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Intellectual Property: Preserving Rights or a Protection Racket?

April 4, 2011

Last week the Financial Times carried an excellent insight into the role of patents in business today (Tech Patent Arms War Reaches New Level Of Intensity). It describes how the registration of patents has become a critical competitive weapon – and how this has become a significant barrier for entry for smaller companies, with the possible frustration of innovation as a result.

The story begins 20 years ago when Nokia found itself on the receiving end of a patent infringement suit by Motorola. As a newcomer to the telecoms market, it lacked enough of its own patents to counter-sue. And thus began a registration battle, so Nokia now has nearly 9,000 US patents in its intellectual property war chest.

This is the ammunition it has used recently against Apple. Having provisionally won one case, it immediately filed a further five complaints. Litigation now covers 46 patents in six courts and four countries.

Converging technologies – for example the personal computer and the smartphone – are leading to new levels of intensity and complexity in this struggle for dominance. Indeed, it appears almost inevitable that any new product will offend someone, so a patent suit has become a ‘business as usual’ risk. Now, with emerging markets such as China jumping in on the act, we can only expect enormous proliferation of such actions.

One question is whether small companies can survive in such an aggressive environment.  The answer appears to be yes; enterprising attorneys and law firms have of course found a way to ‘protect; these clients. Companies like IPX and Intellectual Ventures buy or register patents and then act as middle-men for smaller companies. Intellectual Ventures has more than 30,000 patents, attracting companies as large as Blackberry- maker RIM to its list of clients.

As the FT observes, these activities smack of a ‘protection racket’ and certainly the costs associated with settling these disputes add significantly to the price of the product.

 

 

3 Comments
  1. The following is an excerpt from an article I wrote in 2008 regarding intellectual property rights and values in relation to the procurement process. It raises an interesting question in terms of clients actually financing the innovation that may ultimately be sold to a competitor:

    An example of the perils of expeditiously surrendering IP value in favor of “up-front” savings sounded an alarm that is worthy of consideration. Specifically, it demonstrated that the development of a vendor’s asset is often financed 100% by the client. This may mean that your company might actually be paying the lion’s share of the development costs to ultimately provide your competition with a solution that will give them a competitive edge. A kind of self-inflicted wound. Here are the specifics:

    A company is looking at a web-based content management system. It has operations in the US and France. The vendor of choice does not have a language localization dictionary in French, though it has many other languages. The client and or the procurement group request a quote for the French translation services, knowing that this is best left in the hands of the software company. The software company quotes $25,000. The total price is competitive with other vendors and this is the vendor of choice for a variety of reasons. So the delivery of the French dictionary is built to the contract. Though a small opportunity, the procurement department had the chance to look at the translation as intellectual property, in this case Copyright. The client was paying full value including a profit. The procurement department could have, and should have asked for a royalty of 20% to 50% for each sale of the dictionary to the software company’s clients. This would open up an entire dialogue from which meaningful insights would surface such as, a) confirmation of the software company’s pricing model for subsequent customers, b) the level of interest on the part of the software company in terms of future market development, and c) the software company’s intentions relative to making the product available to competitors to name just a few. The change in perspective is powerful, because the procurement group starts to treat the dictionary as an intellectual asset or property from which the vendor derives an ongoing value.

  2. Peter permalink

    (Query:how do you have visibility of the software content owner`s profit margin?)

    If a Customer requested a 20% – 50% royalty on my future sales for a 25K deliverable, absent a JV or collaboration agreement, it certainly would open up a dialogue but not how you have described! In fact, the CM would (I submit) be hauled over the coals.

    IP should vest in the party best placed to exploit it. Were there some form of collaboration, well then your scenario would gain more traction;the parties may then enter into a form of license arrangement with a split to the Customer, for a limited time and within a defined territory.

    But other than that…(??). Were it otherwise, the Customer would effectively be looking at a cash outflow burden of 25K in return for an upside cash in-flow benefit which runs to perpetuity – with no risk!

    Great business if you can get it.

  3. Jim Marray permalink

    I have see this tactic used by lots of companies either in an attempt to prevent my employer from owning the IP in things we develop or trying to get in on the future reuse of the asset by us with other companies. In every instance the customer claims that they are funding the development and yet this is clearly not true.
    One reasons that customers employ established suppliers is because they have knowledge and experience of developing the same or similar solutions for other customers (and this is true in the example as the supplier has the dictionary in other languages just not french). Therefore it is the supplier who is funding the customer and not the other way around. Could you imagine a customer being willing to pay the training and career development costs of each individual who will work on a project? it would make projects unaffordable.
    As Pete says, the exploitation of IP is best left to the party who can do it best. Customer’s have paid for their perpetual, royalty free licence to use the asset and that is what they paid for.

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