Issue 18 winter 09

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How should the intellectual property (IP) system change in light of the financial crisis and the subsequent recession? To be honest, no particular change seems necessary now since I don’t think the way we manage IP now is much different from the way we managed IP two or three years ago. It’s just that the way we managed IP back then was not as good as it could be.

Patent quality

One key issue in IP is patent quality. It is important to strike the right balance between a reward to inventors for their inventiveness and the freedom to move for a competitor. So I have always advocated a patent system that demands a high level of inventiveness, and patents that are structured so that they stimulate competition to build upon the patent or work around it. The problem is that so many useless patents are being granted that they are beginning to block innovation, because the competition has to assess each patent to see whether their plans might infringe on it.

Poorly structured or trivial patents lack predictability

Another issue is that poorly structured or trivial patents also lack predictability. A patent application is filed and published and then the competition reads the application. It's important that the patent application is structured such that competitors can predict, on reading it, what its impact is likely to be on their plans. If the patent is so loosely drawn as to have unpredictable consequences, then competitors may decide simply to avoid innovating in the areas it may (or may not) cover. It is evident that the patent granting authorities play a major role here. Eventually the judicial systems in the various countries have the final word. A transparent and predictable system in which patent owners know what they have got and the competition knows what their free space is, may avoid superfluous patent fights that only distract from real innovate.

IP and collaboration

A few years ago I began to see a number of tendencies in innovation. Companies began to think that R&D was just too costly and so started looking for partners to share the cost and the risk. Meanwhile governments were finding that educational establishments such as universities and colleges were costing too much, and so began to ask them to find at least part of their funding from the private sector by making money from their innovations, for example by licensing or spin-outs. Both these trends demanded greater openness on the part of all involved in the innovation system.

How do IP regimes react to the requirements to be more open?

But there was a tension here. IP has always been a major issue in collaboration because for a long time it has been used as a wonderful tool for not sharing. When companies do R&D they usually file patents to keep competitors from using their techniques. So how do IP regimes react to the requirements to be more open? I haven't seen many companies embracing the necessary change. Companies always say that they are prepared to share the costs of joint R&D projects – but you don't see many saying they will also share the benefits.

The key is for the partners to decide what they want out of collaboration before it starts. This often doesn't happen: it’s so natural for companies to compete with each other. I can only think of one good co-operation in the Netherlands, when Philips and Douwe Egberts worked together on the Senseo coffee machine. Philips developed the machine and Douwe Egberts the coffee pads to go in it, and it made sense for them to collaborate because their skills and objectives were complementary, rather than competitive. But as soon as big companies in critical markets start working together, there can be problems.

Patent pools

Apple may find itself a net royalty payer to remain in the market

One solution to such issues is to develop patent pools, in which a number of competitors working in a similar market throw all the relevant IP into a pot, which all of them can draw on as needed, under defined terms. This means that all the companies that have subscribed to the patent pool can continue their development without worrying about IP issues. Companies that want to work in the same area without having contributed to the patent pool are likely to face infringement actions that are designed to keep them out of the protected market. In effect, the pool becomes a cosy club for those companies who invested in the R&D that underpins a particular type of product or service.

This works well in some industries, but badly in others. For example in the electronics industry, products such as televisions and mobile phones include components from dozens of suppliers that are covered by hundreds of patents, and work with imposed standards such as those that define the GSM mobile networks. Companies such as Nokia, Ericsson and Qualcomm have each developed substantial IP portfolios in mobile networking, some of whose patents overlap, and I believe that they have formed a patent pool so they can use each other’s IP without fear of penalties. Interestingly, the value of this pool is about to be put to the test, since Nokia is suing Apple for infringing several of its patents with the iPhone. Apple, a latecomer to the mobile phone market, doesn’t have a lot of relevant IP to trade, and so may find itself a net royalty payer in order to remain in the market.

Patent pools don’t work so well in other markets. In the chemicals industry, for example, each of the major chemical companies has its own processes to make its key products – so it can be difficult to pool the underlying, very specific patents. In the pharmaceuticals industry, companies usually try to develop blockbuster drugs whose IP they own exclusively, such that if the drug makes it to market they can become exclusive suppliers to the global market. The idea of patent pools and more open sharing is contrary to most of these companies’ expectations.

In an EIRMA meeting I once said that innovation is stimulated if a competitor has the knowledge that it can, at least, get a licence under a patent; not for free but for a royalty at market rates. This approach would at least partly take away concerns that any effort that a competitor is making to advance the technology might be blocked for years.

Patent trolls

Unfortunately, patents can also be used as a way of extracting money from potential market entrants without really increasing overall levels of innovation. Licensing companies (sometimes known as patent trolls) buy up patents in particular markets until they have assembled what they claim is a portfolio of IP that is necessary to innovate in that market. The companies argue that by licensing these portfolios, companies can have a clear run at a market without worrying about possible infringement claims.

The problem is that if you don’t acquire a licence for the portfolio, you’re likely to get a letter claiming that you’re infringing upon it. I think the companies that make these claims are trading on people’s ignorance. Companies that receive these letters should ask questions - such as whether the patent is valid, and whether the claimed invention is actually obvious. However, since patents are not predictable they are already trailing by one to zero in the game before they have even started. The second thing to do is to look at the scope of the patent. Again, though, because companies can't always predict what a patent covers by reading it, they’re then trailing by two to zero. If they decide to challenge the infringement claim, especially in the US, it will cost around, say, $100,000 a month for perhaps six months. If, on the other hand, the licensing company offers a licence to the disputed IP for $150,000, then the problem goes away and they can continue with their work. But is this a good use of the IP system? I doubt it. The only people who win are the lawyers – and they never intended to use the IP to innovate anyway.

Crowd-sourcing

Crowd-sourcing can be seen as another form of open innovation

The rise of collaboration is introducing some new IP issues that need to be thought about carefully. Crowd-sourcing, in which companies solicit inputs or even solutions from customers and other interested parties, usually over the Internet, can be seen as another form of open innovation. If a company goes to its users and asks them what they want, for example by doing a survey, I can't see a problem with that and to some extent the customers are then being served by being able to buy the improved product when it emerges onto the market. The IP issue gets more difficult if customers move from providing advice about what they want to suggesting solutions that would help the company achieve those aims. This is the point at which a company could become open to claims on its work, so it is important to think about customer engagement in this new open-innovation future in the same way as you would think about any other partnership deal.

Portfolio management

IP portfolio management may also have to change in this more collaborative environment. Portfolio management exists to support the business strategy, whether that is one of open or closed innovation, and will have to evolve to manage the more complex networks of IP assets and rights involved in open innovation. The key to IP portfolio management remains the same, though: it is all about knowing your portfolio and regularly assessing its utility and value.

Globalisation

The rise of open innovation is revealing many more sources of innovation (and competition) to Western companies. The good news is that as places such as India and China begin to innovate on the global stage, they have begun to realise that IP protection mechanisms can protect their work, rather than simply acting as a brake on their growth. So it’s a good sign that Western IP systems are being joined on the global stage by those of China, India and Korea, each of which is increasing its cooperation with the European, Japanese, US and global patent systems.

Recession may have accelerated the move to more cost-effective open innovation strategies

The global recession may have accelerated the move to more cost-effective open innovation strategies, with the IP challenges that such complex sharing arrangements will bring. The IP system will adapt to cope with the approach, but needs to sort out some of its existing issues, such as patent quality and predictability, the use of patent pools and the challenges of globalisation as well.

Albert Zeestraten

azeestraten@casema.nl

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eiq-2009-018-0012