A global view: rethinking patent portfolio strategy
There was a time when patent portfolio managers could follow the idiom ‘think global, act local’. As a practical matter, they could dominate a global market while holding patents in just a handful of jurisdictions, or sometimes even just one. That time has passed. Effective portfolios must now have truly global reach and the number of strategically significant patent jurisdictions is growing every year.
This change did not happen overnight; it has been an incremental transition over three decades. In the late 1990s most major US companies placed their primary licensing focus on US patents. At the time, executives in the electronics industry gave little thought to non-US patents. China was a nascent market and was just beginning its economic rise. In fact, most US corporate executives did not believe that Chinese patents would ever be valuable or enforceable.
The same executives also considered Europe, Japan and Korea to be something of an afterthought with regard to patents. The European Union presented patent enforcement issues because of its fragmentation. While the EU market is approximately the same size as that of the United States, each EU member state is its own legal jurisdiction and patents must be obtained and enforced on a country-by-country basis. Japan had a small sales market compared to the United States, but a substantial manufacturing base; and Korea presented the same profile as Japan, but on a smaller scale. In both cases, US corporate executives felt that the home advantage was significant for the manufacturing companies. In other words, most believed that a non-Japanese or non-Korean company was less likely to be treated fairly in the court system if it was bringing infringement claims against a company based in that country.
As a result, most companies preferred to focus principally on the United States and, to a lesser extent, Europe. In the late 1990s the United States was considered to have a reasonably predictable legal system which enabled patent holders to receive fair compensation for their patents as well as the possibility for injunctive relief – and it was at least four times the size of any other jurisdiction. If companies filed in secondary jurisdictions, it was usually where their foreign competitors were based. In most situations, this meant Germany and/or Japan. Patents were rarely filed in more than three to five jurisdictions.
At the turn of the century, licensing professionals began concluding more deals with European companies, many of which had aggressive strategies for filing patents in the European Union – primarily in England, Germany, France and sometimes the Netherlands. Thus, European companies often had patent families covering up to six countries plus the United States, while US companies’ patent families focused on three countries or fewer (typically the United States, Germany and Japan).
By 2010 major companies were beginning to file significant numbers of patent applications in China and other Asian jurisdictions due to the economic growth in the region. But even today, it is difficult to find broadly filed portfolios with issued patents that provide good worldwide coverage, and many portfolios still focus solely on US patents. Even in Asia, companies tend to file patents only in their home jurisdiction, the United States and China. But that too is changing.
The speed with which change can occur in China when the government puts its weight behind an imperative is dramatic. With China now by all indications fully committed to strengthening its patent system and prioritising IP creation, the ripple effects are already being felt throughout Asia and the rest of the world, and smart companies now view filing Asian patents as a critical component of comprehensive portfolios.
A combination of circumstances has led to this shift in strategy. In the United States, there has been a systematic weakening of rights for patent holders. The country has also gone through significant change in how damages are calculated, lowering the potential award of a successful litigation. Further, the United States has made injunctive relief extremely hard to obtain.
In the current climate, some of the most valuable assets now are European and, in particular, German patents. Conventional wisdom is that the German courts are friendlier to rights holders and that injunctive relief is available in the German courts. Cost is also a factor. In the United States, litigation is both time consuming and costly – mostly due to discovery, which occurs in few other jurisdictions. Patent litigation in US courts costs between $3 million and $10 million and takes three to five years to complete. German litigation is much less expensive – approximately $1 million per case – and is usually resolved relatively quickly, in between one and two years.
In addition, China is of growing significance for several reasons. It is a large market and is beginning to rival the United States in the sale of high-end electronics, computers, smartphones and telecommunications equipment. It was recently reported that Apple sold more iPhones in China than in the United States. In addition, Chinese companies pour billions of dollars into R&D, innovation and patents as a result of their desire to compete with their foreign counterparts. China still has the world’s largest manufacturing base, although there is a trend of foreign companies moving their manufacturing facilities out of China due to rising wages and costs.
While Chinese patent law is still relatively new, the government appears increasingly inclined to protect the rights of patent holders. It has established specialised IP courts in Beijing and has proposed increasing the amount of damages for patent infringement. In addition, the government has made the creation of patents a priority and has urged companies and individual inventors to invent and file patents. While China is not a perfect market, many people believe that it will continue to strengthen its patent laws and their enforcement and ultimately become a location where obtaining and enforcing patents will become imperative.
Mix of markets
The problem with building a portfolio from scratch is that there is no single, simple solution. It is a nuanced, industry-specific process, and the insight and experience of the portfolio manager will have an immeasurable impact on the final function and value of the portfolio. Companies must closely examine their goals, their markets and their competitors, as well as current and potential threats.
Take the light-emitting diode (LED) manufacturing market as an example. One of the key questions in that sector is the optimal geographic shape for an LED portfolio that would cover as much global revenue as possible. To understand that, one must look at the end market for LED technology: where the products are sold relative to where the manufacturing occurs.
Figure 1. LED lighting end market
Source: An LEDInside Study
Figure 2. LED lighting market: manufacturing
Source: A Strategies Unlimited Presentation at the 2014 solid-state lighting manufacturing R&D workshop organised by the Office of Energy Efficiency & Renewable Energy
Sales of LED lighting are relatively evenly spread around the globe (see Figure 1). Europe, China and the United States account for approximately 63% (23%, 21% and 19%, respectively) of the market. Japan accounts for 13%. On the manufacturing side, the United States accounts for 31% of the LED chips made, followed by Japan at 21%, Taiwan at 18%, Korea at 15% and China at 11% (see Figure 2). Eighty percent coverage of the total market could be obtained if a portfolio could be found that included Chinese, Japanese and US patents. With this mix of countries, 53% of the end user market (21% + 19% + 13%) would be covered, while 63% of the manufacturing base would be covered (31% + 21% + 11%).
Assuming that the manufacturing base shipped products to all geographies similar to the end market distribution, then 53% of the end market would be covered and 63% of the remaining 47% would be covered. The result is that almost 83% of the total market could be covered based on only these three jurisdictions (as Taiwan manufactures 18% of LED products, adding Taiwanese patents would result in more than 90% coverage).
The example shows that an understanding of how the patents will be used, the markets in which the technology is sold and how the manufacturing and sales channels are distributed worldwide is critical in determining the geographic filing strategy. Rarely are any two companies or industries alike.
In addition, it is clear that the optimal mix of geographies will change over time as sales markets and manufacturing bases inevitably shift. For example, there is growing interest in wireless patents filed in India, where Ericsson has had recent success in obtaining injunctions against both Xiaomi and Micromax. India is one of the fastest-growing markets for smartphones in the world, but as recently as two years ago the market was nascent at best and no major companies appeared to be seriously filing patents in India. Clearly, Ericsson had insight – likely because it had key market intelligence. Because Ericsson sells wireless infrastructure equipment, it likely saw the bids from the Indian telecoms companies as long as five years in advance of the first installations. This business-specific insight is something that most licensing professionals did not have, and it appears to be paying off handsomely.
Companies must also consider where manufacturing will occur in the future. Predicting the future is always difficult, but manufacturers such as Samsung are moving operations from China to Vietnam. Other companies are moving manufacturing to Malaysia, Burma and other Southeast Asian countries. Patent acquisition strategy should at least consider these trends. Making the decision at the time of the invention is always difficult because frequently it takes 10 to 15 years for the invention to be adopted into a mainstream product. However, the ability to buy patents that have already been issued is always an option.
Flight to quality
In recent years there has been a flight to quality in the patent market. But what is quality? In general, there are few good measures of gross portfolio quality. In the transactional and litigation markets, quality is measured based on three major factors:
- Is the patent valid?
- Has someone infringed that patent?
- What is the potential royalty base of the patent?
Many legacy portfolios have taken the quantity-over-quality approach. This can be seen based on a number of broad factors usually measured in the portfolio. One way of assessing the quality and effectiveness of a portfolio is to examine:
- the average number of independent claims per patent (fewer claims make the three factors above less likely to be true);
- the total number of claims per patent (again, fewer can indicate poor quality); and
- the percentage of patents that are continuations, continuations in part, divisionals or re-examinations (which can reveal a lack of initiative to improve a portfolio).
A review of the portfolio of a major Asian company, which had more patents than any of its rivals, revealed that the company never filed continuations or re-examinations of its patents, and had fewer than two independent claims and fewer than 10 claims per granted patent. In top-notch portfolios, 5% to 10% of patents are continuations and re-examinations, and there are on average more than three independent claims and a total of more than 20 claims per granted patent.
During China’s Great Leap Forward, it was mandated that China would significantly increase its steel production. This led to the creation of ‘backyard furnaces’ which performed smelting in local villages. Although a lot of so-called ‘steel’ was created (much of it from recycled metals), ultimately little of it was useful due to the lack of expertise and poor process management. The same principles could be applied to portfolio building. Quantity does not equate to value or usefulness.
Forecasting the future
When deciding to file a patent, it is often difficult to predict whether the invention – no matter how novel – will actually be used in others’ products. This inherent uncertainty makes it hard to estimate the value of a newly filed patent application. Ultimately, companies must forecast where they think their market and those of their IP competitors are going, and what features and functions will be needed for key products.
Because of legal trends in the United States, damages are now rarely assessed based on the entire market value of the product. Rather, they are based on the narrower smallest saleable patent practising unit (SSPPU). Therefore, if companies focus on broader features and functions instead of narrow inventions around discrete parts, it could be expected that at least the royalty base of the inventions would potentially be larger.
In addition, companies should think about how they draft their claims to ensure that they claim not only the individual component, but also how that component is used in a broader system. A patent for a novel memory device may cover only the chip; but if there are claims that detail how the memory chip interacts with a microprocessor, the royalty base should be larger. This will at least give the company a chance to argue that the claim covers more than a narrow, discrete component.
If a company decides that it needs to buy patents, it is important to think about who has licensed those patents. Any licensee reduces the total addressable market (TAM) for the patent. There are a number of companies selling fundamental patents but, because of past licensing practices, the TAM for these inventions is minimal and therefore the value of the patents is much smaller.
For example, in the smartphone market, if a company has licensed Samsung and Apple, then a sizeable part of the market will be exhausted and as a result the licensed portfolio would be anticipated to sell at a significant discount. In addition, it is important to overlay quality with geographic coverage of any portfolio. In the United States, there might be significant obstacles due to the SSPPU, while in other countries it is possible to obtain injunctive relief.
As stated above, geographic coverage and patent quality are key factors in building a portfolio. These must be considered and planned, and should not be the purview of just one function of the corporation. Rather, marketing, R&D and legal must all have a voice in the planning if a patent portfolio is to become a significant part of a corporation’s asset base.
A well-managed portfolio can positively affect a corporation’s financial performance. Managing a patent portfolio resembles managing an investment portfolio in many respects. It requires good judgement on when and where to allocate resources, patience in determining when to reap benefits or cut losses, as well as persistence and effective execution of plans. Just as a financial adviser can add experience-based insight and market intelligence, a seasoned IP adviser can assist in making the right strategic patent investment decisions.
Transpacific IP Group Limited
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Donald Merino leads the licensing and advisory business team at Transpacific Advisors. He is instrumental in developing programmes that work with individual inventors, companies and universities to help them understand the value of their inventions and the potential paths towards monetisation.
Dr Merino spent nine years at Intellectual Ventures as senior vice president and general manager for intellectual property. He was also responsible for building the Asia IP licensing revenue. Previously, Dr Merino was director of licensing at General Instrument and Intel Corp. Dr Merino is a graduate of the US Naval Academy and a Certified Licensing Professional with an MEng in mechanical engineering and a PhD in interdisciplinary subjects, both from the Stevens Institute of Technology.
Vice president, business development
Billy Lam is in charge of Transpacific IP’s business development and technology commercialisation activities in Hong Kong and the South China region. He specialises in working with technology companies, academic and research institutions, and other IP and technology-focused organisations.
Before joining Transpacific IP, Mr Lam served as technology licensing coordinator for the Chinese University of Hong Kong. While there, he was involved in a number of successful technology transfers and focused on licensing and commercialisation strategy in several fields. Mr Lam is the first Certified Licensing Professional in Hong Kong and China. He has also received professional training in patent drafting, biotech intellectual property and other IP-related matters from the World Intellectual Property Organisation.