Made in Japan

A packed room listens as IAM editor Joff Wild gets IPBC Japan underway

If there was one overarching takeaway to emerge from the first-ever IPBC Japan, it is that Japanese companies are now very seriously engaging with the whole notion of IP value creation. Representatives from over 40 of the country’s biggest businesses gathered at the Hotel Okura on September 4 for the day-long event, with a total attendance in excess of 200. Over the course of the day, it became clear that for most corporates, gone are the days when the overriding priority was to file as many patents as possible in order to create strong defensive positions – in the second decade of the 21st century, there is much more to IP management in Japan than that.

From the outset of IPBC Japan, the monetisation potential of Japanese portfolios was made obvious. In his opening keynote address, Japan Patent Office Commissioner Hitoshi Ito highlighted just how important intellectual property has become to the country. Overall, he explained, Japan is now running a significant trade deficit; but if you look at intellectual property, it is a different story altogether. The IP royalties that the country’s companies are generating in foreign markets have grown significantly and in 2013 stood at over Y1trillion, or $9.5 billion. This makes Japan one of the few countries in the world with an IP royalties surplus. And for ‘IP’ here, read patents – the commissioner commented that copyrights are still a negative contributor.

And there is scope for plenty more on top, he implied. Compared to their counterparts in Europe and the United States, Japanese companies tend to file a much lower proportion of their patent applications in foreign markets. If they filed more, there may be the potential for even greater licensing income. Something that the commissioner did not say, but which may also be the case, is that perhaps if Japanese companies as a whole were more aggressive in searching out new royalty income streams, or more willing to agree deals with third parties that could do it for them, the patents that they already hold across the world might deliver still larger returns.

But change could be on the way. The challenge facing Japanese companies was laid bare by Fumihiko Moriya, senior general manager of Sony’s IP division. There are some businesses, he said in his presentation, that spend Y10 billion-plus a year on maintenance fees. That may be just about acceptable when times are good, but it is very hard to justify in the current economic climate. In today’s environment, big decisions have to be made. Do you abandon, do you hold or do you look to monetise?

Japan Patent Office Commissioner Hitoshi Ito delivers the opening keynote speech

Strategic choices

What was clear at IPBC Japan is that, having given this question a lot of thought, companies are reaching different conclusions about how they should best use their intellectual property to maximum effect. You need only look at a few recent examples to see that this is the case.

Take Fujifilm, for example. It has used intellectual property as part of an ongoing strategy to transform itself from a company that specialises in producing photographic film to one that operates in numerous markets, including cosmetics, medical devices and semiconductor materials. Shoei Imai, general manager of its IP legal division, explained to delegates how the company’s fortunes took a drastic turn for the worse in the early 2000s as digital photography exploded and demand for celluloid film plummeted. In response, he and his team set about identifying Fujifilm’s core technologies and working with the rest of the company to work out their relevance to other industries.

“We simply had to dispose of some of our photo-film patents because the technology had become obsolete and there were no interested buyers,” Imai said. “But in other areas, we were able to reshuffle our portfolio.” This included selling patents that were no longer considered crucial for the company’s business plans (it has transferred a number of rights to Facebook over the last year, for example); and purchasing patents from external sources to help speed up its entry into the new markets it is targeting – such as the acquisition of a portfolio covering magnetic tape technology from Kao. Fujifilm was also closely involved in the $520 million acquisition of the Kodak digital imaging patents back in 2012.

The participants in the opening plenary on “World class corporate IP strategies”, from left to right: Toshiya Watanabe, professor, Research Centre for Advanced Science and Technology, University of Tokyo (moderator); Paul Fehlner, global head of IP, Novartis; Dan Lang, vice president of IP, Cisco; Micky Minhas, chief patent counsel and IP strategist, Microsoft; Fumihiko Moriya, senior general manager, IP division, Sony; and Kenichi Nagasawa, director, group executive, corporate intellectual property and legal headquarters, Canon

Imai made the point that his company’s turnaround owes a lot to its progressive approach to IP strategy, which has also allowed for the diffusion of Fujifilm’s proprietary technologies throughout Japanese industry. “Much of our digital camera business has been lost to smartphones, so we are trying to make back our investment in that area,” he said. “This is not just about enforcing our rights, but about transferring them to companies that can best use them.”

What Fujifilm does not seem to have done yet is sold any patents to non-practising entities (NPEs), but other Japanese companies have done just that. Panasonic is among the most active in this regard, having made deals with the likes of Inventergy, WiLan and Sisvel; while Renesas is developing a special relationship with Acacia. For its part, NEC sold patents to Hon Hai in September 2012 which the Taiwanese company asserted in the United States against Toshiba, Funai Electric and Mitsubishi Electric in June 2014.

Ericsson chief IP officer Kasim Alfalahi talks FRAND in the second plenary session

Canon, too, is doing some serious thinking. As head of IP Kenichi Nagasawa explained, it will not contemplate doing business with NPEs and sees them as a very negative factor in the IP market; but that has not stopped the company showing leadership in Japan and beyond as one of the prime movers, with Google, behind the LOT Network.

For Dan Lang of Cisco, strategic IP decision making must be based on enlightened self-interest. If you are going to sell patents, he told delegates, make sure you do so to another operating company that will use them to build a product or offer a service. Better still, seek out cross-licensing opportunities. Selling to NPEs nets relatively low returns and only promotes an ongoing cycle of destructive litigation, he claimed. Kasim Alfalahi, Ericsson’s chief IP officer (CIPO), was not so sure. As a seller, you can dictate the terms under which you divest your patents, he stated; if you insist that your buyer acts in a certain way and stipulate this in the contract, there is no harm in selling to whoever – it is behaviours that matter, not business models.

Naoto Kuji, executive managing director of the Japan Intellectual Property Association, makes his presentation

Collaboration for mutual gain

Traditionally, Japanese companies have tried to avoid litigation wherever possible (culture is part of the reason – though the fact that plaintiffs in patent cases heard by the country’s courts face a 27% win rate may also have something to do with it). This aversion to getting involved in disputes is one explanation for why Japan’s patent owners are yet to realise the full value creation potential of their sizeable IP portfolios. However, a clear theme in the two afternoon plenary sessions at IPBC Japan was that monetisation does not necessarily mean litigation.

Jayson Pankin, CEO of AutoHarvest, explained the collaborative innovation marketplace that his non-profit organisation has developed based on the automotive sector to help IP owners find partner companies to commercialise their technologies, as well as to source third-party IP that could help them in their own R&D efforts. Naoto Kuji, executive managing director of the Japan IP Association, outlined his efforts to create a global platform to facilitate the licensing and transfer of environmentally friendly technologies to developing nations at prices that are fair to both sellers and buyers. The point was that monetisation and value creation need not occur in the context of a dispute – they can be about collaboration and coming together to find mutually convenient solutions. As Kuji said: “We don’t always need to go to court to fight… We respect IP and if we want to use somebody else’s patent, we should ask them to use it.”

FRAND focus

An issue that came up time and again at IPBC Japan was standards-essential patents (SEPs) and the fair, reasonable and non-discriminatory (FRAND) licensing of those assets to industry. Japanese companies own a large volume of patents reading on foundational technologies, so contributing to standards, as well as gaining access to standardised technology, is a major issue for them. Giving the licensee’s perspective, NTT’s Hiroshi Kuranaga expressed the view that injunctions relating to SEPs should be carefully regulated to ensure that their owners cannot gain a monopolistic advantage in their market. Arguing from the patent owner’s side, Ericsson’s Alfalahi made the point that his company owns such a large swathe of mobile SEPs that, without the threat of injunction, it would be unable to get the returns to justify its R&D spending. “It is standards and FRAND that have made the smartphones we all use today possible,” he said, adding that Ericsson pumps a significant cut of its patent royalties back into R&D.

At the end of the day, talk returned to these matters as the event closed with a discussion between Randall Rader, former chief judge of the US Court of Appeals for the Federal Circuit, and Toshiaki Iimura, former chief judge of the IP High Court of Japan. Just prior to his retirement earlier this year, Iimura presided over a Samsung v Apple dispute focused on SEPs owned by the Korean company. The case was especially noteworthy due to Iimura’s call for the submission of amicus briefs, marking a first in a Japanese IP suit. It was a move that Rader applauded; though not all attendees agreed that the court’s decision to refuse Samsung an injuction and award the company damages equivalent to just $100,000 was the right one. For some, it looked very close to the grant of a compulsory licence – though this was not raised directly with the judge, but was instead a subject of discussion during breaks.

As well as looking at the FRAND issue in the US context, Rader discussed NPE litigation – another major concern for Japanese corporates. “The way to solve NPE problems is to reduce the costs of litigation in the US,” he said, adding that it is the cumbersome discovery process that is largely responsible for the costliness. He also called for more accurate and widely accepted methods for valuing patents (small patents are fine, but should come with small valuations, he stated); and rubbished the idea that NPEs should be treated differently from any other type of patent owner by the courts. “None of us would want judges to make decisions based on the characteristics of the parties,” he said. “Are we going to start distinguishing between a small company and a big company; a domestic company and a foreign company; a practising entity and a non-practising entity? The characteristics of the parties are irrelevant.”

Delegates winding down at the closing reception after a busy day

Potential

It is common to talk of potential in various IP markets around the world. China always crops up; Korea often does; there is even a chance that in the brave new world of the Unified Patent Court, Europe may get in on the act. Japan, though, is usually overlooked. It is seen as hard for foreign entities to penetrate, while the perception from the outside is often that the Japanese are stuck in their ways and incapable of change. But the reality is that if there is one country where the word ‘potential’ really applies, it is Japan. Despite its economic troubles, it is one of the world’s largest economies; its companies own some of the biggest and highest-quality global portfolios; those companies have a long IP tradition; and they are contemplating a future in which they face increasing costs pressures and growing competition. Japan is a conservative country, it is true, but it is also a highly intelligent one – people in the IP scene there know that things cannot continue as they have.

That said, we are not looking at an immediate revolution. Knowing that change is needed is very different from actually instigating it. In the close-knit Japanese IP community, everyone knows everyone else. In a society where consensus is valued so much, going out on a limb and doing something different – something that your colleagues in other companies may not like – is a very hard thing to do. And appreciation of IP value is not helped by a court system in which plaintiffs prevail less than 30% of the time and where, even when they do, damages awards are relatively low.

At the top end, the Japanese market matches anything you will find in the world in terms of holdings and understanding; but what the country lacks is the IP-savvy, entrepreneurial businesses and start-ups below this level that you will find in, say, the United States. This means that power and thought leadership are concentrated in relatively few hands – something which also inhibits the growth of an active and competitive IP service sector. It’s not as if there is something intrinsically un-Japanese about entrepreneurialism – after all, its big companies were not always the size they are now – but somewhere along the way, perhaps a spark has been lost. Again, it seems that a lot of Japanese are aware of this, but doing something about it is tricky – especially over a short timeframe.

All in all, though, Japan is an IP market well worth keeping a close eye on and getting involved in. It poses challenges, but perhaps not as many as those outside the country might think – and in comparison to other jurisdictions with less of an IP tradition, there is a level of certainty that can only help deal making and value creation. Will everything change tomorrow or next week? No. Will things look different in five years? You can bet your bottom yen on that.