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Mining Patent Gold: What Every CEO Should Know


Written by Marshall Phelps & John Cronin
Posted: September 15, 2011 @ 2:30 pm
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In the weeks since Google acquired Motorola Mobility and its 17,000 patents for $12.5 billion, the media has engaged in an orgy of hand-wringing over a supposedly “broken” patent system that diverts resources away from innovation and towards litigation instead.

Ignore the histrionics. What the Google-Motorola deal actually proves is that innovation — and its embodiment in intellectual property — is more valuable and necessary than ever for market success. What’s more, patents are no longer simply akin to mining claims that give one the exclusive right to pan for gold. In many cases, patents are the gold itself.

But first, let’s debunk some myths about our supposedly-“broken” patent system. The truth is that the number of patent infringement suits each year has held steady for seven years, at just under 3,000. Ninety percent of these suits are abandoned or settled, and of the 300 that remain, two thirds never go to trial but are adjudicated on pre-trial motion.

What we are left with, then, are about 100 patent infringement trials per year, the same number that went to trial a decade ago. This is pretty modest for a nation with two million active patents and hundreds of thousands of companies competing with each other on a daily basis.

“It’s not excessive at all,” concurs Paul Michel, retired Chief Judge of the U.S. Court of Appeals for the Federal Circuit, which handles patent appeals. “Not in a technology economy.”

To be sure, we are plagued by a new type of patent litigant these days —so-called “patent trolls” — who buy up questionable patents in hopes of extracting payments from deep-pocketed firms eager to avoid the expense of a trial. But remember that any free and open legal system like ours is inevitably going to be subject to a certain number of abusive “holdup” suits — and not just by “patent trolls,” either, but by “product liability trolls,” “medical malpractice trolls,” and “shareholder fraud trolls” as well. Just watch the ads on late-night TV and you’ll see that the lure of making a quick buck by suing someone — anyone! — is, unfortunately, as American as apple pie. That’s the price we pay for allowing everyone unfettered access to the courts.
But the bigger problem with the “litigation defense” explanation for why Google bought Motorola is that a large percentage of Motorola’s patents — perhaps even a preponderance — are enmeshed in a worldwide web of licenses, cross-licenses, patent pools, and standards activities that tend to undermine any offensive or defensive value they offer in litigation.

The truth is that Google bought a great deal more than patents when it acquired Motorola, though there are doubtless some real gems in the Motorola portfolio. As a relative newcomer to the wireless arena, the search giant in one bold move got its hands on the unmatched innovation experience of the longest-lived mobile phone company on earth. The technical acumen and product experience of those thousands of mobile software and hardware engineers will prove hugely valuable to Google as it seeks to dominate the $250 billion global market in smartphones, especially if it decides to become a handset maker as Motorola had been.

From this viewpoint, then, the Google-Motorola offers important lessons for CEOs.

First, make sure your intellectual property strategy serves your business strategy. You’d be surprised how many once-great companies simply churn out patents on automatic, without regard for where the business needs to innovate and grow.

But even where companies do try to align their intellectual property strategy with their business strategy, market conditions can change very quickly. If you doubt that, just remember how yesterday’s leader in cell phones, Nokia, became today’s laggard in smartphones — and how in only two years netbooks went from the Next Big Thing to “who cares?”

Two, once you know where your business needs to grow, build or buy the innovation and the supporting intellectual property that you’ll need to succeed. By securing patents in emerging new markets before your competitors get there — we call this “forward invention” — the patents serve as placeholders for the products and brands you will create. Start with the end goal in mind and set up rigorous patent processes that can ensure a place for your company in the most vital innovation arenas of tomorrow.

In Google’s case, the company could have spent years developing the internal capabilities needed to dominate tomorrow’s smartphone field — years that Apple was unlikely to give them. Instead, in one fell swoop, Google has gained many thousands of man-years of experience and put itself on a more equal footing with Apple.

Third, mine the gold within. There are hundreds of mature companies who have built strong portfolios of thousands of patents. Some of these firms license parts of these portfolios to other, usually non-competing, firms in exchange for millions of dollars in annual revenue. But a great many of them are sitting on a treasure trove of unused patents just gathering dust in their legal department’s filing cabinets, like long-forgotten Rembrandts in grandma’s attic.

In some cases, the patents may even be worth more than the operating company itself. Kodak is one example; there are certainly others. In other cases, though, a patent portfolio could provide the financial or strategic life raft that enables an old-line company to survive and transition into new and more successful lines of business.

Trust us, we know. Twenty years ago, when IBM faced bankruptcy, we turned Big Blue’s patent portfolio into a $2 billion a year revenue stream that helped the venerable firm survive and eventually prosper again, creating the patent processes used in many industries today.

[Marshall Phelps built and led the intellectual property operations at IBM and Microsoft. John Cronin was formerly IBM’s top inventor and ran its Patent Factory, and is today chairman and managing director of the ipCapital Group, an intellectual property consulting and licensing firm.]


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7 comments
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  1. The myth is further deflated (as has been noted a few times) when you consider that the numbr of suits per year must be divided by a different denominator – that of active patents available for which to bring suit against.

    When looked at in the light of litigation rate, it should be noted that the so-called “litigation storm” is a decreasong light mist.

    But ir is much more difficult to get worked up over a light mist.

  2. In highly competitive industries like smart devices, the speed at which you are able to execute is critical. By all accounts, Google increased their initial offer by 25% – 30% in the final two days in an effort to expedite the deal and mitigate threats from other potential acquirers. As the authors point out, a well thought out IP strategy that is supportive of the business strategy, along with a clear understanding of whether to build or buy (in this case buy), allowed Google to quickly enhance its position in this space.

  3. Good point, Blind Dogma.

    The actual litigation rate — the number of suits per the total number of active patents — has been declining steadily since 1995.

    So if anything, the 15-tear trend has been toward LESS patent litigation.

  4. Over the 15 year trend, has the average cost of litigation increased substantially?

    If so, could that be a strong contributing factor holding back an overall increase in the yearly number of new suits?

  5. I would imagine the cost has increased, just because that’s how things generally go in life and lawyersx always cost more than they did yesterday.

    But I doubt the cost increase was a major factor in constrraining the growth of litigation. Companies like Microsoft’ and Apple and HTC and Samsung all have litigation budgets in the $50m -$100m range — ample enough to sue whenever it suits (so to speak). As for ambulance chasers — er, I mean patent trolls — it costs very little to file a suit and hope for a settlement. The major costs come well into the litigation process, during discovery and afterwards.

  6. Both Marshall Phelps and John Cronin will be speaking at the upcoming 9th Annual ipCG Thought Leadership Conference (2-4Nov11 in Stowe VT). Come learn more about their views on IP, innovation, and recent changes to the patent system. More info here: http://www.ipcg.com/?file=ipcgconference

  7. Sorry for the late post, just wanted to take a minute to let you know you bring fantastic points and your entire article is in defense to a recent Book Review for the book entitled Don’t file a Patent. Our patent system is indeed not broke and 8 million patent goes to show that. See my blog: The Day the Patent Office Stood Still: 8,000,000 Patents, http://tinyurl.com/3fur4p3.
    Thanks!