Topic 5: Patents, licensing and basic strategies

1. Topic 5: Patents, licensing and basic strategies • A. What is a patent? • B. Three distinct uses of IP as business tool • As a strategic tool to exclude rivals • As an asset to use in bargaining • As an asset to sell • C. Dangers • Poor choice of licensing strategy: the GIF patent • Gaming the system & changing legal norms • D. Buying patented technology • University/industry licensing: Founding of SUN Markets for technology

2. A. What is a patent? • Inventor gains right to exclude others for 17/20 years • Usually wants to exclude an imitator • Provides “incentives to innovate” • What the patent office does in the US • Non-obviousness (to someone schooled in the art) • Novelty (beyond what already is patented) • The patent examiner has LOTS of discretion (but is subject to later review by courts & *rarely* by own supervisors) • First to invent  first to file • Examples & other stories • Does anyone here have a patent in their name? Markets for technology

3. B. Patents as a busines tool to exclude rivals • The intended public policy behind patent systems • Frames traditional analysis & most examples • In practice: A variety of strategies • Clustering (e.g., Xerox in 1960s, Polaroid in 1970s) • Bracketing – sometimes w/an eye toward a later bargain (e.g., HP medical systems division) • Often used w/other mechanisms (to slow down rival) • Sometimes not used b/c disclosure required • Worldwide: disclosure 18 months after filing for patent & contesting of patents prior to issuing Markets for technology

4. B. Patents as an asset to be used in bargaining • Impede another firm’s “design freedom” • Holders of chip patents threaten Intel • Collect a pay-off through the threat of suit • Shut down another business w/preliminary injunction (e.g, the TI approach) • Collect royalties & damages after the fact (e.g., the Kodak/Polaroid suit) • Entry into cross-licensing deals & patent-pools • How big is your stack of patents? • Any way else to use it as a bargaining tool? Markets for technology

5. B. As a tool to collect revenue • Large firms w/large R&D labs • Classification s/w makes it easier not to “lose one” • Why license out and not exploit it themselves? • Generates revenue w/o hurting profits too much • Foreign market: Either b/c it is cheaper to trade in license than trade output or foreign firm understands local demand • The patent of more value to another firm (who already has key assets in place – e.g., biotech & big pharma) • The growth of niche firms (e.g., specialized engineering firms in chemicals or VCs in biotechnology) • A new trend: To control versions do not use patents • Sun & Java trademark Markets for technology

6. C. Dangers: poor licensing of patented technology • What happened to the GIF patent? • A patent within a standard format . . . What is LZW? What role does it have in GIF? • Why did CompuServe develop GIF in the first place? • Unisys’ June agreement • Costs/benefits of action • How was the license structured? • CompuServe’s 12/29 announcement • Costs/benefits of action • What position did they put themselves in? Markets for technology

7. C. Lessons from looking back • Did management blunder? • Public relations: Timing of actions/announcements • Business relationships with developers: Implicit norms about paying for IP when it is already widely in use • Was it worth the trouble? • To Unisys? To CompuServe? • Structuring licensing deal that makes sense • What would you do differently? • Matching the structure of the license w/structure of market Markets for technology

8. C. Another danger: Gaming the system • Sneak one by patent examiner • Biotech, computing and other young technologies • Find a sympathetic judge for a new ruling • Take advantage of changing norms • When are the courts an effective weapon? • The higher court tends to favor IP holders since 1982 • Lawsuits slow, but business cannot tolerance delay • Ex: Microsoft views lawsuits as cost of doing business • The future is cloudy: Patents for algorithms and Internet business methods???? Markets for technology

9. C. An example of shifting legal norms: Lotus/Borlund • Patenting at the edges of legal convention • An example: Lotus’s best case • Protect “look and feel” which they developed • It is popular b/c it is original • Borland’s best case • Method of operation • Enable interoperability • Risks/returns of this sort of strategy • On the edge of shifting norms • Legal maneuvering back and forth Markets for technology

10. D. Buying patented technology • Firms acquire technology • Through hiring knowledgeable personnel (e.g., SUN) • Through licensing a patent • Through investing in own talent and own R&D • Through acquisition of business unit (e.g., Cisco) • The trade-off b/w personnel/license • Own personnel may be necessary for smart licensing practices (e.g., complement not a substitute) • Lawsuits over trade secret (e.g., Walmart/Amazon). • Boundaries of non-compete clauses always challenged Markets for technology

11. D. An example: The founding of Sun Microsystems • Technological incubation at universities • Also at government labs • Who owns what? • Government funding and the Bayh/Dole Act • Move technology to the commercialization • Which is more mobile? Licensing or personnel? • Why did VC want the inventor & not just license? • What benefit goes w/hiring personnel? • What is the drawback with hiring personnel? Markets for technology

12. Learning points • Strategic use of patents • No cookbook • Possibilities for careless decision making • Licensing • Difficulties/possibilities for acquiring knowledge through market mechanisms • Dependence on legal norms • If you ever find yourself with one of these problems  hire a good lawyer! Markets for technology