Why Google Wins by Giving Away Patents to ‘Startups’ Willing to Join the LOT Network

By Kevin A. Rieffel
August 2, 2015

Google’s latest patent strategy is a brilliant tactic for them. Now, their executives and attorneys certainly do not need my applause—and their motivation is not necessarily based in Google’s philanthropic nature—but a close look at their new Patent Starter Program reveals an aggressive strategy that will invariably lead Google’s continued influence in the patent market. Whether you feel Google is the guardian of the galaxy, the evil empire, or something in between, we have to acknowledge this bold approach for what it is.

While I have no inside knowledge of the goings on in Mountain View, from the appearance Google is indeed giving away patents to small-ish tech firms who apply and agree to join the License on Transfer Network (“LOT”). Not only does this paint Google in a positive light as it continues its battle against the presumed evil patent “trolls,” but it promotes the LOT Network as an army of white knights.

Grabbing headlines such as “Google Offers To Give Away Patents To Startups In Its Push Against Patent Trolls,” is genius. However, even more valuable than good press is a plan that aims to radically shape the landscape of the patent market by encouraging patent transaction between operating companies and limiting the number of patents Non-practicing Entities (NPEs) have available to acquire and assert.

 

Google’s Patent Starter Program

According to Google, “startups or developers having 2014 Revenues between US$500,000 and US $20,000,000” are eligible to apply to review an offer for 3-5 patent families (selected by Google). Upon successful application (first 50 eligible companies), the chosen participant must then choose 2 of the offered patents and then join the LOT Network. Google, of course, retains a license to the patents (which can only be asserted defensively, i.e., after someone sues the participant first) and asks the participant stay in the LOT Network for 2 years or the patents revert back to Google. Also, Google gives the participant access to browse Google’s “inorganic patent portfolio” (i.e., acquired from third parties) with an eye towards selling and licensing more patents to the participant.

Now, we all remember in April that Google was buying patents through its Patent Purchase Promotion. The headlines referred to this program as “Outfoxing Trolls” and “Disarming Trolls by buying patents before they become weapons.” Google acquired patents from inventors and/or entrepreneurs who wanted to sell their patents to Google and gave the former owners a license to use their own inventions. Kurt Brasch, senior patent licensing manager at Google, told TechCrunch that Google “considered the [purchasing] experiment quite a success” and paid prices between $3,000 and $250,000 for patents.

 

Google’s Bigger Strategy – the LOT Network

While the purchase program was lauded as a way to get potentially problematic patents out of the hands of “trolls,” clearly it was part of a larger Google plan:

Step 1: Buy patents (i.e., Patent Purchase Promotion)

Step 2: Give patents away in exchange for participants joining the LOT Network

Step 3: Enjoy defending fewer patent infringement lawsuits

Without knowing what the LOT Network is, getting two free patents and their families sounds like a spectacular deal. It might be, depending on your situation. Last year, I blogged about the then-newly-formed LOT Network:

Silicon Valley has recently seen a handful of tech companies come together as the License on Transfer Network, a group hoping to disarm the “Patent Assertion Entities.” Joining the LOT Network comes via an agreement that creates a license for use of a patent by anyone in the LOT network once that patent is sold. The thought is that the NPEs who consider purchasing patents from companies in the LOT Network will have fewer companies to sue since the license to the other active LOT participants will have triggered upon the transfer and, thus, the NPEs will not be as inclined to “troll.” For instance, if a member-company such as Google were to sell a patent to a non-member company and an NPE bought that patent, the NPE would not be able to sue any members of the LOT Network with that patent.

The LOT Network Solution reveals the motivation:

By reducing the number of patents potentially available to PAEs, it mitigates the risk of costly litigation and allows such companies instead to focus on making and selling innovative products and services.

Google and friends really want to make the patent market cumbersome for PAEs. Because PAEs would likely stay away from purchasing patents with such severe limitations on potential assertion, the LOT Network hopes to limit the available patents to potential NPEs looking to purchase assets to monetize in licensing and litigation strategies. Joining the network does not give a license until a trigger sale of each patent and it certainly does not automatically prevent a member company from being sued by patent trolls. In a sense, non-members benefit from the LOT Network’s existence, too, because PAEs will likely avoid purchasing patents that are already licensed to multiple companies.

Secondarily, the apparent mission is to encourage patent sales between operating companies. There is a carve out for patents where if a non-member buys the patent and then is sued by a member for allegedly infringing another patent, non-member can suspend that member’s license. Furthermore, the license back to the members is not triggered for transfers occurring during a legitimate business spin-out or change of control to a “Non-Assertion Entity.” The LOT Network most clearly benefits companies looking to hold onto their patents until they expire and encourages the members to do the same.

The biggest disadvantage to joining is that a member company’s patents might lose value because they essentially forfeit the right to sell the patent to a large section of a potential market: NPEs. Any time someone cuts the size of the market for an asset, the price will naturally decrease. Moreover, limitations like prior licenses can reduce a patent’s value. As the license-on-transfer would attach to every patent in the member’s portfolio, even if the member leaves, joining the LOT Network and potentially lowering the value of all of your patent assets is a huge consideration.

Also worth remembering is that membership in the LOT Network will cost between $1,500 and $20,000 annually, based on the company’s revenue, after a two-year fee waiver. Like being gifted a pet, the company should aware that with these patents come annual membership fees, as well as any USPTO maintenance fees, that can potentially cancel out profit and growth.

 

Troll Slayer and Champion for the Startup Community?

The key transition is for Google to get from Step 2 to Step 3 in the plan outlined above. Google is looking to change the landscape of the patent market, not just for this generation of patents, but for the long term. April’s buying of patents that could potentially fall in the hands of NPEs might affect the business of patent trolls today or tomorrow, but by luring smaller companies to join the LOT Network with this program, Google hopes to keep as many patents as possible out of the hands of NPEs in the future.

Google likely does not do this altruistically. While Google has consistently been an outspoken critic of patent trolls, Google continues to accumulate its own patent assets and does not shy away from asserting them in court. Judging by their own press releases and news (and submitting reports to the FTC and Department of Justice), Google’s campaign against the patent troll is very much rooted in reducing its annual spending on litigation and damages.

Mega-sized tech companies have more to worry about from “trolls” than the litigation initiated by competitors and other operating companies because of the tactics and unpredictability. Patent litigation 101 teaches that if a patent infringement suit is filed by an operating company against one of the few gargantuan companies there are two main defense strategies for BigCo: (i) bleed the smaller guy dry in trial and IPRs and (ii) assert your own patents in retaliation. A large company fighting NPEs cannot use this second strategy as trolls do not practice anything, per se. Thus, litigation with NPEs is more worrisome to tech giants than suits between competitors—so hindering the PAEs’ patent acquisitions is a solid plan to reduce litigation costs for a large tech company.

 

Is the Patent Starter Program Good for My Company and/or the Startup Community?

What’s good for Google may not be necessarily good for you. First of all, your company has to qualify. Is a company with annual revenues between $500k and US $20MM really what we are considering a startup? Again, I give credit to Google for portraying the program as some sort of charity for startups— picture a “patent kitchen” ladling out soup for the struggling developers—but the three-man tech startup in the garage may not qualify just yet.

Like all things that may sound too good to be true, Google offering to give away 2 patent families brings certain obligations to a participant. By taking the Patent Starter Program patents now, a participant is bound to “License on Transfer” any of the participant’s other patents (even in the future). Any sale involving the participant’s patents may have a limited market because of the potential for a triggering event that would allow (a) anyone in the LOT Network to use them freely and (b) any future owner of the two given patents can only assert them defensively.

Google offers the main incentive for accepting the patents as “when a prospective investor may ask [a startup] how they are protecting their ideas (‘You don’t have any patents???’).” Anyone who has watched Shark Tank (like John Oliver) will echo that sentiment. Tech companies with $500k-20MM in annual revenue should already have a patent portfolio. While taking these patents now could attract investment at an early stage, joining the LOT Network without careful consideration could potentially handcuff a company’s self-made patents and future IP portfolio. Google wisely encourages participants to speak with an attorney because of the significant contribution the participant provides to the LOT Network.

So, for a true startup with no patents it is definitely worthwhile to investigate, but to current patent owners taking the patents from Google could potentially be a poison pill for your portfolio—especially for a growing company who may need to use a patent as collateral for a loan (or sell it) to provide some liquidity. On the other hand, the LOT Network is not without its benefits. Executives and counsel would be remiss not to consider applying and bringing in someone skilled such as the experts at TechPats, to evaluate the offered patents and balance the potential risks to your currently owned patents and future technology development. 

 

This is provided for informational purposes only, and does not constitute legal or financial advice. To the extent there are any opinions in this article, they are the author’s alone. The strategies expressed are purely speculation based on publicly available information. The information expressed is subject to change at any time and should be checked for completeness, accuracy and current applicability. For advice, consult a suitably licensed patent professional.

The Author

Kevin A. Rieffel

Kevin A. Rieffel a registered patent attorney with Haley Guiliano LLP. Kevin’s focus is on patent preparation and prosecution, portfolio development, and IP licensing and litigation strategy. Kevin almost exclusively reads and contributed to blogs on IP news and policy, high school swimming, and Georgetown basketball.

For more information or to contact Kevin, please visit his Firm Profile Page.

Warning & Disclaimer: The pages, articles and comments on IPWatchdog.com do not constitute legal advice, nor do they create any attorney-client relationship. The articles published express the personal opinion and views of the author and should not be attributed to the author’s employer, clients or the sponsors of IPWatchdog.com. Read more.

Discuss this

There are currently 4 Comments comments.

  1. Anon August 2, 2015 11:44 am

    In respect to Gene’s penchant for science fiction, the phrase that comes to mind first as I scanned this article was the ominous:

    “You will be assimilated.”

  2. Gene Quinn August 2, 2015 12:56 pm

    Anon-

    Yes, it sometimes does certainly feel that way. Of course, it felt that way in the 1990s with Microsoft as well. I think Google’s stagnant innovation and chasing things not where they have specialty marks the beginning of the inevitable decline. Time will tell.

    -Gene

  3. Pro Se August 3, 2015 10:03 am

    The best thing about owning the first portfolio in an innovation genre is there’s no patents that can be sold to one of my defendants that can be used to counter sue me and my products.

    The patent system was around before Google and it will be around after them. For real IP still out here in the market, this Google move does nothing but gives them some PR to hide the fact that they are the biggest IP infringers in history.

    And to remind you, an Ex-Googler is running the USPTO… only in America could a government be so naive.

  4. Mr. V August 3, 2015 2:03 pm

    I think the Google “LOT” network would appeal mostly to the unsophisticated startup. With today’s boom in the app-based tech industry, it’s some what hard to believe that there could be a serious startup out there that is completely naked when it comes to organic IP; though I know they exist. Investors find assurance in patents because (a) they provide a good indication to idea novelty and (b) the exclusivity helps to ensure a profitable return on investment. Bottom line, if your idea isn’t novel enough to qualify for the protections afforded by Patents and Copyrights then maybe it isn’t that groundbreaking and the LOT route seems like a good option. On the other hand, if you have some good self-generated IP, why would you want to dilute the value of your portfolio via compulsory licensing? That’s where the MONEY is; not to mention handcuffing all of your future generated IP.