only those methodologies that are founded on methodology that extracts the business purpose from patent filings can provide your client with investment-grade insights from patent filings.
Methodologies I recommend to my venture capital and entrepreneurial clients use a combination of data and legal analysis to extract the business information from patent filing data. Importantly, the business question must be well defined prior to starting the analysis. A broad business question will lead to comparably, and likely non-insightful, answers. Anyone seeking business answers from patent information should therefore spend considerable time up-front clearly defining the business or investment question they seek to obtain an answer to, and also in communicating this to the patent analyst.
I also believe that the best patent analytics vendor is not the one who demonstrates that its data analysis techniques are the most efficient in analyzing 1000’s of patent documents to provide attractive and succinct pictures of the data in landscape form. Indeed, rarely would a well-defined business question lead to more than several hundred relevant patent documents at most. This number of patents typically can be reviewed at a high level by a trained patent analyst. As such, when selecting a patent analytics vendor, your client should move past the charting and picturing aspects of the sales pitch, to better understand how the vendor will work with your client to define and answer the specific business question.
Furthermore, I strongly recommend that your client seeks a patent analytics vendor whose methodology centers on reviewing the patent filing documents not for what they say, but for what they claim. The claims provide the relevant business information because that is what your client’s competitors seek to prevent them from doing. In other words, this exclusionary aspect is what matters because it defines what your client can and cannot do (or patent). In my experience few patent analytic vendors truly understand that this aspects of patents, a fact which significantly lowers the value of most product offerings.
Only after the patent analytics vendor analyzes the claims for relevance to the specific business question does your client care about who might own the patent filing or what they might wish to accomplish with it. This means that the vendor should present your client not with graphs, pictures and analysis of 1000’s of patents, but rather, with substantive analysis of a fraction of this number of patent documents that are directly or substantially directly related to your client’s business question. In my experience, better analysis of a more precisely generated library of patent filing documents provides clients with more readily actionable business insights from patent information.
CONCLUSION
Given that more than 50% of venture capital investment is lost, there is certainly room for improving the quality of the decision-making processes involved. I believe that patent analytics can serve a critical need in this regard. At a minimum, those entrepreneurs and venture capital investors who use such information are obtaining an additional piece of information that is not commonly used to make investment decisions today. The critical factor for those seeking to use patent analytics to improve their investment decisions is to make sure the vendor they choose for such information is providing them with the right information in accordance with the methodologies set out in this article.
If you are a counselor of venture capital firms or entrepreneurs who owning start-up companies that are targets of venture capitalists, you might already be familiar with the high rate of failure associated with such investments. Nonetheless, you may be surprised to find out that 50% of all money invested in venture capital is a loss. This figure, which is based upon separate research projects by a Chicago Graduate School of Business (“GSB”) professor and a former Chief Economist at the Securities and Exchange Commission, indicates that the actual return on venture capital investment is not much different from the average annualized returns on the smallest NASDAQ stocks. In particular, the return on venture capital investment from 1987 to 2001 in these smallest stocks was 62% as compared to the 59% mean return of venture capital funds.
This 59% figure certainly does not reflect the investing public's general perception that venture capital return on investment markedly outweighs what one can obtain on the stock market. And, it is this apparently erroneous assumption of perceived higher return that presumably justifies the higher risks your venture capital and entrepreneurial clients associate with venture capital. Investor perception certainly does not match investment reality for your clients who play in the venture capital space.
Why this disconnect between perception and reality on venture capital returns? Professor Cochrane, the Chicago GSB professor, posits that, in effect, traditional methods of measuring venture capital return do not take into account the fact that ventures that are a total loss disappear and are not measured. Because these losing ventures are not around to be measured for calculation of rate of returns, Professor Cochrane states that this survivor bias significantly skews the rates of return on venture capital. His simple explanation of the effect of these missing numbers is telling (quoting from the Jacobius article): "They collect the returns for everybody that is around," he said. "It is like collecting data from everyone still in the casino: They're not asking the people on the bus … who are on their way home.”
HOW YOUR CLIENTS CAN IMPROVE THE QUALITY OF THEIR BUSINESS DECISIONS
From the Jacobius article, it appears that there is much room for improvement in your venture capital clients’ investment decision-making, as well as the quality of entrepreneur's decisions regarding their start-up companies. As an IP Business Strategist and Consultant, I am a strong advocate of using knowledge and information to reduce risk and improve the rate of return on investment. I firmly believe that venture capitalists, and entrepreneurs who are seeking venture capital investment, can improve the quality of their business and investment decisions by collecting and analyzing business information available in published patent data.
When one knows how to extract and analyze the right data in patents, significant business insights are effectively "hiding in plain sight." In short, valuable business information is available for the taking by smart entrepreneur and investors. And, why wouldn't your client seek to gain knowledge that could reduce the strategic uncertainty of her investment decisions to better manage decision-making risk?
In particular, before your venture capital firm client invests in a new business idea for a new venture, why wouldn't she want to know whether the business idea is ownable in the long term or whether she will possess the opportunity to innovate freely in relation to that business idea? Or, why wouldn't she want to know whether another firm has invested $100K or more in patent rights alone in the new business idea that she is investigating for investment? This, and other, valuable business insights and information are embedded in published patent filings.
For your start-up entrepreneur client, patent filing information can also provide valuable insights to provide enhanced long term business value and raise the value of her start-up company to venture capital investors. For example, patent filing information can reveal where the entrepreneur should focus her patenting efforts beyond the parameters of her specific inventive concept. By undertaking a competitive review of what others have sought to protect in her relevant product or technology area, your client can better understand the full breadth of patent rights obtainable. This can allow your client to gain enhanced patent claim scope that can serve to prevent competitive knock-offs of her product or technology concept. As a result, her start-up company’s value to venture capital investors can be significantly increased.
YOUR CLIENTS DON’T JUST NEED PATENT ANALYTICS, THEY NEED PATENT ANALYTICS THAT PROVIDE THE RIGHT BUSINESS INSIGHTS
However, it is not enough for your clients to collect and graph published patent data to obtain insights that will improve the odds of making the right investment decisions. Rather, specific business-focused data collection and analysis methodology is necessary for successful use of patent data for use by your clients. This is easier said than done.
In my experience as an actual purchaser of patent analytics costing upwards of $20K per single business question, I found that the vendors that collecting and analyzed the patent data generally had no basic understanding of the business questions that my company required answering. As such, these patent analytics vendors’ products were effectively useless to answer our business team's investment and innovation questions. Put simply, these vendors’ products did not provide my team with actionable business insights. I thus learned an expensive lesson about patent analytics: the data collection must be based upon the right foundation for the results to have any value. In other words, with patent analytics it is "garbage in, garbage out."
As one example of patent analytics “garbage,” one vendor, who offered a patent analytics product for $25-30K for a single business question, presented example data to us in his sales pitch regarding complex patent portfolio where the business conclusions were based upon published patent assignment information. The analytics vendor affirmatively stated that because the primary inventor named on this portfolio’s moved from Tennessee to Arizona, we should be concerned because he likely had gone to work for a major competitor of ours. He further stated that our company should be concerned that our major competitor was entering a new technology area in which the inventor was a renowned expert.
These conclusions seemed reasonable because they were supported by Patent Office assignment data, as well as other signals informally observed by our marketing team. We therefore considered investigating this competitive threat more thoroughly and addressed making preliminary steps toward evaluating a new product introduction in our competitor’s apparent new technology area. Before doing so, however, one of our team members contacted a former colleague of his who had worked in the same department as the inventor who now worked for our competitor.
Our team member found out that the inventor moved to Arizona not to work for our competitor, but to tend to his ailing mother. This intelligence revealed that the inventor was working in a wholly different product area at our competitor than he had worked at while being a prolific inventor at the Tennessee company. The technology area did not pose a competitive threat to our company. Fortunately, we found out this was the case before investing significant time and effort into the patent analytic vendors’ conclusions from patent assignment data.
Interestingly, the patent analytics vendor did not consider any alternative reasons for the inventor’s change of residence, other than that he presented. In his view, if the data revealed by his analysis said it, it must be true. But, it wasn't the data that was the problem, it was the conclusions he presented to us. If we would have been more credulous about his conclusions, we would have wasted considerable corporate resources chasing his erroneous assumption about our major competitor’s activities.
HOW YOUR CLIENT CAN SELECT THE RIGHT PATENT ANALYTICS
In the world of start-up company management and attendant venture capital investment, information is undoubtedly power that can fuel your clients’ decision-making processes. But before your client spends good money on patent analytics to improve the payback from her business decisions, she must ensure that the data and insights she obtains are based upon methodology that extracts actionable business insights from patent filings. As shown above, selection of the wrong analysis methodology could be worse than her not conducting patent analytics at all because her investment decisions could be influenced by information that provides the wrong business conclusions. Only those methodologies that are founded on methodology that extracts the business purpose from patent filings can provide your client with investment-grade insights from patent filings.
Methodologies I recommend to my venture capital and entrepreneurial clients use a combination of data and legal analysis to extract the business information from patent filing data. Importantly, the business question must be well defined prior to starting the analysis. A broad business question will lead to comparably, and likely non-insightful, answers. Anyone seeking business answers from patent information should therefore spend considerable time up-front clearly defining the business or investment question they seek to obtain an answer to, and also in communicating this to the patent analyst.
I also believe that the best patent analytics vendor is not the one who demonstrates that its data analysis techniques are the most efficient in analyzing 1000’s of patent documents to provide attractive and succinct pictures of the data in landscape form. Indeed, rarely would a well-defined business question lead to more than several hundred relevant patent documents at most. This number of patents typically can be reviewed at a high level by a trained patent analyst. As such, when selecting a patent analytics vendor, your client should move past the charting and picturing aspects of the sales pitch, to better understand how the vendor will work with your client to define and answer the specific business question.
Furthermore, I strongly recommend that your client seeks a patent analytics vendor whose methodology centers on reviewing the patent filing documents not for what they say, but for what they claim. The claims provide the relevant business information because that is what your client’s competitors seek to prevent them from doing. In other words, this exclusionary aspect is what matters because it defines what your client can and cannot do (or patent). In my experience few patent analytic vendors truly understand that this aspects of patents, a fact which significantly lowers the value of most product offerings.
Only after the patent analytics vendor analyzes the claims for relevance to the specific business question does your client care about who might own the patent filing or what they might wish to accomplish with it. This means that the vendor should present your client not with graphs, pictures and analysis of 1000’s of patents, but rather, with substantive analysis of a fraction of this number of patent documents that are directly or substantially directly related to your client’s business question. In my experience, better analysis of a more precisely generated library of patent filing documents provides clients with more readily actionable business insights from patent information.
CONCLUSION
Given that more than 50% of venture capital investment is lost, there is certainly room for improving the quality of the decision-making processes involved. I believe that patent analytics can serve a critical need in this regard. At a minimum, those entrepreneurs and venture capital investors who use such information are obtaining an additional piece of information that is not commonly used to make investment decisions today. The critical factor for those seeking to use patent analytics to improve their investment decisions is to make sure the vendor they choose for such information is providing them with the right information in accordance with the methodologies set out in this article.
Monday, April 20, 2009
Innovative Methods for Corporate Legal Managers to Reduce IP Counsel Costs
The Slideshare presentation that follows is an excerpt from a class that I am teaching to in-house legal managers about innovations in IP management. The topic of the presentation is innovative methods to reduce IP legal procurement and management costs. The goal of my presentation is not to get corporate IP types not to think outside the box but, rather, to think outside the truck the box came in. As such, many people may think these ideas are "way out," but if you start with small ideas, you end up with small improvements.
Friday, April 17, 2009
The "Dirty Little Secret of Patents" is that Most are Worthless to Their Owners. Here is Why.
Notwithstanding the vast corporate and entrepreneurial resources expended each year to file, prosecute, manage and maintain patents, a significant majority end up having little or no business value to their owners. Patents can end up being worthless for any number of reasons, most of which center on the fact that the claims do not cover a product or technology either currently or in the future being made, used or sold by either the owner or a third party. And, when a patent does not cover a current or future product or technology, one might argue its only residual value is as the attractive government document on the right.
No doubt exceptions exist to my bold assertion that most patents end up as worthless to their owners. That is why I used the qualifier "most" in my statement. (And, if the reader is a patent owner, I certainly am not referring to your patents because, like the children of Lake Wobegon, all of your patents are above average.) Whether or not you agree with my opinion, or whether you think that only "many" or even "some" patents are worthless, with the resources committed to obtaining patent rights and the expectations placed in them by their owners, the question must then become "why do any patents end up not having any value?"
Most patent owners, both corporations and entrepreneurs alike, place responsibility for obtaining and managing their patent rights in the hands of patent professionals. The path to value goes astray at this point because it is not the patent professionals' job to obtain a patent that has business value, rather, it is their job to get the patent.
Specifically, the Patent Office grants patents to inventions that meet the legal requirements for patentability. A patent professional's job therefore centers on assisting inventors in identifying what subject matter might meet these government requirements and to successfully convince the patent examiner that the invention is "good enough" to justify others being prevented from freely practicing the subject matter claimed in the application.
Except for very limited circumstances, the Patent Office does not care a bit whether the invention claimed in a patent application is commercially successful. This means that the patent procurement process takes place almost exclusively in the legal realm. Even if a patent application was initially drafted and filed with clear business objectives in mind, legal arguments and the legal process itself typically begin to overshadow the business aspects of the invention soon after filing. In other words, the patenting process is fought in the legal trenches where success is measured by successfully arguing for allowance of the application.
It is therefore not surprising that a patent professional's incentives are typically aligned with the legal process itself, not the business value obtained from the patent rights she obtains for her clients. Think about it: law firm patent attorneys are paid by the hour or by the project and in-house patent attorneys are paid to manage these outside attorneys or to obtain patent rights themselves. The efforts of few, if any, patent professionals are evaluated in relation to the business value that they create for their clients. Patent professionals are measured, and therefore incentivized, by their ability to obtain patents on inventions, while still keeping patenting costs at a manageable level.
Moreover, patent law is highly specialized and can often seem arcane to those not trained in the area. Even sophisticated business people often express reticence about venturing into the weeds of the patenting process, instead preferring that their patent specialists handle the details. This effectively cedes decision rights for patents and resulting determinations of value obtained to those incentivized for patent legal successes, not business successes.
With the incentives of those responsible for obtaining patents aligned primarily with successful management of the underlying legal process, it follows that the business aspects of a patent can often become a secondary factor. In my opinion, this is a primary reason why most patents end up providing little or no business value to their owners.
Of course, the way to fix the problem of worthless patents is to realign the incentives of those involved in the process of obtaining and managing them. The scope of such a project would require restructuring of the patenting efforts and expectations of many, if not most, participants in the patenting processes. While I have strong opinions about how to accomplish this, my ideas are beyond the scope of this article. At a minimum, however, bringing measurement of business value obtained from patenting efforts will require business managers to exercise more interest and control over the process than they have in the past.
Thursday, April 9, 2009
Scott Garrison Guest Posting: A True Story of Wasted IP Assets & Why a Chief IP Officer Could Have Stopped the Loss
NOTE TO READERS: Since I am on vacation this week (well, sort of), I have asked my friend Scott Garrison to pen a piece about IP Strategy for me. He has been so gracious to do so, and the post follows. At bit about Scott: Scott Garrison is Chief IP Counsel and Assistant General Counsel for Scientific Games which, among other things, makes scratch off lottery tickets. Prior to joining SciGames, Scott was a senior IP attorney at Kimberly Clark and, prior to that, was a law firm patent attorney. Scott Garrison is a true IP Strategist and I am pleased to present him a forum to express his views on this blog.
Scott's blog post:
A short while ago I had an interesting conversation with an out of town acquaintance named "Mike" who works at a large international B2B ("business to business") corporation. I was interested to find out that his opinion was that patent protection was useless in the B2B field. It seems that since his consumer base is much smaller than a B2C ("business to consumer") business he believes the nature of the business requires deals to be cut and IP is often a nuisance to be worked around.
As we continued to talk I learned that he was the lead inventor on a couple of critical and groundbreaking patents in his field. In fact, it seems that a few years earlier he had been a major shareholder in a relatively small corporation when he received the patent grants. At that time he believed they held great value to his company. As he tells it, his present employer acquired his former company predominantly in order to procure these very same patent rights.
I at first assumed that his opinion was driven by feelings real or imaginary of being slighted by his present employer with respect to these patents for any number of potential reasons. However as we continued our discussion I was shocked to learn what had actually happened. It seems that the company which had bought the patents for the purpose of building value for itself and carving out a niche it could wield against its biggest competitor in fact had inadvertently destroyed the value of the patent family. As we discussed the details the following story unfolded--
In the B2B category where Mike and these companies exist, it was quickly recognized that the patents were a revolutionary and innovative gem. Mike's current employer, Big Co. did successfully acquire his former company and hence the patents for a sum in the high 7 to low 8 figures. At once Big Co's patent attorney added them to the company's patent portfolio and the business leaders began to push the technology onto their customers.
For Big Co to reap the most benefit from this technology it needed to license the patents to a number of distributors who would in turn sell to the end consumers. However these distributors were represented by Big Co's actual customer, a single overarching B2B entity, and Big Co had to work through this entity. Big Co's business leaders were able to create the necessary interest with the B2B entity and negotiations began. Over the course of those negotiations Big Co's patent attorney created a very complex license arrangement to license the patented technology.
The arrangement consisted of a single agreement providing a license directly to the B2B entity for a specific sum to be collected from each sublicensee interested in the technology. The sublicensees consisted of each distributor that was willing to enter the agreement under the terms negotiated with the B2B entity. Each distributor in turn had to acknowledge this arrangement by entering a written agreement acknowledging the arrangements between each party. These sublicenses were in turn signed by Big Co and the B2B entity to tie up all loose ends. Due to the nature of this business it was contemplated that some of the products would have the patented feature whereas some would not. A complex and detailed structure was specified to address this, including sliding royalty scales, most favored nations clauses, etc. Although one could certainly argue the complexity of this arrangement was unnecessary, as Mike said it seemed to work for those sublicensees who signed.
Meanwhile Big Co's competitor was not sleeping. Due to the nature of the industry, the competitor had access to the same distributors and learned that those who did not enter the above license arrangement were interested in working with the competitor. After some time, Big Co filed a lawsuit against this competitor for patent infringement. This lawsuit was handled by a major patent litigation firm, which in turn was overseen by the litigation department at Big Co, and after many months and much money, just prior to trial, a settlement between the parties was signed.
The settlement provided the competitor with a world wide license for the patents. Past infringement was forgiven for a settlement amount and future royalties were dependent upon product lines, upon which type of technology was used, upon which claims in which patents were impacted, etc. Again the terms of this settlement, like the license, were very complicated and required one to undertake a great deal of analysis to determine whether a product was covered by the settlement and what royalty if any was due. Moreover, after a period of about three to five years from the settlement date the license would convert to a royalty free license.
Somewhere during this entire time, one of Big Co's business units not connected to any of the above matters was attempting to work out a deal with another major account. In order to coax this account into entering this deal which would prove very lucrative for that business unit, it was decided that a royalty free license would be given to these patents to sweeten the deal. With that, the deal was signed and the final nail was hammered into the coffin of this IP.
After hearing this story I was stunned. How could a company of Big Co's size and with its leadership position that so obviously placed a high value on these patents when purchasing them a few years previously just lose control over them? The answer is quite obvious. There was no central oversight, no overriding strategy on how best to monetize the patents, no single person who knew what was going on. In this case they had the patent attorney structure the license, the litigation team handle the lawsuit, and the business unit work with an in house general attorney to hammer out the business deal since other than a single license clause there was nothing more on IP. The result was that no one talked to anyone else nor did any of them fully appreciate that other agreements were being penned, each of which could and in this case did impact terms with previously licensed parties. From what Mike told me, certain of these distributors learned of others having royalty free licenses. In short order Big Co was forced into giving all parties royalty free licenses.
Mike and I discussed how this could have been averted. My answer was to create some form of central oversight. This oversight should not be a function of the legal department but should be a high level business function. Many people, including myself, suggest the creation of a Chief Intellectual Property Officer who would ensure that the overall business objectives and strategy are being followed and that the appropriate IP protection is put into place to maximize market position and value. Such a function could readily be handled by a business person who wears a legal hat, but I do not believe that a legal person wearing a business hat would suffice.
Although I did make some headway with Mike in explaining that his patents could have reaped profits in a manner consistent with his original beliefs, I think it may take a few more dinners and some good examples to completely convince him.
Scott's blog post:
A short while ago I had an interesting conversation with an out of town acquaintance named "Mike" who works at a large international B2B ("business to business") corporation. I was interested to find out that his opinion was that patent protection was useless in the B2B field. It seems that since his consumer base is much smaller than a B2C ("business to consumer") business he believes the nature of the business requires deals to be cut and IP is often a nuisance to be worked around.
As we continued to talk I learned that he was the lead inventor on a couple of critical and groundbreaking patents in his field. In fact, it seems that a few years earlier he had been a major shareholder in a relatively small corporation when he received the patent grants. At that time he believed they held great value to his company. As he tells it, his present employer acquired his former company predominantly in order to procure these very same patent rights.
I at first assumed that his opinion was driven by feelings real or imaginary of being slighted by his present employer with respect to these patents for any number of potential reasons. However as we continued our discussion I was shocked to learn what had actually happened. It seems that the company which had bought the patents for the purpose of building value for itself and carving out a niche it could wield against its biggest competitor in fact had inadvertently destroyed the value of the patent family. As we discussed the details the following story unfolded--
In the B2B category where Mike and these companies exist, it was quickly recognized that the patents were a revolutionary and innovative gem. Mike's current employer, Big Co. did successfully acquire his former company and hence the patents for a sum in the high 7 to low 8 figures. At once Big Co's patent attorney added them to the company's patent portfolio and the business leaders began to push the technology onto their customers.
For Big Co to reap the most benefit from this technology it needed to license the patents to a number of distributors who would in turn sell to the end consumers. However these distributors were represented by Big Co's actual customer, a single overarching B2B entity, and Big Co had to work through this entity. Big Co's business leaders were able to create the necessary interest with the B2B entity and negotiations began. Over the course of those negotiations Big Co's patent attorney created a very complex license arrangement to license the patented technology.
The arrangement consisted of a single agreement providing a license directly to the B2B entity for a specific sum to be collected from each sublicensee interested in the technology. The sublicensees consisted of each distributor that was willing to enter the agreement under the terms negotiated with the B2B entity. Each distributor in turn had to acknowledge this arrangement by entering a written agreement acknowledging the arrangements between each party. These sublicenses were in turn signed by Big Co and the B2B entity to tie up all loose ends. Due to the nature of this business it was contemplated that some of the products would have the patented feature whereas some would not. A complex and detailed structure was specified to address this, including sliding royalty scales, most favored nations clauses, etc. Although one could certainly argue the complexity of this arrangement was unnecessary, as Mike said it seemed to work for those sublicensees who signed.
Meanwhile Big Co's competitor was not sleeping. Due to the nature of the industry, the competitor had access to the same distributors and learned that those who did not enter the above license arrangement were interested in working with the competitor. After some time, Big Co filed a lawsuit against this competitor for patent infringement. This lawsuit was handled by a major patent litigation firm, which in turn was overseen by the litigation department at Big Co, and after many months and much money, just prior to trial, a settlement between the parties was signed.
The settlement provided the competitor with a world wide license for the patents. Past infringement was forgiven for a settlement amount and future royalties were dependent upon product lines, upon which type of technology was used, upon which claims in which patents were impacted, etc. Again the terms of this settlement, like the license, were very complicated and required one to undertake a great deal of analysis to determine whether a product was covered by the settlement and what royalty if any was due. Moreover, after a period of about three to five years from the settlement date the license would convert to a royalty free license.
Somewhere during this entire time, one of Big Co's business units not connected to any of the above matters was attempting to work out a deal with another major account. In order to coax this account into entering this deal which would prove very lucrative for that business unit, it was decided that a royalty free license would be given to these patents to sweeten the deal. With that, the deal was signed and the final nail was hammered into the coffin of this IP.
After hearing this story I was stunned. How could a company of Big Co's size and with its leadership position that so obviously placed a high value on these patents when purchasing them a few years previously just lose control over them? The answer is quite obvious. There was no central oversight, no overriding strategy on how best to monetize the patents, no single person who knew what was going on. In this case they had the patent attorney structure the license, the litigation team handle the lawsuit, and the business unit work with an in house general attorney to hammer out the business deal since other than a single license clause there was nothing more on IP. The result was that no one talked to anyone else nor did any of them fully appreciate that other agreements were being penned, each of which could and in this case did impact terms with previously licensed parties. From what Mike told me, certain of these distributors learned of others having royalty free licenses. In short order Big Co was forced into giving all parties royalty free licenses.
Mike and I discussed how this could have been averted. My answer was to create some form of central oversight. This oversight should not be a function of the legal department but should be a high level business function. Many people, including myself, suggest the creation of a Chief Intellectual Property Officer who would ensure that the overall business objectives and strategy are being followed and that the appropriate IP protection is put into place to maximize market position and value. Such a function could readily be handled by a business person who wears a legal hat, but I do not believe that a legal person wearing a business hat would suffice.
Although I did make some headway with Mike in explaining that his patents could have reaped profits in a manner consistent with his original beliefs, I think it may take a few more dinners and some good examples to completely convince him.
Thursday, April 2, 2009
Entrepreneurs: Ask 2 Simple Questions to Determine Whether IP Strategy is Critical to Your New Business Venture
Intellectual property ("IP") is often a subject that is "out of sight, out of mind" for entrepreneurs who are launching new business ventures. And, why shouldn't it be: business schools rarely teach much about law in general, let alone about the highly specialized world of IP law. Since non-business school trained entrepreneurs generally take their cues from the methods of their colleagues, it follows that a significant majority of entrepreneurs likely do not consider IP to comprise a necessary step when they are formulating their business plans. My conversations with entrepreneurs from all backgrounds over the years bears this out.
When IP does form a fundamental basis of an entrepreneur's new venture, it is likely because scientific or technical subject matter forms the basis of the business. In this context, it makes sense that the scientific or technical core of the business model must be protected by seeking patent coverage. While patents are significant in this context, in my opinion, this is a far too narrow view of when a new entrepreneurial concept requires IP protection, however.
Put simply, proper formulation of IP strategy requires an entrepreneur to determine whether she should obtain one or more patents. Rather, prior to launching her new business venture, an entrepreneur must identify whether her business plan requires one or more forms of IP protection in order to allow her to meet her goals.
While IP can seem somewhat arcane and impenetrable to people who have not been trained in this specialized legal area, fortunately, formulation of an IP strategy requires an entrepreneur to ask just two simple questions:
As for the second question, most entrepreneurs will agree that it would be difficult for them to succeed in their goals if a competitor were able to copy the differentiated aspects of their business model. In answering "yes" to each of these questions, the entrepreneur should understand that an executable IP strategy should form an essential aspect of their business plan preparation.
It is important to clarify here exactly what I mean by "IP strategy." Significantly, IP strategy does not necessarily mean that the entrepreneur's end goal is to obtain enforceable IP rights, whether a patent or otherwise. Rather, an IP strategy centers on understanding whether and how protection of the differentiated aspects of the business model will enhance the enterpreneur's ability to achieve her goals.
With regard to patents, the IP strategy may indicate that it may not be cost effective to obtain a patent, but that filing of an application may nonetheless provide significant competitive protection. For example, because it takes many years and significant expense to see a patent through to the end in most technologies, it would not make sense for an entrepreneur to seek rights when the business model is expected to significantly evolve over time. In this instance, by the time the patent issues, it likely will not actually cover the products, technology or services of the company. Even so, the IP strategy formulation may indicate that it would nonetheless be valuable for the entrepreneur to provide her competitors with the perception that she is seeking to obtain a patent on some aspect of the business model.
To this end, the entrepreneur might wish to file an application with the full expectation that it may not issue as a patent. Such a filing will allow the entrepreneur to advertise that her business involves "patent pending" technology. I have found that in some industries the use of "patent pending" can assist in keeping competition at bay and can substantially assist in a company's marketing efforts. This "patent pending" IP strategy can be accomplished fairly cheaply if undertaken by a strategically focused IP attorney. The end goal with such an IP strategy is not to obtain an enforceable rights at the end but, rather, to leverage the "patent pending" to potentially reduce competition or give a product or service greater marketplace cache.
Moreover, by applying an under-utilized provision of US patent law, the entrepreneur can request that the application remain unpublished, a technique that will effectively keep her competitor in the dark about what she may be seeking protection on and whether she is likely to prevail. The uncertainty afforded by the unpublished application may be enough to keep potential competition away from the entrepreneur's growing business. Thus, the end goal of this IP strategy effectively serves as a shield against competition, rather than a sword to sue others for infringement.
Another way for an entrepreneur to use IP strategy to protect the differentiated aspects of her business model is to include brand equity development in the earliest stages of the launch of the venture. This brand equity must be associated with strategic trademark and service mark filings. As the business becomes more successful, consumers will increasingly associate the strong brand with the entrepreneur's product, technology or service. Successful strategic protection of a brand will hopefully result in the entrepreneur's solution being the go-to brand.
One example of an entrepreneur's establishing immeasurable value from developing brand equity is the LifeLock identity theft prevention product. This company was not the first to offer a product of this type; rather, it was the first to offer a $1MM guarantee that a purchaser would not experience identity theft as long as she paid $10 a month to LifeLock. Interestingly, LifeLock provides identity theft protection services in ways analogous to those of its competitors, both those coming before and after. This guarantee served as the basis of LifeLock's competitive differentiation.
Notably, the LifeLock guarantee could not be protected by a patent. Instead, LifeLock's owner (Todd Davis) decided to advertise the guarantee and build his company's brand equity around it. To this end, Mr. Davis flooded the airwaves with commercials in which he recited his social security number as proof that his company's product was foolproof--so foolproof, in fact, that he was willing to give the $1MM guarantee. Today, it is likely hard for many potential purchasers of identity theft protection products to think of going anywhere else than the company "where the owner tells us his social security number." The entrepreneurs responsible for the successful launch of LifeLock realized that the guarantee made them different from their competitors and made sure that the company's marketing strategy was focused toward ensuring that the public associated that guarantee only with LifeLock.
There are many other ways for an entrepreneur to protect the differentiated aspects of her business model from competition using IP strategy. Further illustrative examples include strategic agreements and first mover advantage. Indeed, there are likely as many ways to protect a business model from competition as there are business models. The key is for entrepreneurs to fully engage with the need to include IP strategy in their business plans and to ensure that they execute on that IP strategy. Put simply, IP strategy is not about getting IP as an ultimate end goal. Rather, IP strategy can ensure that the entrepreneur's business model not only provides a competitive advantage but that it is also sustainable.
When IP does form a fundamental basis of an entrepreneur's new venture, it is likely because scientific or technical subject matter forms the basis of the business. In this context, it makes sense that the scientific or technical core of the business model must be protected by seeking patent coverage. While patents are significant in this context, in my opinion, this is a far too narrow view of when a new entrepreneurial concept requires IP protection, however.
Put simply, proper formulation of IP strategy requires an entrepreneur to determine whether she should obtain one or more patents. Rather, prior to launching her new business venture, an entrepreneur must identify whether her business plan requires one or more forms of IP protection in order to allow her to meet her goals.
While IP can seem somewhat arcane and impenetrable to people who have not been trained in this specialized legal area, fortunately, formulation of an IP strategy requires an entrepreneur to ask just two simple questions:
- What aspects of my business model differentiate me from my competitors?
- Would I find it difficult to meet my goal and obtain my desired payback if someone copied the differentiated aspects of my business model?
As for the second question, most entrepreneurs will agree that it would be difficult for them to succeed in their goals if a competitor were able to copy the differentiated aspects of their business model. In answering "yes" to each of these questions, the entrepreneur should understand that an executable IP strategy should form an essential aspect of their business plan preparation.
It is important to clarify here exactly what I mean by "IP strategy." Significantly, IP strategy does not necessarily mean that the entrepreneur's end goal is to obtain enforceable IP rights, whether a patent or otherwise. Rather, an IP strategy centers on understanding whether and how protection of the differentiated aspects of the business model will enhance the enterpreneur's ability to achieve her goals.
With regard to patents, the IP strategy may indicate that it may not be cost effective to obtain a patent, but that filing of an application may nonetheless provide significant competitive protection. For example, because it takes many years and significant expense to see a patent through to the end in most technologies, it would not make sense for an entrepreneur to seek rights when the business model is expected to significantly evolve over time. In this instance, by the time the patent issues, it likely will not actually cover the products, technology or services of the company. Even so, the IP strategy formulation may indicate that it would nonetheless be valuable for the entrepreneur to provide her competitors with the perception that she is seeking to obtain a patent on some aspect of the business model.
To this end, the entrepreneur might wish to file an application with the full expectation that it may not issue as a patent. Such a filing will allow the entrepreneur to advertise that her business involves "patent pending" technology. I have found that in some industries the use of "patent pending" can assist in keeping competition at bay and can substantially assist in a company's marketing efforts. This "patent pending" IP strategy can be accomplished fairly cheaply if undertaken by a strategically focused IP attorney. The end goal with such an IP strategy is not to obtain an enforceable rights at the end but, rather, to leverage the "patent pending" to potentially reduce competition or give a product or service greater marketplace cache.
Moreover, by applying an under-utilized provision of US patent law, the entrepreneur can request that the application remain unpublished, a technique that will effectively keep her competitor in the dark about what she may be seeking protection on and whether she is likely to prevail. The uncertainty afforded by the unpublished application may be enough to keep potential competition away from the entrepreneur's growing business. Thus, the end goal of this IP strategy effectively serves as a shield against competition, rather than a sword to sue others for infringement.
Another way for an entrepreneur to use IP strategy to protect the differentiated aspects of her business model is to include brand equity development in the earliest stages of the launch of the venture. This brand equity must be associated with strategic trademark and service mark filings. As the business becomes more successful, consumers will increasingly associate the strong brand with the entrepreneur's product, technology or service. Successful strategic protection of a brand will hopefully result in the entrepreneur's solution being the go-to brand.
One example of an entrepreneur's establishing immeasurable value from developing brand equity is the LifeLock identity theft prevention product. This company was not the first to offer a product of this type; rather, it was the first to offer a $1MM guarantee that a purchaser would not experience identity theft as long as she paid $10 a month to LifeLock. Interestingly, LifeLock provides identity theft protection services in ways analogous to those of its competitors, both those coming before and after. This guarantee served as the basis of LifeLock's competitive differentiation.
Notably, the LifeLock guarantee could not be protected by a patent. Instead, LifeLock's owner (Todd Davis) decided to advertise the guarantee and build his company's brand equity around it. To this end, Mr. Davis flooded the airwaves with commercials in which he recited his social security number as proof that his company's product was foolproof--so foolproof, in fact, that he was willing to give the $1MM guarantee. Today, it is likely hard for many potential purchasers of identity theft protection products to think of going anywhere else than the company "where the owner tells us his social security number." The entrepreneurs responsible for the successful launch of LifeLock realized that the guarantee made them different from their competitors and made sure that the company's marketing strategy was focused toward ensuring that the public associated that guarantee only with LifeLock.
There are many other ways for an entrepreneur to protect the differentiated aspects of her business model from competition using IP strategy. Further illustrative examples include strategic agreements and first mover advantage. Indeed, there are likely as many ways to protect a business model from competition as there are business models. The key is for entrepreneurs to fully engage with the need to include IP strategy in their business plans and to ensure that they execute on that IP strategy. Put simply, IP strategy is not about getting IP as an ultimate end goal. Rather, IP strategy can ensure that the entrepreneur's business model not only provides a competitive advantage but that it is also sustainable.
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