The year of the dragon

In July last year Lenovo’s senior management team gathered in the sultry summer heat of Hong Kong for its regular get-together. CEO Yang Yuanqing – the man credited with turning the company from a Chinese PC manufacturer to a global tech giant – was present; as were the chief financial officer, head of HR, chief marketing officer, general counsel and the heads of each main business unit.

Fergal Clarke, IP business analyst

“I sit with a business hat on with a light touch in legal and tech trying to bring them together from a business point of view”

Kathryn Tsirigotis, director of licensing

“The idea that you can quickly make tens of millions of dollars [from licensing] is usually not correct”

Ira Blumberg, vice president of IP

“My guiding principle is that we have to support the product business”

Jay Clemens, general counsel

“We needed to enhance the talent we had internally and so one of the first steps was hiring Ira”

Also in town was Vice President of IP Ira Blumberg, ready to make a pitch to the company’s top brass that would transform the business from bit-part IP player to major patent acquirer. As part of his 90-minute presentation, Blumberg argued that any expansion of Lenovo’s mobile business into the mature markets of North America and Europe needed to be underpinned by an aggressive stockpiling of patents.

Blumberg’s reasoning obviously proved persuasive. In the first half of this year Lenovo embarked on an ambitious patent acquisition programme, picking up a portfolio of 21 patent families from public IP company (PIPCO) Unwired Planet and more than 6,000 patents from Japanese high-tech company NEC. A further 2,000-plus patents will be added if US regulators give the green light to its proposed acquisitions of Motorola Mobility from Google and IBM’s server business. Together with aggressive growth in its own, internally developed portfolio, Lenovo’s patent arsenal has been transformed.

The buying spree throughout the first six months of 2014 certainly fits Lenovo’s style. Even in a world that has become used to tales of China’s rapid rise, Lenovo’s growth has been staggering. Ten years ago it was a Chinese PC maker, barely known outside its home market. Today it is a global powerhouse, the world leader in PCs with a significant presence in the United States and an emerging force in the smartphone sector.

The 2005 acquisition of IBM’s PC business helped to put Lenovo on the map outside of Asia and gave it its first significant batch of US patents to assert. But it is the company’s planned expansion into the highly competitive and litigious smartphone sector in Europe and the United States that has convinced Lenovo’s leaders that it must steel itself with a substantial patent portfolio. “In looking to move into those more mature markets, management was aware that patents would be a concern,” Blumberg says from his office in Lenovo’s Morrisville North Carolina campus. “As we focus more and more on those markets, IP will be a key driver.”

An IP makeover

Lenovo’s patent transformation is perhaps even more remarkable when you consider that just two years ago, the company did not have a senior IP head. When general counsel Jay Clemens joined from eBay in January 2012, it quickly dawned on him that this was a major gap in the company’s personnel. “When I joined, there were just a few people in the IP team, but they had no experience of working in new markets,” Clemens comments. “We needed to enhance the talent we had internally and so one of the first steps was hiring Ira.”

Having previously worked at eBay and HP, Clemens tapped his contacts in Silicon Valley to see whom they might recommend for the post. Blumberg was one of a small pool of names to emerge that could both help Lenovo to navigate new business areas and lead key licensing negotiations. Having trained as a lawyer and worked for the Valley’s best-known law firm, Wilson Sonsini Goodrich & Rosati, Blumberg had held a series of licensing roles – first in-house at Intel, then at Rambus, iPotential and, before jumping ship to Lenovo, Intellectual Ventures.

This deep background in licensing played a key part in convincing Clemens to hire Blumberg in July 2012. “As a business moves into mature markets, the initial licensing negotiations are critical and Ira was known as one of the best at negotiating licences,” Clemens stresses. From Blumberg’s perspective, the Lenovo role gave him something of a clean slate – an opportunity to help shape the patent strategy of a major tech player from the ground floor up.

“Both Jay and Rachel [Adams, Lenovo’s head of litigation and deputy general counsel] were upfront that a large part of the IP function was missing,” Blumberg says. With a mandate to build a small team, he quickly added Douglas Robinson as director of patents and trademarks from Infineon Technologies, IP business analyst Fergal Clarke from Rambus and director of licensing Kathryn Tsirigotis from ON Semiconductor. Together with senior IP and product counsel Scott Reid, they form the core of Blumberg’s team in the United States.

Below those four direct reports are a senior IP lawyer in China, a patent attorney who is also based in China, a paralegal in the United States and two IP professionals in Japan. While Blumberg says that he is looking to add to his group and several members of Motorola Mobility’s team are expected to move across if the deal wins approval, the IP team and the wider legal department of around 80 people are exceptionally lean for a business of Lenovo’s size.

Figure 1. The growth of Lenovo’s global patent portfolio

Source: Questel

Before Blumberg was hired, management of many day-to-day IP issues fell to Scott Reid, who – apart from a three-year stint in private practice – has spent all of his career in the legacy IBM business and now Lenovo. When matters became litigious, head of litigation and deputy general counsel Rachel Adams would step in. “For a while I was trying to do everything, including managing the trademark and patent portfolio, all defensive as well as some offensive licensing agreements,” Reid recalls. “For a while I was the only guy here.”

In many ways, that reflected the priorities of the business. After the IBM deal in 2005, Lenovo struggled to make the acquisition pay off and changes to senior management – Yang was brought back in as CEO after the previous head left in 2009 – meant that the focus was arguably more on survival than expanding into new areas. Moreover, the company’s traditional exposure to the less litigious PC market meant there was simply less call for a large patent portfolio.

As the business has recovered and looked to grow in new areas, so the emphasis on patents has increased markedly. But that growth and higher profile have also come at a cost, exposing the company to more approaches and threats from non-practising entities (NPEs) eager to put licensing deals in place and ready to sue if talks fail.

Figure 2. US patent lawsuits filed

Source: Patexia

Lenovo’s litigation challenge

As Lenovo seeks to expand its business in the United States, particularly in the mobile space, it seems inevitable that its litigation workload will increase. Looking at the patent suits filed against the company in the United States since 2005, there has been a marked increase over the last few years - although it is still behind many of its tech rivals such as Dell, HP, Apple and Samsung.

According to global litigation head Rachel Adams, a significant majority of the company’s contentious workload is taken up by patent disputes and of those a lot involve non-practising entities (NPEs). “We devote a lot of time and resources defending cases asserted by NPEs,” she says. “We have our own strategy in dealing with these types of cases. If we believe it’s a case we should fight, we certainly will. In every case we decide what is best for our business.”

A licence to talk

Part of Blumberg’s brief when he started involved handling the backlog of queries from NPEs that had built up in the period leading up to his appointment. “For me it was a game of catch-up, introducing myself to all the NPEs that had been in touch with us,” he says. For the first nine months in the job, this accounted for somewhere between 60% and 70% of Blumberg’s time.

Then, when Tsirigotis joined in April 2013, she took a central role in licensing negotiations. She estimates that 70% to 80% of the company’s licensing workload involves NPEs. “It had been quite quiet on the defensive side in terms of interest from NPEs; but as the company has been making waves in new markets, we have come to their attention,” she says. “Since I joined, that part of the job has gone through the roof.” Tsirigotis adds that she expects her NPE workload to increase further, particularly if the Motorola deal is approved.

According to market research firm IDC, Lenovo is the world’s fourth largest brand in the smartphone sector, with a 4.6% market share for the first quarter of this year. That is still a long way behind market leaders Samsung (30.2%) and Apple (15.5%); but of the five largest smartphone businesses, the Chinese company saw the biggest year-on-year growth, upping its share from 3.6% in the first three months of 2013.

Although Lenovo’s slice of the US mobile market will naturally grow with the proposed Motorola acquisition, the overwhelming majority of its smartphone business remains focused on China, where it is number two in the market behind Samsung. This heavy exposure to China naturally dictates Tsirigotis’s approach to licensing deals. She calculates that between 50% and 60% of what she currently sees involves the Chinese handset business.

The focus on China means that few of the NPEs that approach Lenovo are interested in a litigation-only strategy, as overseas-based patent asserters are more reluctant to wind up in a Chinese court. The majority of NPEs that Tsirigotis comes across, including the likes of Sisvel and InterTrust, are therefore pursuing what she describes as “legitimate negotiations”. However, what an NPE will typically demand for a worldwide licensing rate often does not adequately reflect the much lower rates in China.

Tsirigotis elaborates on this disconnect: “If, like Lenovo, all of a company’s handsets are sold in China or emerging markets, such worldwide ‘blended’ rates are outrageously high for the territories in which the company actually sells its handsets,” she comments. “In China, for example, awards for patent infringement cases are typically hundreds if not a thousand times lower than those in mature markets such as the US and Western Europe.”

Moreover, the geographical focus of Lenovo’s licensing efforts now looks set to shift westwards. Expansion of the mobile business into mature markets will radically change the strategies of both the IP group and the company overall.

Figure 3. Lenovo v Dell: share price and major acquisitions

While Lenovo has looked to grow its business into new areas, the core of its business remains PCs and in 2013 it became the global leader in the sector. That growth has come while the worldwide market for PCs has fallen and many companies, such as Dell, have struggled. This graph shows the share prices of both Lenovo and Dell, together with a timeline of their key acquisitions. Dell was ultimately taken private by founder Michael Dell and Silver Lake Partners in 2013.

Source: Questel

Deal making

There have been several critical moments in the evolution of Lenovo’s IP strategy – not least the return of Yang in 2009 to head the company; the hiring of Clemens at the start of 2012, bringing a renewed focus on the company’s IP function; and the recruitment of Ira Blumberg to head the IP team.

But it was undoubtedly Blumberg’s presentation to senior management in Summer 2013 which set the business firmly on the patent acquisition trail. Although that turning point came a year after he was hired, to Blumberg it had always been a question of when he would begin looking to make deals. “From the day I walked in, I knew we were going to have to start purchasing patents across the board,” he states.

Thus, from his first day Blumberg started fielding enquiries from brokers about possible portfolios in which Lenovo might be interested. “There’s a fairly well developed brokerage market in the US, so even before I took an active role in looking to make acquisitions, I was getting submissions of different levels of detail with various assets for sale,” he says. Once the company had signalled its commitment to buying on the secondary market, Blumberg brought in Clarke to help contact brokers and analyse available opportunities. The brokers they spoke to included GTT Group, Intellectual Asset Group, IPValue, Munich Innovation Group and investment bank Evercore.

This process was crucial not only in helping to determine the kinds of assets that Lenovo could buy, but also in educating prospective sellers on just what the company was interested in. “Once the market understands you’re seriously looking at patents, the more offers you get and the more you consider those opportunities. We grew our reputation as a serious buyer, which led to us being taken seriously,” Blumberg remarks.

Having a business analyst is still not com

Figure 4. Patent map of Lenovo’s portfolio

The map above shows how Lenovo’s patent portfolio is distributed across different technologies in comparison with its PC rival Dell. It includes the patents that Lenovo has picked up from both NEC and the 2005 IBM acquisition, with the former deal fuelling the Chinese tech giant’s aggressive expansion into mobile phones and mobile communications more generally.

Source: Questel

mon practice in many corporate IP functions. In a team as relatively small as Lenovo’s, his presence is a mark of just how radically Blumberg has changed the company’s approach. “I sit with a business hat on with a light touch in legal and tech, trying to bring them together from a business point of view,” Clarke comments on his role. “I ask questions like, ‘What is the return on investment?’ and ‘What is the business impact on the company?’”

Clarke likens the filtering of the various acquisition opportunities that Lenovo considers to a funnel: “We ask where the holes are in our portfolio with regard to our business aspirations, and as the opportunities go through the funnel, I ask which have a chance of filling those holes. You need to understand the value to the business and the value to the marketplace.” Once Clarke has identified a potential portfolio to acquire, he may bring in Robinson for closer analysis, focusing on areas such as the quality of the claims.

While Blumberg and his team fielded numerous acquisition and licensing queries from NPEs before they started looking to make purchases, until they began actively seeking out deals they had no contact with Unwired Planet. Evercore, an investment bank that has carved out a niche advising on patent-heavy M&A deals, was advising Unwired Planet on possible disposals and so when Clarke and Blumberg got in touch, the deal process began.

The negotiations unfolded over a period of six to eight months, leading up to the formal announcement of the transaction in March. The final deal, worth $100 million, involved 21 patent families covering patents in 3G, long-term evolution and other mobile technologies. It also gave Lenovo a five-year licence to Unwired Planet’s portfolio of around 2,500 issued and pending US and foreign patents covering 2G, 3G and 4G technologies, as well as cloud-based mobile applications and services.

According to Blumberg, Lenovo had no specific number in mind in terms of how large a portfolio it wanted to acquire, but instead had “an overall value target, as Unwired Planet had indicated what they wanted to get out of the deal”. He describes the range of patents as an even mix between declared standards-essential patents and feature patents.

In contrast to Unwired Planet, Lenovo had an existing relationship with NEC when the two announced their patent deal. In 2011 the two companies formed a joint venture to grow their PC businesses in Japan. Then, in Summer 2013, stories emerged in the press that the two had attempted to agree a deal involving NEC’s mobile business, but that those efforts had ultimately failed.

Although Blumberg says he can neither confirm nor deny whether talks over a wider smartphone deal took place, it appears that the companies’ familiarity with each other’s business provided the springboard to put the patent acquisition in place. The two sides formally announced the transaction in April, with Lenovo picking up a portfolio of more than 3,800 patent families. Of those, a substantial majority are feature patents, but there is also a significant number of 3G and 4G standards-essential patents.

Unchartered waters

While the NEC portfolio is the biggest patent acquisition that Lenovo has made, it is its $2.91 billion acquisition of Motorola Mobility from Google, announced in January, which has the greatest potential to transform the Chinese company’s mobile business. While Google is holding on to the majority of the 17,000 patents it picked up when it originally bought the Motorola business for $12.5 billion in 2012, more than 2,000 will transfer to Lenovo as part of the deal. Plus, the Chinese company will receive a licence to a chunk of those patents that remain with Google.

While the Lenovo IP team did not drive the Motorola deal as they did in the cases of the Unwired Planet and NEC acquisitions, they did provide crucial due diligence support. Their roles will also be critical in ensuring that the company does not become another protagonist in the numerous lawsuits that have played out in the US and European courts over the last few years.

Blumberg remains largely undaunted by the smartphone wars, describing the “soap opera” of Apple v Samsung as “one of the biggest non-events of the last decade”. To him, the protracted hearings have not dissuaded consumers from buying Samsung products and have so far managed to enrich only the lawyers involved.

He is also not put off by the minefield of licensing agreements to which Lenovo is increasingly exposed, he insists. Earlier this year Wilmer Hale and Intel released an analysis of the royalty burden that many smartphone manufacturers are facing which the analysis calculated could be in excess of $120 on a hypothetical $400 phone. Tsirigotis admits that the burden is “outrageously high”, but although she does not know the exact cost, she puts it at less than $100.

Blumberg also maintains that the cost can be lowered by putting in place savvy licensing deals where part of the fee is tied to the volume of devices sold, which can significantly reduce the licensing cost per device. He points to a deal along these lines that Samsung negotiated with Qualcomm. “If you create and inherit a decent portfolio and negotiate clever deals then it’s not insurmountable,” he concludes.

On the attack

Although Lenovo’s acquisitions have caught the attention of the market, they are only part of the company’s patent-building strategy. In the last fiscal year, as Douglas Robinson points out, the company filed three times the number of patent applications as in its best previous year. “There has been a strong effort to reach out to the various parts of the company that were not as well connected to patents and the invention process,” Robinson comments on the reason for this growth in applications. “Our strategy is a combination of building and buying,” adds Blumberg. “We have brilliant engineers in the company and historically had more inventions than resources to protect them.”

As it grows its portfolio both organically and through acquisitions, Lenovo must also consider the extent to which it is ready to use its patent assets to generate significant licensing returns. According to Tsirigotis, the company will carefully weigh up the pros and cons of any wider approach it takes to assertion. “The idea that you can quickly make tens of millions of dollars is usually not correct,” she insists. “It takes a lot of time, and you need an appropriate revenue goal and time goal in order to close deals.” Plus as the horizons of a public company’s leadership are often focused on a quarter-to-quarter basis, managing expectations is crucial.

“My guiding principle is that we have to support the product business,” Blumberg stresses. “Revenue licensing can be an obstacle in lots of ways, including antagonising customers and suppliers.”

As the company seizes more opportunities to grow, so more questions over its patent strategy will arise. Despite this year’s shopping spree, in many ways Lenovo’s work has just begun.