Why ethics are critical to licensing success

Most patent licensors believe that long-term business success depends on the strength of their portfolios, their contacts and, let’s face it, their litigation track record. But times have changed. With the dramatic rise in public, policymaker and industry concerns over patent troll abuses, a new success factor is emerging – the ability to differentiate one’s company from the taint of patent trolls in the minds of prospective licensees and monetisation partners.

In “The role of trust in patent monetisation” (Intellectual Asset Management (IAM), May/June 2014), we argued that it is more important than ever before for non-practising entities (NPEs) to demonstrate integrity and trustworthiness in order to secure partnerships with patent owners. Expanding on this view in the September/October 2014 issue of IAM, IP Hall of Fame member Marshall Phelps and author David Kline described this new success factor as “building a white-hat brand in the patent industry”.

Unfortunately, despite the growing calls from the business community and elected officials to rein in abusive litigants, many in the patent licensing industry have remained silent about patent troll abuses. Unlike the responsible players in other industries where bad behaviour has occurred over the years – abuses by ‘ambulance chasers’ in the personal injury field, for example, or by exploitative sub-prime ‘lenders’ in the home mortgage business – the leaders of the United States’ 200-year-old patent licensing industry have not exactly been strong advocates of reform in their own backyard.

Many keep their heads down for fear of getting embroiled in controversy. Some even refer to the ‘so-called’ patent troll problem, as if companies such as MPHJ Technologies – which was forced to sign a consent decree with the State of New York and pay back thousands of dollars it had extorted from small businesses by falsely claiming that they were infringing its patents – were a figment of Main Street’s imagination or a propaganda ploy invented by well-heeled technology giants to scare Congress into eviscerating the patent system.

It is certainly true that some companies label as a troll any legitimate patent owner that challenges their often-blatant infringement. But it is also true that bona fide patent trolls are out there damaging small businesses every day – and need to be stopped.

Whatever the reasons, this silence from many in the licensing industry prevents them from developing a positive brand in the eyes of prospective licensees, monetisation partners and the wider public. That is not only bad for their business, but also bad for our industry.

For one thing, industries grow faster and create more jobs when they police themselves rather than waiting for legislation and regulation to deal with the bad actors that lurk in every field of economic activity. This is doubtless why virtually every major US industry has a code of conduct for ethical behaviour. This begs the question: why has the patent licensing industry as a whole not moved to advance a set of ethical licensing practices or a code of conduct?

But beyond that, every licensor’s bottom line will depend on its ability to participate in what is arguably our generation’s greatest patent licensing opportunity: the large product company portfolios previously held for defensive and cross-licensing purposes, but now increasingly being tapped for financial value. To succeed in this effort, licensors will need to form trusted partnerships with the operating companies which opt for third-party assistance in monetising those portfolios.

Industry insight

A proprietary study from an independent research firm several years ago confirmed the important role played by ethics and trust in product company decisions in selecting partners to capitalise on their monetisation opportunities. This independent research included extensive interviews with senior executives at several dozen Fortune 500 operating companies. According to the findings, approximately 50% of the product companies surveyed would consider using a third-party specialist to monetise their portfolios and were interested in discussing such a partnership with a patent licensing company.

“The main objective in using a third-party NPE would be to generate more money from licensing and assertion,” noted the vice president and general counsel at the US headquarters of a major Japanese company. “We have a strong patent portfolio and I believe there is much unrealised potential in the returns that an NPE licensing company could generate.”

A company’s willingness to outsource a portion of its patent portfolio for monetisation is driven by three main in-house factors, according to the research:

• a lack of time and resources to identify potential infringements of and licensing opportunities for its patents;
• a lack of expertise to exploit licensing markets in adjacent industries; and
• a lack of the relationships needed to initiate, conduct and successfully conclude licensing negotiations.

“We have great resources here, but we’ll turn to a third party when we feel they provide us with a better chance of getting a deal done,” explained the vice president and general counsel of a global products company. “Otherwise you leave value sitting on the table and you’ve squandered the chance to redeem that value. Third parties can sometimes do better than we do because they have greater geographic reach with contacts all over the country and a reputation for making deals happen.”

Added the assistant general counsel of a US product company: “Our main objective in using a third party would be to gain access to other markets where we can license our patents.”

But with whom will a product company partner to overcome its lack of resources, expertise and relationships? What are the criteria for selecting a patent monetisation partner? That is the central question in the battle for patent monetisation success.

And as I stated in my May/June 2014 IAM article, these product companies will insist on partnering with a licensing company known for transparent, ethical and non-litigious business practices. They simply cannot afford the reputational damage to their brands that could result from partnering with licensor thought to engage in patent troll behaviour.

The independent research cited earlier backs this up. Given today’s cluttered marketplace of third-party licensing firms with varying experience, the product company decision makers interviewed placed great emphasis – of course – on a licensing company’s actual monetisation track record. However, aside from track record, the single most important selection criterion in a company’s choice of a potential licensing partner was reputation and trust (see Figure 1).

Figure 1. Deciding factors in selecting an NPE partner

When selecting a third-party monetisation partner, product company decision makers place greatest emphasis on a provider’s historical track record of licensing success. Aside from track record, the single-most important selection criterion in a company’s choice of a potential licensing partner is its reputation and trustworthiness.

Question: What are the top three criteria you would use to select a provider of patent management services?

Source: IGS Primary Research, N=17

“We would never voluntarily work with some of these patent troll licensors,” insisted a senior executive at a large semiconductor company. “We don’t trust them. They’re like wild guns, shooting first and aiming later.”

Added the chief patent counsel at one of the world’s largest technology companies: “The stigma around NPEs does influence a lot of companies in their decision to not work with them. There are certainly companies that choose to look past that stigma and collaborate with NPEs, and I think those companies tend to fall into two categories. The first category is distressed companies who work with NPEs out of necessity, trying to generate revenue by handing off their patent portfolio to the NPE to monetise. The other category is healthy businesses that may have not done all their homework and are looking to make a fast buck. But in general, most companies are hesitant to work with troll-like NPEs because of the danger to their own reputations.”

This view was echoed by former long-term IP chief at Hewlett-Packard (HP), Joe Beyers, who was quoted in Phelps’s and Kline’s September/October 2014 IAM article. “HP’s brand was extremely important to us when I worked at HP,” says Beyers. “When other companies would come and try to license their IP to us, the nature of their brands had a big impact on whether I wanted to work with them or not. I would look at their behaviour and reputation, and I’d form an impression of the likely value of the IP they were trying to license. If the company had a history of acquiring assets and then suing right away – or had a history of going after nuisance fees – then I’d assume they likely had weak assets and we’d choose to dig in and fight harder. But if the company was a more legitimate player with a reputable brand, we’d take the engagement more seriously. And we’d analyse their assets much more carefully.”

As Beyers suggests, there is much at stake in any product company’s association with a licensing company. What if, for example, a global product company sells a portfolio to an NPE which then goes out and sues ‘mom and pop’ small businesses? It is not hard to imagine the public backlash – and its impact on the company’s brand. Much of the value of public companies today lies in their intangibles, of which their brand is a major component.

Or what if a global brand collaborates with a licensor which engages in abusive demand letter practices, sending out unsupported claims of infringement to businesses whose products it has not investigated with appropriate due diligence? This can also cause reputational blowback for the product company and even taint the patent assets it retains internally.

In fact, the problem of bad demand letters is so widespread and corrosive that Conversant has launched a campaign to assist businesses in detecting and responding to such demand letters (for more information, please see www.standuptodemand.com).In sum, one of the most significant barriers to product company patent monetisation is the fear of competitive, legal and reputational blowback. That is why patent monetisation decisions are typically made by the C-suite and in some cases go to the board, depending on the level of competitive, legal and reputational risk. That is also why third-party licensors are evaluated so closely based on their track record, expertise and especially their brand and reputation.

We certainly find this to be true in our own experience of partnering with product companies on monetisation projects. Time after time, we have discovered that differentiating ourselves from the stigma of patent trolls – not just in words, but in actual deeds observable to licensees and potential monetisation partners alike – has been critical to our success.

Increasing transparency

It was this realisation that led Conversant to be the first in our industry to commit to a set of ethical licensing practices. On four of the hottest-button issues in patent licensing today, in November 2013 we pledged – and encouraged others in the industry – to do the following:

• Disclose a patent’s true ownership.
• Seek to license an appropriate company instead of going after, for example, a start-up company, a local retailer or a small end-user customer.
• License quality patents that diligent investigation indicates are valid, enforceable and being used or likely to be used by the potential licensee.
• Try first to negotiate a licence; but if litigation becomes necessary, initiate it only for the purpose of obtaining fair and appropriate compensation for the use of patented technology – not to extort a nuisance or litigation cost-based settlement.

The movement for greater transparency and best practices is gaining momentum. In March 2014 Finjan Holdings, a developer and licensor of patented cybersecurity software, stepped forward with its own licensing best practices. These committed Finjan to transparency, fairness in not targeting small business end users and negotiation rather than litigation. One of its goals in issuing these licensing best practices, said Finjan, is “to provide a heightened standard by which we wish to be perceived within the industry”.

Also in March 2014, Microsoft announced the launch of Patent Tracker, an online tool that allows anyone to inspect all of the company’s thousands of patents. According to Microsoft general counsel Brad Smith, “Transparency around patent ownership will help prevent gamesmanship by companies that seek to lie in wait and ‘hold up’ companies rather than enable a well-functioning secondary [licensing] market.”

Dominion Harbor Group (DHG), a newly formed licensing company, published a list of six best-practice principles in June 2014 intended to help to improve standards in the patent market. Among the six principles that DHG proposes adhering to with its clients are the following:

• Pre-filing letters – DHG will not work with any clients that send serial demand letters in the hopes of extracting ‘cost of defence’ settlements.
• Patent pleading – DHG will work only with clients that agree to provide clear, concise and detailed disclosure regarding their claims early in the process.
• Revenue threshold for licensing – DHG will not represent any client in a case where the alleged infringing company has less than $25 million in annual revenue.

What next?

These are encouraging first steps. However, more leading licensors need to stand up and be counted – for greater transparency, fairness and improved patent quality, and against the abusive practices of patent trolls.

For one thing, without credible evidence that our industry is committed to curbing abuses, our pleas to policy makers that they avoid over-reaching legislation that could stifle legitimate patent licensing – a practice that both protects and encourages innovation – will fall on deaf ears.

Equally, if not even more important, is the new reality that unless patent licensors demonstrate in word and deed that they are ethical, trustworthy and responsible partners, many will end up as bystanders to the great product company patent monetisation race now underway.

Conversant Intellectual Property Management Inc

390 March Road, Suite 100

Ottawa, ON, K2K 0G7

Canada

Tel +1 613 599 9539

Fax +1 613 591 8148

Web www.conversantip.com

Scott W Burt

Senior vice president and chief intellectual property officer

[email protected]

Scott Burt leads Conversant’s legal professionals and public policy initiatives, and in 2013 headed the development of its Patent Licensing Principles, a set of practices for ethical and beneficial patent licensing. Mr Burt is a 21-year veteran of Jones Day, where he led a diverse IP and technology practice focused on complex litigation, IP counselling and IP transactions. In the patent enforcement and litigation area, Mr Burt’s practice emphasised patent analysis, global litigation and dispute resolution for clients in electronics, software, communications and other industries. In 1992, Mr Burt drafted the complaint for what is believed to be the first patent infringement case filed in the now-renowned US District Court for the Eastern District of Texas, specifically to take advantage of that court’s procedures.