At the heart of policy disputes over standard essential patents is a simple truth: Companies whose products depend on standardized technologies want to increase their profit margins by cutting input costs – the royalties they pay to use standardized technologies invented and patented by other companies.
In other words, policy conflicts over standard essential patents (SEPs) tend to pit implementing companies against inventing-and-licensing companies, one business model against another.
So when in the course of patent policymaking it becomes necessary to examine the worthiness of alleged scholarship about SEPs, a decent respect for the consumers and markets ultimately affected requires policy makers to examine the scholarship’s origin and separate fact from advocacy.
Such is the case for a new “working paper” that entered the standards debate last month with a controversial thesis that generated headlines and a lot discussion in patent circles. Its title: “The Smartphone Royalty Stack: Surveying Royalty Demands for the Components Within Modern Smartphones.” Its authors: Ann Armstrong, associate general counsel at Intel, as well as Joseph J. Mueller and Timothy D. Syrett, two lawyers at Wilmer Cutler Pickering Hale & Dorr who work for Intel.
~ When your enemy’s making mistakes, don’t interrupt him. Billy Beane (General Manager of the Oakland A’s) in Moneyball
~ Can’t anybody here play this game? Manager Casey Stengel in anguish over his 1962 New York Mets. The team went 40-120– the most losses by any team since 1899.
As an avid baseball fan nothing makes me crazier than seeing my team lose because of dumb unforced errors. And anyone who follows the Pittsburgh Pirates has seen more than their share of these (like on Friday the 13th under a full moon when our pitchers walked 6 batters in the 9th inning blowing a comfortable lead). Countries, like sports teams, make inexplicable unforced errors leading to loses that are a lot more significant than just losing a game. Two recent articles and one anecdote caution that if the US loses its technological lead it could be because of our own blunders rather than what our competitors are doing.
The first article illustrates the significance of one of our greatest resources: our unequalled system of publicly supported R&D. Patents as proxies: NIH hubs of innovation published in the June edition of Nature Biotechnology documents the tremendous potential federally-funded inventions have to help move the life science industry forward. Of course, potential is a double edged sword: every day teams with more potential lose to those who play the game smarter, avoiding unforced mistakes.
Patents as proxies looks at medical innovation which employs one million Americans, generates $84 billion in wages and salaries and $90 billion in exported goods and services. The U.S. biomedical industry dominates the world largely because of successful partnerships between our public and private sectors. Taxpayer supported inventions made in universities and federal laboratories are licensed under the Bayh-Dole Act to the private sector for commercial development. The article notes the resulting impact as universities created 1.7 new companies per day and 657 new products from their patent licensing in 2010 alone. It estimates “that approximately 30% of the total value of NASDAQ has roots in academic research.”
Several weeks ago I had the opportunity to speak with Jane Muir, who now serves as President of the Association of University Technology Managers (AUTM). At the time of our conversation there had been a number of so-called “news reports” that were characterizing universities as trolls. That, of course, is utter nonsense. The role of the university is to push technologies into the marketplace and work with those who license university innovation, which is the antithesis of what a patent troll does. Still, some in the popular press who obviously have their own agenda see it otherwise, which is both curious and sad.
In this segment of the interview we talk about concerns over patent trolls and Muir explains exactly how and why universities are NOT patent trolls. To begin reading from the beginning please see Exclusive Interview with AUTM President Jane Muir.
QUINN: There’s this belief that innovation just happens. And that if you do come up with a great invention it’s 1, 2, 3 and you’re done and there’s going to be checks starting to arrive. And you’re going to be laying on a beach somewhere living a life of luxury. And that’s just not true. It’s not true for the individual, it’s not true for the startup, and it’s not true for the university.
MUIR: That’s absolutely correct. When you talk to an entrepreneur as an investor and the entrepreneur shows their plan with how long it’s going to take or how much money it’s going to require, you always take that and multiply by two or three, right?
QUINN: Exactly, because things are going to go wrong. Estimates are going to be wrong. I remember the first business I ever started. And this is, you know, many, many, many years ago. It was a shock to me that the electricity cost more when it was being sold to a business. Just silly things like that, you know, that if you’ve never started a business you don’t really understand that on every level, no matter how insignificant, it seems there’s a hurdle.
Recently IPWatchdog.com published an article that cited the work we do at the Infectious Disease Research Institute (IDRI) as an example of how dedicated individuals and corporations can work together to transform science into global health solutions. By integrating capabilities, we strive to create an efficient pathway to bring scientific innovation from the lab to the people who need it most.
I write today to explain more about what IDRI does and why leveraging spin-out companies supports global health initiatives.
One of the most important engines in populating and growing the life sciences sector within the United States is the practice of universities spinning out new technologies into startup biotechnology companies. This, in turn, drives the development of new drugs, vaccines and other much-needed health products.
Regardless of the number of patent reform bills, IP industry conferences, and risk management business models, the number of patent infringement lawsuits remains exceptionally high. Resolving disputes through the inefficiencies of litigation represents an enormous waste of resources and lost opportunities. And this issue runs beyond the usual suspects—a GAO August 2013 report found that 80 percent of patent litigation is brought by manufacturing companies. Thus, IP games are being played on all sides, resulting in demon dialogues, negative patterns and quick escalations to legal actions. In order to foster productive discussions, both sides need to stop playing games and start being transparent and candid about their intent at each stage of an IP licensing discussion. This is a foundation for building trust, developing cooperative behaviors, and allowing business creativity that is critically needed in our knowledge based economy.
The dialogue begins with a demand letter from a patent rights holder, which can take the form of a soft invitation to enter into mutually beneficial licensing discussions or detailed allegations of patent infringement. Often times, the intent behind this letter is to seek a payment to compensate the patent rights holder for the commercial exploitation of its patented technologies by the receiving side of the letter, not to stop the exploitation. There is nothing condemnable in this intent– trading IP rights offers a way to support the broad dissemination of technological advancements, which in turn create rewards for investments in innovation and job creation. These IP trades are so common that seasoned IP executive speak regularly about “IP monetization” or “IP value creation” in trade associations (e.g., the Licensing Executives Society) and conferences (e.g., the IP Business Congress).
It’s no secret that the regulatory environment is challenging for companies that license patents – in our case, patents that are deemed essential to wireless standards and that our company, InterDigital, has developed in-house over the course of multiple decades, and continues to develop today. Some of the companies that dominate the wireless market today had little or nothing to do with the development of the standards that have contributed so much to their success, so they make every effort to devalue standards participation. And many in Washington lend them a willing ear, and take up arms to wage their battle for them.
One of the greatest frustrations for me is that so much of this rests on a bedrock of total miscomprehension of how standards are developed, the enormous cost and risk of investing in standards development, the value that standards provide, and the kind of licensing practices that have made the market successful, benefitting everybody. Late last year in New York, I met with a reporter for one of the primary tech websites in the world, and he dismissed standards development. It became apparent he didn’t understand how the process worked at all. When we asked him how he thought these things got developed, he said that he “figured there must be an engineering organization somewhere that did it.” And this is from the legal correspondent of a major tech website, someone whose articles influence debate!
He didn’t realize that it was private sector companies – companies like ours – that committed significant engineering time and resources, and competed to develop the best solutions, and in so doing committed to licensing them fairly. So – for his benefit, should he read this, and for the benefit of anyone involved in the debate – I’ll describe our company’s story, and draw some conclusions about what should and shouldn’t be done to protect, foster and incent innovation that benefits everybody.
Image taken from US Patent No. 6,655,077 titled “Trap for a mouse”
To paraphrase the famous quote of Ralph Waldo Emerson, if you build a better mouse-trap the world will make a path to your door.
If only it were that easy!
Inventors and entrepreneurs frequently take this mouse-trap quote all too literally, thinking that if they make a better product it will sell and make them rich beyond their wildest dreams. Although inventors hate hearing this, the truth is that the invention is the easy part of the process because it is the only part of the entire cycle from idea to commercial success that is completely controlled by the inventor. Once you invent something market forces and the reality of life takes over. There are any number of reasons why an invention won’t make money even if it truly is unique and superior to available alternative solutions.
As any viewer of “Shark Tank” can attest, the variety of financial arrangements which are negotiated between inventor entrepreneurs and investors is broad. A final agreement is always the result of negotiation between the two parties. Unfortunately, many inventors go into the gunfight with a knife, so to speak, over-matched and under-prepared.
Unless you are a veteran of previous negotiation and thoroughly understand the potential value of your invention, you would be wise to engage the services of an attorney and/or a firm who has previously negotiated financial transactions for similar inventions. You don’t want to leave money on the table, nor do you want to have an unrealistic view of your work. Expert assistance can help you avoid either outcome.
The following descriptions are by no means exhaustive, but represent a sample of the strategies you might employ in order to monetize your work: