How Important Are Patents for Big Oil?

What are patents worth? If one is to believe what was reported by The Economist in its August 3, 2013 issue ("Supermajordammerung"), the answer may be, at least for the huge integrated international oil companies, or "supermajors" (think Exxon or Royal Dutch Shell)—"less than you might think". The thrust of the article is summarized by its byline: ''The day of the huge international oil company is drawing to a close." The piece then goes on for three pages to support this conclusion. It is not our intention to evaluate the correctness of this overall conclusion. Rather, our focus is on the question—how does the article address intellectual property, in general, and patents, in particular, in reaching its conclusion? With an eye towards the role of patents and IP in the context of the present and future prospects of the supermajors, the gist of the article is as follows.

1. The supermajors are increasingly dependent upon oil reserves that are more difficult to access. "Their size, know-how and experience serve the companies well in such plays," the article observes. However, these companies are expending a greater share of their money "to produce less and less global oil output."

2. Growth in demand, if it is to happen, will take place in the emerging world. However, efficiencies in vehicle performance and the availability of alternatives mean that demand for oil for will not materially increase, if at all.

3. Moreover, so-called "national oil companies" (NOC) now make up six out of the ten largest oil companies in the world. As reported, "[s]ome of the NOCS still lack the know-how and the capital to get to their oil on their own, and thus seek out supermajors to help. ….But others can do everything for themselves …, they have learned what the supermajors have to teach them."

4. In addition, the NOCs are acting increasingly like oilfield service companies (think Haliburton or Schlumberger). Indeed, some are supporting in-house service-like firms "to offer other NOCs the know-how that once came from the big international oil companies."

5. According to the article, the supermajors have few viable options short of slimming down (becoming "smaller, fitter oil firms"). That said, "[r]eviving unique in-house technology might help."

The reader will notice a simple, salient fact—the word "patent" does not appear even once in the article. However, the article refers to "know-how" in various places, as summarized above. There seem to be two possible explanations for this. First, the piece is lumping patents and know-how together under the rubric "know-how" (maybe poetic licence, maybe poetic oversight). Secondly, the report is accurately describing the IP position of the supermajors, at least in connection with their continuing ability to discover, produce and sell substantial quantities of oil. As such, the ultimate IP strength of these companies lies more in their collective know-how rather than in their patent portfolios.

I do not have sufficient information about the oil industry to decide independently which of the two explanations is correct. That said, my natural preference (indeed intellectual reflex) is to assume that the article is accurate, and that it says what it means. Based on that assumption, my conclusion under the circumstances is that patents take a back seat to trade secrets and know-how in determining the overall IP contribution to these companies. This observation is not insignificant. In addressing IP management, there is a tendency to assume the "natural" primacy of patents. When is the last time that anyone of exalted rank ever approached know-how as worthy of much attention? To the contrary, attention to patent issues seem everywhere, whether the White House issuing a report on patent trolls and non-practising entities, here or the President overturning a trade ban recommended by the U.S. International Trade Commission on certain Apple smartphone because of patent infringement, here. Seemingly every where you look (or listen), when you talk IP, you necessarily mean "patents."

However, in summarizing the state of the oil supermajors, no explicit attention to patents is made. Rather, it is the accumulated proprietary knowledge and wisdom of these companies and the competencies that flow from such know-how, which is crucial. Presumably, when The Economist suggests that the supermajors would be well-advised to develop some "unique in-house technology", this reference is to know-how in its broadest sense, rather than a sudden surge in the size of these companies' patent portfolios. If so, then IP management literature on an industry such as oil (far from the spotlight of mobile connectivity) seems wanting. What we really need is increased attention to the nuanced relationship between patents and know-how in various settings. After all, when is the last time that we read of a patent-troll going after an Exxon or Royal Dutch Shell?

The Biotechnology Industry and the Choice to Patent or Rely on Trade Secrecy

The U.S. Supreme Court released its much anticipated decision in the Myriad case today.  Basically, the U.S. Supreme Court held that isolated DNA is not patentable subject matter.  While the U.S. Supreme Court apparently dealt a blow to some in the biotechnology industry, it did provide that cDNA could be patentable subject matter and the opinion carefully explained what it did not cover:

It is important to note what is not implicated by this decision. First, there are no method claims before this Court. Had Myriad created an innovative method of manipulating genes while searching for the BRCA1 and BRCA2 genes, it could possibly have sought a method patent. . . . Similarly, this case does not involve patents on new applications of knowledge about the BRCA1 and BRCA2 genes. Judge Bryson aptly noted that, “[a]s the first party with knowledge of the [BRCA1 and BRCA2] sequences, Myriad was in an excellent position to claim applications of that knowledge.  Many of its unchallenged claims are limited to such applications.”  689 F. 3d, at 1349. Nor do we consider the patentability of DNA in which the order of the naturally occurring nucleotides has been altered. Scientific alteration of the genetic code presents a different inquiry, and we express no opinion about the application of §101 to such endeavors. We merely hold that genes and the information they encode are not patent eligible under §101 simply because they have been isolated from the surrounding genetic material.

Notably, Myriad’s stock went up immediately after the decision and the stock did go back down by the close of the market.  And, at least one company has announced today it will offer BRCA testing for about a third of Myriad’s price.  My understanding is that many firms in the biotechnology industry have turned their back on patenting and have focused instead on trade secrecy (although a sound IP strategy surely includes both).  This supposedly has been happening for quite a while—maybe 5 years now.  I’ve been told that one reason firms are seeking to utilize trade secrecy instead of patents is because of the cost of patenting—particularly in seeking patent protection throughout the world.  The Myriad decision seems to further tilt the biotechnology industry towards trade secrecy with respect to some discoveries, but will it make that much of a difference?  In other words, the industry already was going down the trade secrecy path—does this decision push it a little faster down the road or does it have little to no impact?  (it matters to Myriad considering the way Myriad’s stock is going)  What about the signaling effect of patents?  If there is more reliance on trade secrecy over patents, does that mean that investors will have more difficulty ascertaining the expertise and value of small biotechnology companies? 

Who Owns the Firms That Own IP?

Jonathan Band and Jonathan Gerafi have recently released at infojustice.org(March 5, 2013) a paper entitled, “Foreign Ownership of Firms in IP-Intensive Industries.”  In this paper, the authors examine the question of whether firms in IP-Intensive industries are owned by US companies or are foreign owned.  The general finding of the authors is that, in fact, many if not most firms in IP-Intensive industries are foreign owned—perhaps contrary to popular belief and the belief of policymakers.  The interesting conclusion the authors draw is that, "IP policies adopted by [the US] Congress and the [US] Executive Branch may benefit foreign corporations at the expense of U.S. consumers.” 

The report lists the following “key findings”:

Four of the “Big Six” publishers, the largest English language trade publishers, are foreign-owned. More than 80 percent of the global revenue of the Big Six is generated by these foreign-owned companies.  These foreign-owned companies publish more than two thirds of the trade books in the U.S.

Four of the five largest STM (science, technical and medical)/Professional publishers are foreign-owned.

More than 90 percent of the revenue of the five largest STM/Professional publishers was generated by foreign-owned firms.

Only seven of the world’s 50 largest publishers of all categories are U.S.-owned.

The book publishing industry in Europe has approximately twice as many employees as in the United States.

Of the top ten best-selling fiction authors in any language whose work is still in copyright, five are foreign.

A British author wrote three of the top five best-selling books in the U.S. in 2012.

Two of the three major record labels are foreign-owned. These two labels have a market share of 59 percent.

Thirteen of the twenty best-selling recording artists are foreign.

Of the 50 most popular motion pictures in the United States in 2012, 50 percent were filmed partly or entirely outside of the United States.

In 2013, the Oscar winners in thirteen of 24 categories were foreign. In 2012, the Oscar winners in eleven of 24 categories were foreign.

Seventy percent of the most recent generation of game consoles were manufactured by Japanese companies. Japanese companies have manufactured 92 percent of all game consoles ever sold.

In 2011, foreign companies obtained 7,000 more U.S. patents than U.S. companies.

In 2011 and 2012, seven of the top ten companies receiving U.S. patents were foreign.

57 percent of the global revenue of the fifteen largest pharmaceutical companies was generated by foreign-owned companies.

The majority of the employees of both the U.S. and the foreign-owned pharmaceutical companies work outside of the United States.

And the paper states that:

Since 2008, foreign companies have obtained more U.S. patents each year than U.S. companies. . . .  Additionally, in 2011 the number of patents obtained by U.S. companies grew less than 1 percent, while the number of patents obtained by foreign companies grew more than 3 percent. . . .  A total of 29,220 U.S. patents were issued to the top 10 companies; 66 percent—19,319—were granted to foreign companies.

(Hat Tip to Professor Michael Carroll at American University Washington College of Law for notice about the paper.  Professor Carroll is also the Director of the Program on Information Justice and IP).

Patent valuation: how much does it cost?

A reader has contacted this weblog to ask the following request for information:

I need to know the typical or average fee charged to clients for "patent valuations." I have found a few Powerpoint presentations, papers, and the like downloaded on the Internet, which indicate a typical fee ranging from a low end of roughly $1,500 US per patent "family" for a so-called "internal" valuation (I assume this must be a "down and dirty" or bare bones valuation), up to about $40,000 per patent family for valuations done for banks, etc. I take it the latter would be the full-blown, more extensive approach, involving detailed market analysis and full pat scope studies, etc.

This blogger has no direct experience of patent valuation and imagines that the cost would be a function of various things: the methodology adopted, the nature of the patent(s) being valued, the magnitude and complexity of the prior art and even the purpose for which the valuation was sought. Can readers be of any assistance at all in giving some guidance in this matter?

The U.S. National Science Foundation I-Corps Program: The Goal is Commercialization

The I-Corps Program is a collaboration between the U.S. National Science Foundation [NSF], Kaufmann Foundation and Deshpande Foundationdesigned to help bring government funded—NSF funded—inventions to market.  As fellow blogger, Neil Wilkof has discussed, the valley of death is a real problem and a search for effective solutions is ongoing.  The I-Corps Program is another attempt to solve the problem.  The I-Corps Program started out on July 28, 2011 with a plan to fund 100 projects per year at $50,000 for each project.  Basically, the program has several parts:

There are three distinct components of I-Corps: Teams, Nodes and Sites. I-Corps Teams are composed of the principal investigator(s) (PI), an entrepreneurial lead (EL), and a mentor. The I-Corps Nodes serve as hubs for education, infrastructure and research that engage academic scientists and engineers in innovation; they also deliver the I-Corps Curriculum to I-Corps Teams. The I-Corps Sites are academic institutions that catalyze the engagement of multiple, local teams in technology transition and strengthen local innovation.

Here is the I-Corps Teams’ role:  

Over a period of six months, each I-Corps team, composed of the principal investigator, a mentor, and an entrepreneurial lead, will systematically identify and address knowledge gaps to ascertain the technology disposition: What resources will be required? What are the competing technologies? What value will this innovation add? The I-Corps program will also pilot innovative merit review processes through which promising discoveries emerging from NSF-funded research projects will be identified quickly and efficiently for financial support as well as for mentorship through the national network.

A key component of the program appears to be the required curriculum for all I-Corps teams based on a Stanford “Lean Launchpad” course that is described as “The I-Corps curriculum provides real-world, hands-on, immersive learning about what it takes to successfully transfer knowledge into products and processes that benefit society.  . . . [T]he entire I-Corps Team will be engaged with industry; talking to customers, partners, and competitors; and encountering the chaos and uncertainty of creating successful innovations. Getting out of the laboratory/university is what the effort is about.”  The Lean Launchpad course was developed by Stanford faculty member Steve Blank and is available online here via Udacity. 

According to Xconomy and TechnologyTransfer Tactics, the program is being expanded to include more than the original I-Corps I-Core Sites and/or Nodes—Stanford University, Georgia Tech and the University of Michigan.  Now UC Berkeley, UC San Francisco, University of Maryland, Virginia Tech, George Washington University, City University of New York, New York University and Columbia University will participate as I-Core Sites and/or Nodes.  Are there any similar programs in other countries?

 

Dogs and Cats Living Together? The New WIPO, WTO and WHO Book.

On February 5, 2013, WIPO, the WTO, and the World Health Organization issued a jointly authored book titled, “Promoting Access to Medical Technologies and Innovation – Intersections between public health, intellectual property and trade.”  The 253 page book is an ambitious one—tackling the intersection of innovation and access.  The press release states:

Today’s health policy‑makers need a clear understanding both of the innovation processes that lead to new technologies and of the ways in which these technologies are disseminated in health systems. This study captures a broad range of experience and data in dealing with the interplay between intellectual property, trade rules and the dynamics of access to, and innovation in, medical technologies.

The study is intended to inform ongoing technical cooperation activities undertaken by the three organizations and to support policy discussions. Based on many years of field experience in technical cooperation, the study has been prepared to serve the needs of policy‑makers who seek a comprehensive presentation of the full range of issues, as well as lawmakers, government officials, delegates to international organizations, non‑governmental organizations and researchers.

The book has four parts: 1) Medical Technologies: The Fundamentals; 2) The Policy Context for Action for Innovation and Access; 3) Medical Technologies: The Innovation Dimension; and 4) Medical Technologies: The Access Dimension.  The study is very complete and attempts to tie together a lot of different concepts, and generally does so well (although I know I need to spend more time with it).  Some interesting items in the report include: a statement that a goal of the report is to find some “policy coherence” between the three organizations and that the report was made in a spirit of cooperation began by the Doha Declaration, the WIPO Development Agenda, and the WHO Global Strategy and Plan of Action for Global Health; a specific section on traditional medicine and knowledge; a statement that “[t]he overarching condition for providing access to needed medical technologies and health services is a functioning national healthcare system”; a dizzying chart concerning Tanzania’s medical supply systems; placing the human right to health within the intellectual property law context; and a helpful table breaking down pharmaceutical related provisions in FTAs.

On the Bayh-Dole Act and similar policies, the report states:

Such policies, and a general trend towards more active management of technologies created through publicly funded research, are leading to the steady accumulation of publicly held patent portfolios, including on key upstream technologies that provide platforms for a range of new medical technologies.

This report appears to be a great step toward harmonizing a lot of concepts in public health and intellectual property.  There is no question that trying to find solutions to the problems outlined in the report requires expertise in a lot of different areas and much collaboration. 

Basic Research – Soon to be a Thing of the Past?

One concern since the Bayh-Dole Act was passed in the United States has been the effect of the Act on the direction of research.  Would the Bayh-Dole Act—allowing grant recipients such as universities to take title to government funded invention—make researchers move their agendas away from basic research to applied research?  To many, this would be a negative impact of the Act; although some would disagree.  And, to some, the movement to applied research is not happening fast enough.  I have heard rumors over the years that some universities have already changed tenure standards for professors in the “hard” sciences to include things such as, number of company spin-outs or patents.  The other day I received an email from Technology Transfer Tactics which mentions a possible “policy change” in tenure standards at Oklahoma State University and a change in standards at the University of Texas.  Apparently, the changes include adding commercialization factors.  Here is the text of some of the email:

Commercialization as a Tenure Criterion:
A Powerful Incentive for Faculty Inventors

Live Webinar ~ March 19, 2013 ~ 1:00pm - 2:30pm ET
(also available on DVD, On-Demand Video and Print Transcript)

CLICK HERE to register now or call 239-263-0605
(OUTSIDE THE U.S. DIAL 877-729-0959)

---

The push for commercialization of university research has become more like a giant shove. Federal and state governments are pinning their hopes on it, economic development agencies work hard to enable it, and university presidents demand it. Pitch competitions, accelerators, funding schemes, outreach efforts, partnerships, incubators, and mentoring programs abound, all trying to encourage it. But there is one glaring, gigantic disconnect in the innovation ecosystem: tenure policy.

While the drumbeat sounds for new models of entrepreneurship and commercialization support, a very old model -- steeped in the academic traditions of yesteryear -- presents a major barrier to realizing the full potential of university innovations. Tenure policies, which reward publishing and teaching but do nothing to incentivize commercialization, arguably represent the single biggest missing link in the innovation ecosystem that so many now agree is critical to economic growth, jobs, and global competitiveness.

These policies -- if they are adjusted to take commercial-focused research into account -- also represent a tremendous untapped opportunity for universities to unleash a deluge of research with market potential, by simply rewarding the behavior that forms the essential foundation for the dynamic innovation activity the world is clamoring for. But changing the entrenched system is anything but simple.

While most university systems continue to resist formal recognition of commercialization activities when evaluating faculty for tenure, a select few have emerged on the leading edge of this issue. Oklahoma State University and the University of Texas System have both gone down the road of including commercialization within their tenure policies. In fact, OSU is currently in the throes of policy change.  * * *

Live Webinar ~ March 19, 2013 ~ 1:00pm - 2:30pm ET
(also available on DVD, On-Demand Video and Print Transcript)

CLICK HERE to register now or call 239-263-0605
(OUTSIDE THE U.S. DIAL 877-729-0959)

Please join Bryan T. Allinson, Executive Director of Technology Commercialization for the University of Texas System - Austin, and Dr. Stephen W. S. McKeever, Vice President for Research and Technology Transfer with Oklahoma State University, for this cutting-edge program. These forward-thinking leaders will present case studies illustrating the key strategies used to gain administration and faculty support, as well as the specifics of their tenure policy changes. Here’s a quick look at the agenda:

• Laying the foundation for culture change with:

o    Tools for creating an open dialogue with faculty

o    Outlining business terms

o    Evidence to back up commercialization vs societal impact: they can coexist!

• Strategies for getting buy-in from university policy-makers
• The benefits of including commercialization as a requirement for tenure consideration
• Details of policy changes
• Handling push-back from faculty and/or administration
• Tactics for obtaining early support from key leadership

Wow!  Will basic research be a thing of the past?  Changing tenure standards is extreme and a huge threat to academic freedom that I suspect will be ultimately very harmful to the production of break through research that benefits the public.  Does anyone have any information about what is happening at OSU?  Also, has anyone’s university changed its tenure policies to include commercialization-related factors?  If so, I am very interested to see your policy. 

Venture Capital-- Future Perfect? Future?

As we enter 2013, it is worthwhile to consider the state of venture capital. A succinct summary was contained in a piece by Peter Cohan, entitled "What's Ahead in 2013 for Venture Capital", which appeared on January 3, 2013, in entrepreneur.com here. I suppose that there are many of you who were nurtured, as I was, over a decade ago, to treat the venture capital world in almost mystical terms. But the ravages of the dot.com bubble in 2001, the virtual disappearance of the IPO market since 2005, and the Great Recession of 2008 have all left their mark.

As for the venture capital world, Cohan concluded as follows:

"Simply put, VC has been underperforming the average stock index since venture returns peaked in 1999. In the decade ending in 1999, the average VC generated a whopping internal rate of return of 83.4%. By 2010, the typical VC fund was a big money-loser, generating an internal rate of return of -5.2%. But by the mid-2012, the typical VC fund had recovered to generate a positive internal rate of return of 5.3%."

While at least pointing in the right direction, these kinds of returns hardly presage any return to the glory days of the 1990s. Moreover, the expectation for investments in 2013 is not evenly divided across sectors. Business and healthcare IT are seen as most likely to enjoy increased investment, while investment in medical devices, clean-tech and biopharmaceuticals are expected to crater. There is something disheartening in the apparent fact that these areas are being viewed with disfavour as a matter of return on investment. Moreover, given that all three of these areas are frequently accompanied by active patent filing programmes, any precipitous decline in investment may well have repercussions for patent practitioners with an oversized position in these areas.

The current state of start-up funding is also characterized by what seems to be an odd, if not corrosive, situation in how funding is taking place. As stated by Cohan, certain

"wealthy investors have been pouring seed capital into start-ups at the earliest stages of development without sufficient discipline. These investors expect only one in 10 of these companies to succeed. But the availability of the seed capital is driving up the salaries of top technical talent." 

 As a result, however, there is a tendency for less funding to be available for Series A funding (investments of between $5,000,000 to $10,000,000). This means, perhaps perversely, that unless the start-up can become cash-flow positive already at the seed capital stage, it will find it difficult to attract next-stage funding. Such a state of affairs, if widespread, will make it even more difficult for enterprises in medical devices, clean-tech and biopharmaceuticals to obtain the funds needed, especially given their more lengthy time-line for product development.

Voices are increasingly heard about how the current form of venture capital is broken (see, for instance, the report by the Kauffman Foundation-- “WE HAVE MET THE ENEMY… AND HE IS US” here). How the modest positive signs seen in 2012 will affect this discourse on the present and future of venture capital bears watching. At the more modest level, as an IP practitioner, these developments bear attention as they potentially affect the nature of IP practice.

Incentives to Collaborate: WIPO Article and the US DOJ/USPTO Guidance Letter

In the December 2012 WIPO Magazine there is an excellent brief article concerning patent pools and standards titled, “Collaboration in Intellectual Property: An Overview,” by distinguished Harvard Business School Professor Josh Lerner and doctoral student Eric Lin.  The article describes the increase in patent pools in the last 15 to 20 years after a period of regulatory distrust of such collaborations since the 1940s.  The article notes that many questions remain for research relating to collaborations and makes suggestions for future research, but also states that some lessons can be learned from the existing literature, such as “requiring patent pools to engage in independent licensing.”  The article also argues that regulatory agencies should “actively encourage socially beneficial collaborations” instead of focusing on the potential anticompetitive consequences of such collaborations.  Specifically, the authors note that France, Germany and the United Kingdom provide benefits to participants in certain collaborations.  Moreover, the authors caution that US regulators may be too zealous in prohibiting discussions of price by standard setting organizations and this may waste time.  The authors suggest a “temporary safe-harbor status to firms that wish to explore the feasibility of collaborating.” 

The United States appears to be taking some steps towards ensuring that the International Trade Commission does not act in a way that creates a disincentive to participate in or create collaborations.  In a January 8, Joint Statement by the United States Department of Justice, Antitrust Division (DOJ) and the United States Patent and Trademark Office, Office of the General Counsel (USPTO), the DOJ and USPTO provide guidance to the International Trade Commission concerning whether exclusion orders should issue in all cases if standards essential patents offered on F/RAND terms are infringed.  The DOJ and USPTO clearly explain the benefits of patents as well as the benefits of voluntary licensing such as F/RAND licensing, and ultimately caution that exclusion orders in particular cases could result in providing disincentives to participate in F/RAND licensing.  The Intellectual Property Watch provides a description of the report here and a copy of the report is available here.   A good first step? 

When Should a Start-Up Seek Patent Protection?

In carrying out due diligence, how many times have I heard this refrain from a start-up: "Oh yes, we have a couple of a patents or patent applications, but they don't really address our current activities." And so I ask--"so what about seeking patent protection for the current activities?" The answer tends to be: "We have not gotten around to it" or "it is not really within our current budget." Being told that the company can always try to sell the patent, especially if things don't go well, is beside the point. Suggesting that the patents can be licensed looks good on paper, but less so in the marketplace for technological transfer. The problem is that the patent no longer matches the start-up.

I thought about this disjunction between the patent position of a start-up and the nature of its current business activities while listening to a recent podcast about a survey conducted at Stanford University on the impact of the university and its graduates on the world of entrepreneurship here. One of the salient points made was that around 60% of start-up ventures alter their business model [Jeremy notes: Neil asked me to guess how high this figure was: in my own experience it has been very much higher, possibly because I only get to speak to start-ups after they have hit a problem] and around 80% change the definition of their target audience. Since these are aggregate figures, the correlation between the change of a business plan or a target audience and the ultimate success of the start-up will differ, depending upon the specific industry involved. However, generally speaking, these results mirror those that I have frequently heard in connection with entrepreneurial activity.

In considering these results, the question crossed my mind: what is the relationship between the likelihood that a start-up will alter its business plan and the capacity of the company to plan an effective patent strategy? A useful way to understand this interaction is in terms of David Teece's influential notion of "dynamic capabilities". Teece describes "dynamic capabilities" ("Dynamic Capabilities & Strategic Management", Oxford University Press), as follows:

"For analytical purposes, dynamic capabilities can be disaggregated into the capacity (1) to sense and shape opportunities and threats, (2) to seize opportunities, and (3) to maintain competitiveness through enhancing, combining, protecting, and when necessary, reconfiguring the business enterprises's intangible and tangible assets. Dynamic capabilities include difficult-to-replicate enterprise capabilities required to adopt to changing customer and technological opportunities. They also embrace the enterprise's capacity to shape the ecosystem it occupies, develop new products and processes, and design and implement viable business models" (p. 4).

In a more pithy form, as set out on page xi of the Preface to the paperback edition to the book, it is "the managerial capacity to engage in sensing, seizing and transforming ..."

As described by Teece, managing "dynamic capabilities" in general, and in particular, "reconfiguring the business enterprises's intangible ... assets", is a tall order for any company, no matter how established. A fortiori, given the likelihood of a substantial (and often early) pivoting of the business plan of a start-up, the challenge is dramatically increased. Here, the question is how to align any potential patent program with the likelihood that the overarching business model of the company may well shift. here seems something fundamentally at odds between the swirl of the entrepreneur's "sensing, seizing and transforming" and the (presumably) more measured process by which an invention is identified and a corresponding patent application is then drafted and filed.

Under such circumstances, should the start-up even consider engaging in any type of patent registration programme, at least until the company has a relatively firm notion of what its ultimate business is likely to be? Whatever the inventor's imagined clairvoyance about his or her ability to comprehensively embrace all the possible preferred embodiments in the patent, the likelihood of successfully doing so seem daunting. Or should the patent applications wait until it is more clear whether the start-up will need to change its business plan and, if so, in what direction? Guidance from readers who can point to empirical studies that have sought to analyze the connection between the especially dynamic nature of a start-up and the nature and timing for seeking patent protection would be most welcome.

Financial importance of a prior art search

IP Finance is pleased to host this little piece by Daniel Porter, a case researcher and writer for Patexia.com ("a social network for researcher, business, and innovation"). He writes as follows:

"The United States patent system is overburdened, and the results are becoming increasingly detrimental. Prior art, intended as the scepter of inventorship justice, has become a double-edged sword that cuts deep. Effectively searching for relevant prior art is among the most fundamental problems in intellectual property law today.

The basic rule is simple enough: an individual is not entitled to a patent if a record of that individual’s invention is publicly available prior to the patent application date. Ostensibly, this first-to-invent system offers protection to inventors who have publicly disclosed their invention but have not yet patented it: if the original inventor doesn’t patent the invention, nobody can. In practice, the waters are slightly more murky. Problems arise because the pool of potential prior art is nearly limitless. The system gives examiners the impossible task of wading through all previously published documents (everywhere) for prior art which could lead to patent invalidation. Invariably, already-pressed examiners miss relevant prior art. The result: swathes of patents which should not have been issued in the first place. The costs: excessive, if difficult to pin down.

The prior art is always a matter of impression, and one man's
murky pool is another man's priceless innovation ...
or Monet-making idea!

The best indicators of cost may be the results of an extensive annual survey published by the American Intellectual Property Law Association. In 2011, they found patent infringement litigation cost an average of $350,000 pre-trial, and $600,000 or more through discovery. These cases most often hinge on an effective prior art search.

When faced with an infringement lawsuit, the easiest and most common defense is to invalidate the patent claimed by the plaintiff. If a patent should not have been issued in the first place because unknown prior art existed but was not discovered, all a defendant need do is find this previously undiscovered prior art. Voilà! Patent; invalidated. Lavish legal expenses: wasted.

An increasingly litigious technology environment means that this problem will likely persist, but could have been avoided if a proper search was conducted before the patent was issued. A more comprehensive initial search by either the patent examiner or the filing inventor would ensure that the USPTO issues fewer, stronger patents. In turn this would mean that inventors, business, and courts alike could all focus on protecting legitimate intellectual property rights.

It would be good to test the hypothesis that there is any correlation between (i) the quality of pre-issue search,  (ii) the quality of granted patents and (iii) the incidence of post-grant invalidity litigation.  This blogger's contention is that the degree to which these three items are interrelated may be a good deal smaller than many people believe. This is because the validity of patents is not contested because they are inherently of poor quality but -- regardless of their quality -- because they are coming between the party contesting them and the aim which that party wishes to achieve, be it a licence on favourable terms, a clear path to bringing out a new product or indeed anything else. If that is so, then spending more cash up-front on patent search may not just one of a number of patent-seeking strategies rather than something which is always to be taken as best practice.

As usual, readers' views are welcomed.

So Which Is It for a Start-Up: A Patent or a Proto-Type?

The debate goes on: how important are patents for start-ups? At a conference in which I particpated last month in Singapore, the sense that I got from speakers ranging from Silicon Valley to Europe and Asia was that patents are less rather than more important for start-ups. Against that back-drop, I was intrigued by an article tht recently appeared in Bloomberg Business Week--"Startups' New Creed: Patent First, Prototype", by Ashlee Vance here. The thrust of the article is that, where once a start-up would give priority to first coming up with a prototype, today "they must first protect [there prototypes] with bulletproof intellectual property portfolios that can take years to build." According to the article, "this is the fallout" of the recent high-stakes patent disputes between such giants as Apple, Samsung and Google.

The article focuses on the operations of the Schox Patent Group, a patent boutique located in San Francisco. A look at the firm's website includes a brief video in which the founder, Jeffrey Schox, states that his office deals only with patent filings for start-ups ("no trademarks, no copyright, no licensing, no litigation"). From this starting point, the article recites the basic features of Schox's business model:

1. The firm charges a flat rate per patent application--$15,000, rather than charging on an hourly basis, "making him more like a partner to his client." According to the article, by contrast, the typical law firm charges for a patent are in the range of $40,000.  

2. His client base derives in material part from the contacts that he makes in teaching two classes at Stanford, attending angel investing clubs and devising ways "to identify promising companies." Indeed, he will sometimes take an equity interest in the companies that he represents.  

3. His office makes liberal recruiting use of students from the Institute of Design at Stanford because, as Schox observes, this provides a non-engineering perspective that is conducive to a more creative, "multidisplinary approach."  

4. Schox's approach to dealing with his start-up clients is to impress upon them that patents are a weapon. As such, the emphasis is on trying to conceptualize how competitors might design around a patent, leading to a consideration of coming up with "unusual extensions of the technology." (In the video promo, Schox states that a start-up to does not obtain a patent for enforcement purposes, but rather to make the company more attractive for investors.) In any event, in his view, "the going rate for a hot patent is about $1 million."

So which is it--are patents of secondary importance to start-ups, or are they now the primary currency for seeking to leverage one's hot new idea? Is the start-up paradigm more like Steve Jobs and Steve Wozniak, tinkering in their Palo Alto garage to develop a prototype for the nascent Apple computer, or like Craig Ciesla and his company, Tactus, as featured in the article, where his techology regarding a feature of flat screens yielded 20 patent applications before any outside funding sought?

A couple of thoughts in this regard:

1. Schox's model might well be idiosyncratic to the innovation ecology of Silicon Valley. In particular, there is an unparalled aggregation of creative human capital and technological prowess, against the backdrop of the billable hourly rate system for law firms that allows for different pricing models for patent preparation and prosecution. Or maybe not?  

2. Schox's fields of focus lend themselves more to seeking to protect features via patentable inventions rather a workable prototype. Still, we wonder about the role that patents play in the valuation of a typical start-up. Anecdotally, I listen weekly to a podcast, emanating from Stanford, focusing on innovation. I have been struck, time after time, how seldom patents are brought up in the presentations and discussion (especially as compared with quality of staff).  

3. Many commentators are heard to lament that there is a relative dearth of substantial innovation at the moment. If so, perhaps there is a correlation between the focus in start-ups on patent protection rather than coming up with a prototype at the outset, and this produces the alleged lack of substantial innovation. If so, an emphais on patent protection uber alles might be either a coincident indicator,or even a cause of the decline, in innovation.

Is There "Gaming" of the Patent System?

I think that the first time that I heard the reference to "gaming the system" in the context of intellectual property was in a class lecture given by a friend and colleague. The course, one of the few of its type offered by a top-tier MBA program, sought to impart to its students an appreciation of the way by which a proper understanding of IP could be of service as part of a manager's s professional skill set. I was sitting in on the class to gain a better appreciation about how to pedagogically approach MBA students. I don't remember too much about the actual contents of the lecture (it was, after all, a few years ago). What I do recall well was one sentence which he reiterated several times in response to various suggestions by students how to exploit the patent system. My friend said loud and clear--"Don't try to game the system"!

What exactly did he mean? He did not elaborate, at least not in the class session that I attended that day. Ever since that I encounter, I have sought to try and work it my mind what the term might mean in the IP context.

Let's start with a definition, taken from , where "gaming the system" is acting so as 

"[t]o use the rules and procedures meant to protect a system in order to instead manipulate the system for a desired outcome."

That sounds pretty negative to me. The trouble is that I continue to have difficulty in articulating the difference between making use of patent rules and procedures for one's benefit, while maintaining the integrity of the system, as opposed to nefariously manipulating the system in a way that, while it might be work to my advantage, also does harm to the patent system itself. It is assumed that "gaming the system" does not mean that one is breaking the law, but merely that one's conduct somehow works to the detriment of the system even if it allows one to achieve his desired goal. Stated in that way, however, I still struggle to find a reasoned way to distinguish between conduct that does, and does not, "game the patent system." Let me suggest several examples:

1. Submarine patents-- Prior to legislative amendments in the 1990s, it was possible under U.S. patent law to engage in what was called "submarine patenting." As the U.S. Committee on the Judiciary noted in a 2008 report,

"[p]rior to requiring the publication of [U.S. patent] applications, the public would not learn of a patent until after it issued, which is often several years after the application was filed. Some patentees took advantage of this practice to the extreme (with ‘‘submarine’’ patents), and intentionally delayed their patents issuance, and thus publication, of the patent for several years to allow potentially infringing industries to develop and expand, having no way to learn of the pending application."

The law was changed to prevent submarine patenting, at least with respect to U.S. applications for which there were also foreign parallel applications. The question is: was "submarine patenting" an example of "gaming the system"? On the one hand, the lack of disclosure until a later time potentially put third parties at risk that they were be the object of an infringement action without having prior reasonable knowledge of the existence of the invention. On the other hand, it still seems to be the case that can engage in such conduct provided he limits himself to a U.S. patent application. Is this "gaming the system" or simply calculated use of patent rules and regulations?

2. Patent trolls--It is well-known that certain companies and law firms pursue patent litigation on the basis of a granted patent for which the patentee is not making any use thereof. Loud voices were raised about such conduct amounting to a perversion of the patent system. Whether or not public criticism was a factor, it remains that the U.S. Supreme Court, in the case of eBay Inc. v. MercExchange, L.L.C here, limited the ability of a plaintiff to use the patent system to extract a monetary settlement in circumstances where there was not exploitation of the patent by the patentee. Neither the navigator of the submarine patent or the alleged patent troll was said to have broken any law, but merely to have adroitly exploited it for his ultimate monetary benefit.

In both instances, the legal system ultimately took steps to rectify what was perceived an unacceptable exploitation of the patent system. On that basis, both submarine patenting and patent trolling could be seen as instances in which the conduct of the patentee was not in the best interests of the patent system, even if such conduct worked to the patentee's benefit. Circling back, however, to the beginning of this blog post: is the role of the manager to refrain from either submarine patenting or patent trolling because it does not serve the best interests of the patent system? If the answer is "yes", then there are potentially huge implications for how we conceive of the role manager in respect of IP rights in particular, and all legal rights, more generally. If the answer is "no", then I remain with the question: what do we mean by "gaming" the patent system?

The Crisis in the Drug Industry: Where Do Patents Fit In?

The headline from the article that appeared in the 6 March issue of the New York Times had the clarion ring of crisis: "Drug Firms Face Billions in Losses in '11 as Patents End" here . The immediate problem is the spectre that patent expirations in 2011 will mean that drug companies will lose exclusivity over more than 10 major medicines with combined sales of nearly $50 billion, thus exposing, it is claimed, the reliance of the industry on blockbuster products.

At a more systemic level, the drug industry faces a whole set of daunting challenges, including "a drought of big drug breakthroughs and research discoveries: pressure from insurers and the government to hold down prices; regulatory vigilance and government investigation and thousands of layoffs in research and development." Finding the solution for any one of these factors is difficult enough; finding the right mix of solutions for these various factors taken together, can only be described as herculean in difficulty.

Taking Pfizer as an example, the industry is talking about "reinventing itself", "fixing our innovative core", and "refocusing on niche products rather than blockbusters, including branded generics". All of this, at least in Pfizer's case, is to be carried out while reducing R&D spending by 30%, so that R&D is directed only "on the most potentially profitable prospects".  The U.S. Government, on its part, through the National Institute of Health, dissatisfied with the pace of current drug development, is talking about the establishment of a billion-dollar centre dedicated to drug development -- this, despite the question why NIH will be able to do a better job of drug development than the companies themselves. In any event, the article then goes on the describe various aspects of the factors, described above, that amount to a potential perfect storm that will challenge the long-term prospects for the industry.

In reading this article from the IP perspective, one thought kept running through my mind. On the one hand, the expiry of more and more patents key to protecting blockbuster drugs is apparently a material proximate cause to the woes facing the industry. On the other hand, the article does not explicitly mention any measures regarding the patent function that might improve the industry's position.

At a certain level, this seems a bit odd. If the patent function is so central, why is there no explicit consideration of that function when considering the steps that the industry can take to reestablish itself. Better R&D--yes; better innovation--yes; but as for better patent strategy, the article is largely silent.

Several thoughts occurred to me:

Linguistic Alignment-- The thinking here is that, when the industry uses terms such as "rediscovery" and "renewed innovation", these notions inherently fold into them proper patent practices. Under this view, patents are an exogenous result of successful execution of these strategic measures. As such, there is no need to consider patents per se separately.

Strategic Potential-- To the contrary, it might simply be that patents are a less exogenous output, but rather an additional source for renewed strategic considerations. One way to think about this is as follows. Much attention has been devoted lately to the fashioning of a new corporate position--Chief Intellectual Property Officer--with high-level C-Suite responsibility to promote and enhance the role of IP (especially, but not exclusively patents) within the company. The CIPO is intended, presumably, to release IP from the silo of the corporate IP department, which more often than not provides patenting services for the company, but without much input at the more strategic level.

And so my question: would such a CIPO (or other form of restructuring of the patent function within corporate strategy) contribute to the efforts of the drug industry to improve its position in the current circumstances? One answer is that this is already taking place, even if these considerations were not discussed in the article. But another possible answer is that patents, as a strategic consideration, need to be reconsidered together with the other factors discussed above.

Patent Data and Innovation: Once Again, So Much and Yet So Little

Can there be a body of IP data that is more analyzed than patent filings and registations? The avalability of this data, and the large number of information fields that can be examined, seem to have made patents an irresistible source of attraction for quantitative analysis. More challenging, however, is the drawing of meaningful conclusions from this wealth of information.

A good example of this gap between the qualitative abundancy and qualitative
scarcity in analyzing patent data was underscored in the article that appeared in the October 2 issue of The Economist entitled "Trading Places: Innovation in Asia." Permit me to summarize points made in the article (more or less in the order of the article itself). The starting point is the statement that "[p]atents are a crude but useful measure of innovation". Based on the opaque disclaimer, of sorts, the article notes as follows:

1. Japan's dominance of Asian technology has been eroded by its neighbours. Consider, for example, the provenance of most of the major components of the Apple IPad (South Korea and Taiwan), but nearly none from Japan.

2. Between 2006-2009, patent filings in Japan have notably declined while those in China have soared. Based on the filing trends of these past years, filings in China may surpass those in Japan in 2010, "putting China in striking distance of America."

3. In 2008-2009, the Japanese filed 11% fewer PCT applications, while the Chinese filed 18% more. That said, the Japanese have a much better success rate in granted patents and enjoy a higher patent citation rate.

4. While Japanese companies are cutting back on R&D, Chinese companies are accelerating their R&D activities. Indeed, China may soon surpass Japan in domestic-spending R&D, "on purchasing-power terms."

5. China is not alone on this. Moving to South Korea, Samsung plans to double its research spending this year. Not by accident, perhaps, Samsung enjoyed profits last year that were greater than the largest nine Japanese electronic firms combined.

6. This push by China in the patent arena is attributed in large part to governmental policy. For example, China wants to wean itself off reliance on foreign patents (Chinese companies pay more than $10 billion to foreign in companies in licensing fees annually). Increasing Chinese patents will (i) avoid some of the need to pay royalties to foreigners: (ii) force foreign companies to take a license of Chinese technology and (iii) improve the position of Chinese companies in negotiating licences.

7. Japan is woefully behind other countries in patents that list a foreign co-inventor (4% for Japanese applications, compared with 40% for American filings).

8. Japan still has the most patents in force (1.9 million, compared to 1.4 million for America and 134,000 for China).

So what are we to make of the article?


First, the article does not really address the connection between patents and innovation. Is it really the case that increased patent filings in China and by Chinese points to increased innovation? Maybe yes, maybe no--the article does not really explain. In this regard, it is curious for The Economist to focus so much on the point given that the cover story of the same issue, entitled, "How India's Growth Will Outpace China's," seems to suggest that, over the long run, India will be a better bet than China with respect to innovation. The place of India in connection with Asian innovation, however, is not addressed in the article.

Second, why the scant attention to South Korea in the article? Given the so-called "lost decade" in Japan, data about patent doom and gloom is not very surprising. The more interesting comparison would be between China and South Korea. Alas, on this, there is nary a word.

Third, the observation that licensing fees are seemingly a major reason for the Chinese government push into patents is quite amazing, if true. Patents are filed for a variety of reasons, of which patent royalties (and the ability to extract cross-licences) is only one of them. If patent licensing has been identified as a major driver of patent activity in China, this seems to me to be a big deal. Sadly, the point is not pursued.

What stands out in the article is yet another effort to gather diverse bits and pieces of patent filing and registration information without either bringing them together into a coherent narrative or analyzing the points in any depth. That is too bad.

International: Malta announces tax exemption for patent royalties

The Maltese Government approved a number of changes to their tax laws on 16th April 2010 – of particular interest on IP is the news that, with immediate effect, royalty and similar income derived from qualifying patents in respect of inventions will be exempt from Malta income tax (subject to conditions still to be announced, including a cap on the maximum amount that may be exempted – and the EU may well have some comments on the matter).

Malta has been reasonably tax-efficient for IP income, but this will put the country on a par with Ireland for patents, depending on the level of the cap. Under EU pressure, Ireland extended its exemption on patent royalty income to include royalties received in respect of non-Irish patents granted after 1 January 2008. A similar cut-off date for the Maltese exemption would seem to be likely, if only to appease the EU.

Monsanto's Patent Strategy: Less Today May Be More Tomorrow

I have been under (blog)water for the better part of the last two weeks but, with the trial over, it's great to be able to comment once again. What grabbed my immediate attention is an article that appeared in the February 1 & 8 issue of Bloomberg Business Week, entitled "Monsanto Sets a Soybean Free."

Monsanto may be the world's largest seed company, and seeds are a desirable commodity to be selling. Still, circumstances have not been kind to the company. Genetically modified crops, with which it is closed identified, have been viewed in some circles as a Frankenstein with roots. As well, the U.S. Justice Department has been carrying on a civil investigation of whether the company has been liable for anti-competitive practices with respect to the soybean business. Further, DuPont -- no shrinking violet in the business, being number 2 behind Monsanto -- has sued Monsanto, claiming an abuse of its market position in the soybeans space, where Monsanto is reported to have a 93% (!) market share of the U.S. soybean crop via its first generation biotech seed. Monsanto is entitled to feel somewhat unloved both in the U.S. and abroad.

Against this backdrop, it is interesting to consider the recent moves taken by Monsanto with respect to its patent position. According to the article, the company will allow its current patents for bio-engineered farm seeds to "expire without a fight", starting with the patent on its soybean market leader, Roundup Ready, with an expiration date in 2014. As a result, competitors will be able to manufacture copycat products, presumably at a lower price. Also, farmers will be able to plant seed taken from the farmers' own harvests, without the threat of legal action by Monsanto.

While Monsanto might have some interest in enjoying the positive publicity that surrounds such a move, the primary motivation appears to be a decision to refocus its strategic focus with respect to its patent portfolio from the first generation of bio-engineered seeds, which are close to expiration, in favor of promoting new versions of gene-modified products. It has already begun to sell new versions of herbicide-resistant soybeans and corn, and it plans to launch additional genetically modified seed products in 2011. Interestingly, Monsanto is also relying on licences granted to other producers to extend the reach of these new generation seed products.

The strategy contained in these moves was described in the article as follows: "Grant [being Hugh Grant, the CEO of the company] is betting that sales of these higher-priced, second-generation seeds will more than offset the loss of sales of earlier versions as their patents expire. 'Growers will decide, do I go with the old 1996 material or do I go with some of these new varieties?' Grant says. "I am fine with that setup.'"

I meant the other Hugh Grant

Stepping back from Grant's comment, this is an interesting strategic move on Monsanto's part. Monsanto seems prepared to de-emphasize its current product line, and the IP enforcement that goes with it, in favour of promoting a new generation of products, backed up by a determination to enforce its patent rights in these new products. Further, Monsanto seems to be betting on the strength of its brand awareness, which will to allow it sell a higher-priced seed to an "installed base" of farmers who have already become accustomed to Monsanto-based genetically modified products.

In so doing, Monsanto seems to be providing a partial answer to the perennial question that bedevils a patent owner who is faced with the ultimate expiry of his patent: "What do I do the day after?" The answer is to try and make certain that there is no perceptible "day after", but rather to provide a continuous branded product stream, where today's product is able to command a premium price, backed by an explicit commitment to enforce its IP rights in the new products.

If so, the question is whether such a strategy is different in context from the incremental development strategy that has been an issue in the pharmaceutical industry. Most notably, Indian patent law contains the controversial section 3(d), which makes it much more difficult for a patent owner to enjoy continued patent protection in pharmaceuticals for incremental development (and thereby, it is argued, make it easier for the generic pharmaceutical industry in India to operate).

With respect to Monsanto's bio-engineered new generation of seeds, the issue then becomes whether we are talking about material improvements in product or "mere" incrementalism backed by the threat of enforcement of patent rights. If the former, Monsanto's effort to extract a higher price will seem reasonable. If the latter, however, one can foresee a time in the not-too-distant future where Monsanto's current patent munificence will be viewed as a Trojan horse intended simply to accelerate (unjustified?) price increases in its seed products.

Find the Seeds?