Following the patent market crisis, licensors have been looking for new models, write David Pridham and Marshall Phelps. Re-embracing the IBM approach which sees patents as marketable innovation assets not litigation weapons could be the answer
In the 2000s the patent licensing industry abandoned its roots and licensors rejected the IBM model in favour of a get-rich quick litigation-based model. Licensors stopped caring about patent quality and lost sight of who their customers truly were. The eventual result of this drastic change was the extinction-level event that struck the patent licensing industry a few years ago.
However, in today’s post-crisis patent environment successful licensors will need to embrace five new realities of the new patent market.
1 - Understand patent value
Although each licensor will have its own secret sauce – high-quality portfolios, superb analytics or flexibility on price – they must all recognise that while patented inventions are often valuable, patent values do have limits. Yes, you have a patent, but you have not split the atom or invented oxygen. A little realism about patent value can really help you succeed as a licensor.
2 - Scalability is key
You need to achieve some scale, even if that scale is modest. If you have just one or two patents, no matter how good they are, there is little reason for a licensee to consider taking a licence at almost any price. That is because it is going to be cheaper for them to initiate inter partes reviews against those two patents and as a patent owner you are likely to lose those assets and end up with nothing. But if you have 20 or more patents (let alone hundreds or even thousands), the inter partes review regime is not as much a threat. That is because the licensee knows that it will cost more to subject those 20 (or more) patents to inter partes review than it would to just take a licence – especially if the evidence of use you have provided demonstrates the clear need for one. The fact that the patent market has become globalised only enhances the value of having a broad and diversified portfolio with assets in multiple countries.
3 - Be a problem solver
Third, licensors need to approach licensees the same way that any other business approaches its customers (ie, with a focus on solving problems for them). When Dominion Harbor launched its licensing campaign for the Kodak portfolio, for example, it told licensees that it was solving a potentially serious problem for them. By acquiring 4,500 Kodak patents from Intellectual Ventures they were ensuring that licensees would never have to worry about those patents being dispersed piecemeal to dozens of NPEs, each of which could pose a significant litigation threat. This allowed prospective licensees to clear the risk of 4,500 patents and protect themselves from assertion attacks from multiple entities. And because the licences were offered in perpetuity, there would be no coming back in five years with another request for royalties.
4 - Think long-term
Fourth, licensors should approach licensees with an eye towards establishing a long-term relationship. It does not take any creativity to point a gun at someone and demand a settlement that is less than the cost of litigation. But, as we all have learned from the experience of the recent patent marketing crisis, that is not a repeatable business model. To truly succeed as a licensor today, you must offer something of value to licensees not just once but repeatedly.
On that point, many licensees are actually good corporate actors. If you show that they are infringing a number of blue-chip patents that are presumed valid, then they will probably talk to you about a licence if the evidence is clear and the deal terms seem fair. To be sure, there are some companies that will not play fair. But in our experience, most will be willing to pay for what they use, especially if you are able to clear their patent risk and provide them with something of genuine value.
5 - Be global, if you can
Finally, licensors should make every effort to leverage the greater opportunities available to them in today’s newly globalised patent licensing marketplace. Internationalisation is a positive development that has created a large number of potential new licensees for patent owners to work with. The opportunities for deal making are that much greater, especially if you have portfolios with assets in dozens of countries.
With Chinese companies such as Xiaomi, Oppo and Vivo, you can market assets that are not only relevant to China and India, but in Xiaomi’s case, also applicable to the European market as well, especially Spain and Germany. Licensors cannot just roll out US patents and expect companies in foreign markets who have not yet penetrated the United States to take a licence (or at least pay you a lot for one). But if you concentrate on assets in global markets where companies need to secure IP rights to gain the freedom to operate, you can capitalise on many new business opportunities.
China presents special opportunities and challenges for licensors. That is because price is such an enduring challenge there, given the thin margins of many home-grown consumer electronics manufacturers. To respond effectively to this, licensors will need to show some flexibility on price. It will also help to have a Chinese partner if licensing in that country.
As the old saying goes, history may not repeat, but it does rhyme. When we speak of going “back to the future” in patent licensing, we mean re-embracing a once-practised approach in which patents are viewed as marketable innovation assets not litigation weapons. We believe licensors will be most successful if they re-embrace a customer rather than court-focused strategy that stresses high-quality assets, fair prices, rigorous due diligence and a partnership approach with customers, which provides genuine value for both sides in a long-term relationship.
This is an abridged version of an article on IBM’s patent licensing model that will be published in the next issue of IAM. It will be available to subscribers at the start of September.