1 Apr
2015

Japan’s uneasy relationship with patent monetisation

Japanese companies are increasingly interested in maximising the potential of their patent portfolios; but a combination of economic factors, cultural barriers and knowledge gaps makes one of the most obvious paths to value – patent monetisation – a challenging prospect

Figure 1. Top 50 US patent recipients in 2014 by country of origin

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Source: IFI CLAIMS Patent Services

Figure 2. Top 10 Chinese invention patent recipients in 2014 by country of origin

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Source: People’s Daily/Intellectual Property Publishing House

Figure 3. Applicants under the Patent Cooperation Treaty in 2013 by country of origin

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Source: World Intellectual Property Organisation

Figure 4. European patent filings in 2014 by country of residence of the first named applicant

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Source: European Patent Office

Japan’s mega-corporations hold some of the largest patent portfolios in the world. As the latest edition of the IAM and MDB Capital Group US Patent Elite (see pages 49-53) reveals, five of the top 10 owners of active US patents hail from Japan. And when it comes to patenting activity, they are showing no obvious signs of slowing down: four of the top 10 US patent recipients in 2014 were Japanese, according to IFI CLAIMS research, while a similar number made it into China’s top 10 recipients for 2014 (see Figures 1 to 4).

With such an abundance of patent assets to monetise, Japanese businesses would appear to be key potential clients for non-practising entities (NPEs), which in recent years have forged successful (and lucrative) relationships with operating companies in both the United States and Europe. But revenue-focused licensing in Japan remains relatively rare and many of the country’s leading enterprises seem actively opposed to the model – especially when done in partnership with NPEs.

“Intellectual property is not a product,” states Japanese LED manufacturer Nichia in its IP policy. “Intellectual property acquires value only when it is used for business activities… Income and expenditure solely related to intellectual property are not important, and intellectual property itself should not be a subject of trading.”

This is, quite clearly, a declaration of opposition to the concept of patents as a tradable asset, and thus to that of a secondary patent market. And Nichia is by no means the only Japanese operating company to have adopted this position. Canon’s head of IP, Kenichi Nagasawa, was quoted by the Nikkei Shimbun in July 2013 as saying: “Our company has never sold its patents. If a company sells patents, they end up in the hands of trolls and are used for attacking others.”

Of course, such views are not exclusive to Japanese businesses. But in a country which plays host to so many IP-rich enterprises, they mean that a great deal of monetisation potential is going untapped.

Whether you love them or hate them, NPEs are the trailblazers of the secondary patent market. And despite hostility of the kind voiced by Nichia, Canon and a host of other domestic corporates, they have been expanding their presence in Japan in recent years: Acacia Research, Conversant and Intellectual Ventures now all have offices in Tokyo. How much traction they have gained as a result is another story. “Judging from the fact that they have appointed Japanese executives with much experience in IP activities as their representatives in the last few years – for example, Seki-san [Hiro Seki, formerly chief IP officer at Renesas Electronics] at Acacia and Katoh-san [Masanobu Katoh, formerly executive vice president of Fujitsu’s Research Institute] at Intellectual Ventures – I believe that they are becoming more active; although I don’t know if their activities are going successfully,” says Hitoshi Yoshino, managing director at IP strategy consultancy Japan IP Network.

The new reality

Japanese companies have traditionally regarded patents first and foremost as a way to make a statement about their innovative capabilities. Large portfolios also facilitated cross-licensing between incumbents, neutralising much of the immediate threat of litigation – among domestic competitors, at least. Furthermore, a prevailing ‘not invented here’ attitude meant that monetisation, open innovation and other forms of IP-based collaboration and co-development went largely unexplored.

More recently, however, this view has evolved in light of heightened economic pressures. Patents can generate cash when sold or licensed, and some Japanese IP management teams have been compelled by those further up the corporate chain to explore these options to unlock this financial potential. The need to develop new products and services at a rate that keeps pace with the demands of the modern market has also encouraged Japanese companies to consider sourcing intellectual property from outside their own R&D functions.

Meanwhile, Japan’s share of the global technology markets has declined due to the country’s ongoing economic travails on the one hand and the new ascendancy of neighbouring countries such as Korea, Taiwan and China on the other. Companies in these jurisdictions have been able to produce many of the technologies that were initially developed and commercialised in Japan at a faster rate and lower cost; increasingly, they also boast impressive innovative capacities of their own and are both disrupting existing markets and creating new ones.

This new reality has ousted Japanese companies from their dominant position in certain markets. As a result, many now find themselves in possession of vast IP stockpiles that are no longer integral or relevant to core and planned product and service offerings. Maintaining such large portfolios is expensive and senior managements are pressing IP functions to find ways to make dormant assets pay their way.

That said, it is still firmly the majority view in the Japanese IP world that patents are principally a badge of innovation. If they are considered as strategic tools to any extent, it is as a means to protect market share and discourage assertions by competitors. The consensus among Japan’s patent owners is that licensing with the aim of generating revenue or facilitating cross-industry collaboration, or selling patents to competitors or third parties that might later assert them against the industry, should be avoided. This gives some idea of the challenges that IP-based businesses such as NPEs face in their attempts to crack the Japanese market – although they themselves may be largely responsible for this attitude through their own overly aggressive activities.

Market challenges

It is not just a cultural scepticism towards NPEs which has slowed their progress in Japan. Another major obstacle has been the simple matter of communication – or lack thereof. Many Japanese executives do not have a confident grasp of spoken English, while few North American licensing executives speak any Japanese, which makes it extremely difficult for NPEs to reach key decision makers in corporates.

“I think NPEs face high barriers in gaining access to the right people in Japanese IP owners and drawing their true opinions on IP monetisation,” says Hidehito Okinaka, deputy general manager in the asset management department of Mitsui & Co, who has a focus on IP assets. “So NPEs need well-known Japanese partners if they are to develop their business in Japan.”

The patent system itself also presents a challenge. For one thing, patent litigation in Japan is rare, despite the number of patents filed in the country and its size and importance as a consumer market. According to law firm Michael Best & Friedrich, just 100 to 200 patent infringement suits are filed annually; compare that to the 5,004 cases that legal analytics firm Lex Machina reports were brought before the US courts in 2014 and the thousands heard in China each year. And most of those cases – somewhere in the region of 80% – are eventually settled out of court, with judges actively encouraging litigants to reach agreement throughout the process.

Moreover, while there is no clear indication of plaintiff win rates – the figures mentioned range wildly from 27% to 60% – the Japanese courts have gained a reputation as not being particularly patentee friendly. Some would argue that this trend is even more pronounced when the plaintiff in question is a foreign NPE that is suing a domestic manufacturing company. And even if a favourable decision is handed down, the damages awarded are low compared to those in the United States. One US intermediary suggests that this is the biggest challenge that the NPE business model faces in Japan: “That’s not because it means that NPEs can’t make money in Japan, but because it sends a message to patent holders and others that patents don’t really have any monetary value.”

For most Japanese, IP is still seen as a right, not as an asset that can be deployed to add value to the business

Meanwhile, the extensive cross-licensing that takes place between the largest patent holders reduces the opportunities to secure new licensees or sell the assets on. “It is another signal that patents don’t have much intrinsic value and are more useful as a way to remove risk of attack from industry rivals,” observes the US intermediary.

Culture clash?

Meanwhile, the prevailing corporate culture in Japan is not one which is naturally conducive to NPE activity. Most senior executives in Japanese IP departments have backgrounds in engineering and R&D, rather than in business-focused roles. As a result, they often lack the commercial experience and expertise needed to identify value creation opportunities in their patent portfolios. “For most Japanese, IP is still seen as a right, not as an asset that can be deployed to add value to the business,” says one head of IP. “Companies see their patents as their children,” adds the regional director of a technology consulting firm based in Tokyo. “Their understanding is: you wouldn’t sell your children – and you wouldn’t buy someone else’s.”

The litigation that inevitably comes with assertion-based ‘stick’ licensing is likewise anathema to many Japanese corporates, which have traditionally shied away from commercial disputes whenever possible. “Having a long list of ongoing litigation is something they would much rather avoid,” continues the director. “Typically, they would rather pay to make the lawsuits go away and shorten that list than fight them.”

The US intermediary suggests that a wider issue may also be at play here: the reverence that is afforded to innovators in Japanese culture and the difficulty of reconciling this with the investor-oriented, assertion-focused model of many NPEs. “There is a near-worship of the craftsman in Japan – of people who make things by hand,” he says. “Think of the smiths who make the world’s finest swords and kitchen knives; the skill of sushi chefs; and globally renowned designs such as those produced by Toyota.”

These attitudes would go some way towards explaining why NPEs are struggling to secure buy-in for their partnership business model in Japan. However, others in the industry would argue that there may be a more obvious reason to distrust NPEs: they have exploited the litigation-averse nature of Japanese corporates by hitting them with unfair demands underpinned by low-quality patents, safe in the knowledge that their targets are more likely to pay up than to fight their corner. “Companies have been sued by NPEs many times on patents that they regard as flimsy,” says Philip Parker, founder and president at Tokyo-based IP brokers PJ Parker & Co. “They also feel that they have had to pay large licence fees to NPEs.”

This, though, might not be the full story: one Japanese head of IP suggests that, in reality, few Japanese companies have been targeted by NPEs; instead, a handful of large market players have been sued on multiple occasions. Their reactions have filtered down to Japan’s small and medium-sized enterprises, which now automatically view NPEs as dangerous and dishonest ‘trolls’ without having any real appreciation of their various business models. It’s something that may sound familiar to anyone following the ongoing patent reform debate in the United States.

On a more positive note, however, the tide of NPE litigation may be having a transformative effect on certain sections of Japanese industry. For at least some of the country’s operating companies, it has opened their eyes to how their North American and European counterparts are working with NPEs to create strategic value. These companies are now considering the best ways in which to monetise their own assets – and are increasingly engaging the services of NPEs to help.

Changing attitudes

There is evidence to suggest that Japanese companies are among the biggest sellers of patents to NPEs of various types. Data from Allied Security Trust published last year (“Back in the old routine”, IAM 69) shows that Panasonic sold more US patent assets than any other company globally in 2014, divesting 1,903 patents in 10 different transactions between January and June alone. We also know from publicly available information that Panasonic has transferred patents to NPEs including Inventergy, Sisvel, Hera Wireless, Optis, Wi-LAN and Japan’s part-public funded patent aggregator, IP Bridge.

Another big Japanese vendor last year was Renesas Electronics, which assigned 226 patents in a single deal to long-term NPE partner Acacia Research; while Rohm Semiconductor also hooked up with an NPE in October last year when it entered into an alliance with Canada’s Wi-LAN. This caused some consternation in Japan, as Rohm had typically been regarded as one of the more conservative companies when it comes to IP monetisation and outsourced licensing programmes. The Wi-LAN deal may indicate that a seismic shift is taking place in corporate attitudes towards NPEs.

“For many large Japanese companies, NPEs did not used to be an option to sell to, because they were worried about the negative impact that such actions could have on their reputation in the market,” says Yoshino. “I for one was so surprised when I learned that Renesas first transferred patents to Acacia four or five years ago. At that time, it was very rare for a large Japanese company to sell its patents to a firm like Acacia.” He acknowledges that although more Japanese manufacturers are talking to NPEs as potential buyers of their patents today, it is still the case that they prefer selling to other operating companies. “But if they cannot succeed in selling their non-core patents to operating companies, I think that they now consider selling the patents to NPEs as a better option than having the patents lapse,” he states.

Table 1. Selected recent patent sales by Japanese corporate sellers

Seller

Buyer

Buyer type

Country of buyer

Date

Details

Sony

Mobilemedia Ideas

Non-practising entity

United States

January 2010

Assignment of 27 patents to non-practising entity reportedly formed by MPEG-LA, Nokia and Sony. Some of those may be among the patents asserted by Mobilemedia against Apple, BlackBerry and HTC later in 2010.

Renesas Electronics

Acacia Research

Non-practising entity

United States

August 2010

Transfer of 65 DRAM-related patents as part of the two companies' strategic patent licensing alliance.

Mitsubishi Electric

Apple

Operating company

United States

March 2011

Apple acquired 12 patents from Mitsubishi, which it later transferred to non-practising entity Digitude Innovations, which asserted two of them against companies including Amazon, HTC, LG Electronics, Motorola Mobility, Nokia, Pantech, Research In Motion, Samsung Electronics and Sony Ericsson.

Hitachi

Samsung Electronics

Operating company

South Korea

August 2011

Samsung acquired 40 US patent assets from Hitachi, including one covering an apparatus for recording and reproducing digital image and speech, which Samsung later asserted against Apple.

Fujitsu

Google

Operating company

United States

December 2011

Transfer of 12 patents, including one later asserted by Google against BT in February 2013.

NEC

Hon Hai/Foxconn

Operating company

Taiwan

September 2012

Acquisition of patents covering flat panel display technology by Hon Hai subsidiary Gold Charm for ¥9.45 billion ($122 million). Hon Hai later asserted some of these patents in US lawsuits against Japanese companies Funai, Mitsubishi Electric and Toshiba.

Sharp

Huawei

Operating company

China

May 2013

Huawei acquired 82 US patent assets from Sharp.

Panasonic

IP Bridge

Sovereign patent fund

Japan

July 2013

Transfer of 645 patents to public-private financed aggregation fund; Panasonic is also one of its key investors.

Panasonic

Wi-LAN

Non-practising entity

Canada

December 2013

Transfer of over 900 patents relating to areas including CMOS image sensors, semiconductor packaging and LED technologies to Wi-LAN subsidiary Collabo Innovations.

Panasonic

Inventergy

Non-practising entity

United States

January 2014

Approximately 500 patent assets covering 3G and 4G technologies.

NEC

Lenovo

Operating company

China

April 2014

Purchase of over 3,800 patent families relating to 3G, 4G and other smartphone-relevant technologies.

Renesas Electronics

Acacia Research

Non-practising entity

United States

July 2014

Transfer of patents to Acacia during the first half of 2014 as the two companies expanded their alliance.

Panasonic

Wi-LAN

Non-practising entity

Canada

October 2014

Transfer of “all rights and title to certain patents related to vending machine systems” to a Wi-LAN subsidiary.

Rohm

Wi-LAN

Non-practising entity

Canada

October 2014

Rohm assigned a patent portfolio covering semiconductor packaging technology to a subsidiary of Wi-LAN. Rohm will share in any licensing proceeds.

Rohm

Wi-LAN

Non-practising entity

Canada

January 2015

Wi-LAN subsidiary Aquila Innovations received full ownership of a Rohm patent portfolio relating to power management in semiconductor devices and systems.

The ethical approach

This does not mean that NPEs can expect that their future success in Japan is assured, however. “Most operating companies here haven’t changed their attitude,” says Okinaka. “But having a different kind of partner available to them to collaborate with might be a key factor in changing their minds.”

In the past year or so, a number of NPEs have made pledges to adhere to ‘ethical’ licensing principles – in other words, to refrain from what many might describe as ‘troll-like’ behaviour. Among these is Conversant, which established its Tokyo operation in early 2014. Back in November 2013, the Canadian NPE published a 10-point set of best practice guidelines for patent licensing for both licensors and licensees, which it committed itself to following. “We employ a highly skilled team of specialists in country-specific patent prosecution and licensing,” says Hiroyuki Takahori, general manager, Japan, at Conversant. “However, our history with Japan goes back much further. We have numerous long-term relationships with leading Japanese semiconductor manufacturers, with which we jointly developed technology or amicably licensed our patents. Today, through our IP management services and sophisticated partnership models, we help our Japanese partners realise the full value from their IP assets.”

Another example is publicly traded NPE Inventergy. Founded in 2013, it has struck partnership deals with Panasonic and China’s Huawei. In the view of CEO Joe Beyers, it is the company’s stated commitment to transparency that has persuaded Asian companies to link up with his firm. “When I came up with the vision for this company, I decided on day one that I wanted this to be public,” Beyers told IAM in February last year. “As a public company, you are forced to be more transparent. Interestingly, for both companies that we have purchased IP from, this also was an important factor for them – they didn’t want to work with a company that might use shell entities and similar tactics that they’ve seen other patent monetisation companies use.”

Parker suggests that the emergence of such ethical models is going some way towards softening Japanese views on teaming up with NPEs and outsourcing licensing activities to them. “There are now a number of ‘responsible’ NPEs that seek a licensing discussion first and sue only as a last resort,” he says. “Japanese companies see this behaviour as little different from their own.”

Nonetheless, Okinaka for one believes that market barriers will keep foreign NPEs out of Japan for a long time to come – unless they can develop business models that are more suited to the domestic environment. “I don’t think NPEs will become more active in the Japanese market anytime soon, because damages and the ratio of winning look likely to continue at a low level in comparison with the United States and EU countries,” he explains. “Our understanding for the future of the IP monetisation business is that the focus will need to shift from litigation to innovation – not just in Japan, but globally. If NPEs could provide some solutions that are more innovation-based than assertion-based, there might be some more space for them to enter the Japanese market.”

More than monetisation

The bottom line is that for the clear majority of Japanese companies with substantial IP portfolios, monetisation – particularly by selling patents to third parties, whoever they may be – is unlikely to become a core business activity. They remain committed to R&D, manufacturing and competing in the product marketplace.

“They are not like Qualcomm and InterDigital, which rely heavily on patents for revenue generation,” says Yoshino. “Their primary business is production and sale of products and services. They are creating patents to use effectively for these business activities. It is only when some areas of business do not go successfully as originally planned that they think to monetise them. When business performance was poor, we saw that some Japanese companies were motivated to generate income by selling their patents, trying to make up for the losses incurred in their primary business activities. But in many cases, their business performance is steadily improving today. Under such circumstances, it just does not make sense for them to monetise patents, the revenue of which must be much smaller than revenue generated by their primary business activities. Moreover, at least some Japanese manufacturers will have already sold their patent assets that had any significant value.”

In this climate, NPEs and other service providers need to be able to offer something different to Japanese patent owners – something more suited to their particular wants and needs. To ensure their survival and their ability to remain competitive, these companies need to develop new and disruptive technologies and tap new consumer markets. And they need to achieve all of this while becoming more cost efficient.

In pursuit of these goals, some Japanese companies have sought to reposition themselves by seeking new uses for their patents. As an example, in 1999 47% of Fujifilm’s consolidated revenue came from photo imaging products and services including photographic film; by 2013, this had fallen to just 9%, with medical systems and life sciences, flat panel technologies, recording media and office document-related products accounting for most of the rest. Fujifilm realised that its core patents were in the chemical area; and as the market for celluloid film shrank with the growth in popularity of digital cameras, it repurposed its patent portfolio to enter new chemical-based industries such as cosmetics and pharmaceuticals.

Further, as Japanese companies look beyond their own borders to invest throughout Asia-Pacific and beyond, many are realising that patents can be a useful tool in helping them to realise their ambitions of expansion. In some cases, the lower costs of manufacturing in other Asian countries are prompting Japanese innovators to license their intellectual property to local partners or form joint ventures. They are also looking abroad – and to other industry sectors – for technologies that can augment their own business offerings, and interest in technology transfer and collaboration is growing as a result.

So could NPEs have a part to play in helping Japanese operating companies to further these objectives? The larger players in the space certainly own the rights to technologies that could unlock a wide range of potential markets. A less aggressive strategy than they have hitherto employed in Japan – a more conciliatory, collaborative approach – could allow them to sell those technologies to the country’s manufacturers. “There is a big need for ‘patent innovation entities’ rather than ‘patent assertion entities’, to help local companies commercialise their patents with technology and know-how,” observes Okinaka.

Intellectual Ventures – a firm which has had more than its fair share of critics around the world – is one entity that seems alive to this dynamic. While its entry into Japan elicited a negative response to say the least, it has since focused on developing alternative commercialisation-focused models that may resonate with the country’s corporate elite. “Lots of companies in Japan – in every country, really – don’t necessarily love licensing,” says Masanobu Katoh, who heads up operations in Japan. “That’s a hard decision to make for many companies. But we’ve been successful in Japan on the one hand by being patient and on the other hand by innovating new IP-related products.” Among other things, the firm’s Invention Development Fund is focused on growing new operating businesses through a combination of venture funding and IP development.

In the meantime, it is also worth remembering that antipathy towards the classic patent assertion model of many NPEs is by no means peculiarly Japanese. For every Japanese company that expresses opposition to NPEs and labels them as ‘trolls’, there is at least one US or European company that says the same thing. Likewise, much of the patent reforms proposed in the United States are a direct response to concerns over perceived ‘troll’-like behaviour; and in preparation for the new regime, many market participants – including intermediaries and corporates alike – are now looking towards IP value creation models and strategies that are less focused on assertion and less reliant on what happens in the courtroom. Given these trends, it may turn out that the perceived gulf between East and West is not so very wide after all.

Action plan

Non-practising entities (NPEs) – and the concept of a secondary patent market in general – have received a lukewarm response from many Japanese rights holders; while the local IP system presents a number of challenges to monetisation brokers:

  • A number of influential Japanese operating companies have publicly expressed their opposition to selling patents on the open market, and to the role played by NPEs. This has had a trickle-down effect among other Japanese IP owners.
  • Plaintiffs face low win rates in Japanese courts; judges successfully encourage the resolution of most disputes out of court, while the damages typically awarded for infringement are considered low compared to those available in the United States and other major jurisdictions.
  • Extensive cross-licensing between Japanese patent holders means that many assets in their portfolios are heavily encumbered.
  • NPEs have earned themselves a less-than-glowing reputation in Japan thus far. Depending on who you ask, this may be because of Japanese cultural attitudes towards innovation and inventors; or it may have more to do with the particularly aggressive approach of NPEs in asserting against Japanese corporates.

However, the Japanese market presents opportunities for monetisation-focused business models – and it would appear that there is demand for their services in a certain cross-section of Japanese industry:

  • Japan’s Panasonic was the top seller of US patent assets globally in the first half of 2014; Tokyo-based Renesas Electronics was the world’s eighth biggest vendor in terms of number of assets sold.
  • The commitments to ‘ethical’ and transparent licensing practices made by NPEs such as Conversant and Inventergy have helped them to attract potential business from Japanese companies to varying degrees.
  • Alternative monetisation models focused on venture funding, technology commercialisation and know-how transfer could prove to be more useful to Japanese manufacturing companies as they seek to augment their existing offerings and expand into new markets.

Jack Ellis is the Asia-Pacific editor of IAM, based in Hong Kong