The License On TransferNetwork is a welcomeaddition to the IP ecosystem,but the companies whichsign up to become membersneed to be clear that they aresacrificing a large part of thestrategic flexibility that patentownership can bring
What a patent boils down to is a right to exclude. If someone is offering a product or service that is covered by the patent you own, you can stop them from doing so. It all sounds very simple, but with that ability you can potentially do a great deal. This is what makes some patents so valuable. They open up a wide range of strategic options. Exclusion, collaboration, monetisation, freedom to operate and going to the financial markets to raise funds or attract additional investment are just some of the possibilities.
Down with patents – or maybe not
Recently, we have seen a number of examples of the operational flexibility that patent ownership can confer. On June 12, for example, Elon Musk – CEO of electric vehicle manufacturer Tesla – penned a blog on the company’s website entitled “All Our Patents Are Belong to You”. It began: “Yesterday, there was a wall of Tesla patents in the lobby of our Palo Alto headquarters. That is no longer the case. They have been removed, in the spirit of the open source movement, for the advancement of electric vehicle technology.” From now on, Musk stated: “Tesla will not initiate patent lawsuits against anyone who, in good faith, wants to use our technology.”
In many quarters Musk was hailed as a hero. By rejecting patents, a number of commentators said, he was embracing a new approach to doing business; one in which old, closed models of operating would be replaced by a new spirit of openness and cooperation. But what the eulogists seemed to miss was that although the patent certificates came off the wall at Tesla HQ, not a single right was abandoned. The company still owns each and every one. And that’s because they remain extremely valuable.
The clue as to why lies in the notion of their “good-faith” use. Musk did not define what this means in his blog, but in a subsequent press call he did. “Tesla will allow other manufacturers to use its patents in ‘good faith’ — essentially barring those users from filing patent-infringement lawsuits against [Tesla] or trying to produce knockoffs of Tesla’s cars,” he told a journalist.
As Professor Adam Mossoff of George Mason University School of Law observed in a piece written for Investor.com entitled “Tesla’s New Patent Policy: Long Live the Patent System!”, what Musk is essentially offering to third parties is a cross-licence. “In exchange for using Tesla’s patents, the users of Tesla’s patents cannot file patent-infringement lawsuits against Tesla if Tesla uses their patents. This is a classic deal made between businesses — you can use my property and I can use your property, and we cannot sue each other,” Mossoff explained. It’s hard to disagree with his analysis.
If things pan out in the way that Musk presumably hopes they will, Tesla will not only be able to use its patents to drive adoption of the technology around electronic vehicles that it is creating, with the many benefits that could bring to the company, but also get access to the patents owned by any entity that takes up its offer of good-faith use – so freeing up R&D time and investment. On top of this, it retains the ability to take action against anything it deems to be a “bad-faith” use of its rights. It is an enticing prospect, but one that is made possible only by the ownership of patents. Thus, far from just being the “lottery ticket to a lawsuit” that Musk wrote about in his blog, the rights that Tesla owns have given it a level of strategic flexibility that it would not have without them.
But there’s even more to it than that. According to a Washington Post report published on June 23, analysis of the Tesla portfolio undertaken by Thomson Reuters found that the company has actually securitised a significant number of its patents relating to automobile, battery and charging technology to obtain capital from financial services provider PNC and its affiliate Midland Loan Services (quite what the pair of them thought of the Tesla pledge and the effect on the value of the security they hold has not been explained). So, in addition to the strategic benefits that the company’s patent portfolio has provided for Tesla, it has also helped it to raise cash. All in all, that’s a pretty strong illustration of the power of patents.
New revenue streams
Meanwhile, over in Japan another company has been using its patents in a very different way. In early July, Renesas Electronics and Acacia Research announced that they will be expanding an existing partnership, which has seen the US non-practising entity (NPE) undertake patent monetisation activities on behalf of the Japanese semiconductor concern.
The two have maintained a close relationship since entering into a “strategic patent licensing alliance” in August 2010. Later that year, the Japanese company transferred a portfolio of DRAM-related patents to Acacia; and in July 2013 its chief IP officer, Hiro Seki, switched offices to become the NPE’s senior vice president responsible for its Asian activities. Now, according to a press release issued to announce the new deal, Acacia will receive “broad and lengthy” access to Renesas’ global patent portfolio.
Renesas opened for business in its current form in April 2010 as a result of the merger of NEC Electronics – a spin-off of NEC’s semiconductor operations – and Renesas Technology, a joint venture formed by Hitachi and Mitsubishi Electric. However, the company has not had an easy time since its launch and by 2012 was engaged in a major restructuring. In July 2014 it announced plans to sell loss-making operations and to cut 12,000 jobs – representing about one-quarter of its workforce.
Given its situation, it is no surprise that Renesas is looking to derive as much value as possible from the assets that it holds. One of these is its patent portfolio. Worldwide, the company owns an estimated 40,000 patents, over 11,000 which are US rights. Teaming up with Acacia gives Renesas the opportunity to outsource a significant monetisation effort to an entity with a long track record of creating direct financial returns from intellectual property. If things work out, much-needed additional cash will flow into the company’s coffers – bringing with it a level of relief to investors, some breathing space for senior managers and, perhaps, the chance to save jobs that might otherwise have been lost.
And Renesas is not the only Japanese company acting in this way. Among others, Panasonic – another business going through tough times – has concluded a number of similar deals with a range of NPEs based in North America, Europe and Asia, including Inventergy, WiLAN, Sisvel and IP Bridge. The investments that the likes of Renesas and Panasonic have made in developing patent portfolios now offer the prospect of much-needed income that is not available to organisations that do not own patents.
Of course, patent monetisation is not confined to a handful of Japanese firms facing challenging trading conditions. It is a significant business for countless entities of all kinds in all parts of the world, and the money that it generates is put to all kinds of uses – from reinvestment in R&D to enhanced dividends for investors. For some companies, it is the main revenue stream; for many others, it is an additional source of income which mostly goes straight to the bottom line. Whichever way you look at it, though, it is an attractive value creation option and one that rewards investment in inventive activity and the procurement of high-quality rights.
Marching all together
In recent weeks another group of companies has come together to use their patents in a way that they believe will create considerable strategic advantages. Formed by Google, Asana, Dropbox, Canon, Newegg, Pure Storage and SAP, the aim of the License On Transfer Network (LOTNet) is to offer protection to its members against what they see as the harmful activities of patent assertion entities (PAEs).
The LOTNet solution to the problem that they feel exists is a simple one: “In the event that patents held by a LOT Network participant are transferred through a triggering event (e.g., a transfer to an entity other than another LOT Network participant), every active LOT Network participant as of the date of transfer will have its license to the transferred patents become effective. This arrangement immediately reduces the risk of PAE litigation to participants. Should a LOT Network participant be acquired outright by a PAE, or become a PAE itself, other participants active at the time of such a transfer will obtain licenses to its entire patent portfolio.”
Whether you agree with LOTNet’s claims and analysis or not, there can be no doubt that its founders have got together perfectly legitimately to set up a very neat mechanism to ensure that their patents will never be used by PAEs against LOTNet’s members; while at the same time retaining all the other benefits that their rights individually confer upon them.
Not everyone is the same
But what LOTNet’s founders do not seem to acknowledge is that not everyone chooses to use patents in the way that they do; and that any choice is as legitimate as any other, as long as it is legal.
“Had we formed LOT Network in 2005, and if every operating company had joined that year, approximately 10,500 defendants in PAE litigations using acquired patents may have collectively avoided more than $100 billion in costs,” the LOTNet home page states. Well, maybe; but there is another side to that argument. In coming together in the way that LOTNet suggests, companies would also have profoundly reduced the value of the patents that they owned because they would have considerably reduced the options open to them.
Tesla, for example, might have struggled to raise the finance it got had it previously agreed that the patents it gave as security would automatically be licensed to thousands of entities at no cost upon their transfer in case of default. For Renesas, Panasonic and other monetisers everywhere, by eliminating the opportunity to transfer rights to PAEs or to sell to them outright, it would have reduced the size of the market and decreased the opportunities to generate royalty streams, as well as the amounts associated with them.
Beyond that, you could also argue that in effectively reducing the monetary value of patents, the LOTNet path would have seen Kodak go out of business instead of saving itself from bankruptcy by selling a portfolio of patents to a consortium put together by Intellectual Ventures and RPX in 2012 for $525 million; and would have left Nortel pensioners – given some hope of a retirement income by the $4.5 billion sale of 6,000 of the Canadian company’s patent assets to Rockstar Bidco in 2011 - even more exposed than they are currently. And these examples are but the tip of the iceberg.
To return to the top – a portfolio of high-quality patents gives its owner a wide range of strategic choices. Any LOTNet member denies itself the full deck of these – and it does so without knowing what will happen further down the line. For the likes of Google, that is probably not going to be an issue. For smaller operations, perhaps it will be. Waving goodbye to all the flexibility that a patent portfolio can bring is a very big step. It is an option that is open to every patent owner, but it is one that should be taken only after all the ramifications have been fully considered. After all, once you have waved your strategic freedom goodbye, it is never coming back.
John Allen, March 27 1970 – July 17 2014
Among the 298 passengers on Malaysian Airlines flight MH17 who were killed when the aircraft was shot down over eastern Ukraine on July 17 was John Allen, an IP lawyer and partner of Dutch law firm NautaDutilh. He was travelling to Kuala Lumpur with his wife and three children. In the 2014 edition of the IAM Patent 1000: The World’s Leading Patent Practitioners, published at the end of May, Allen was identified as one of the top patent litigators in the Netherlands.
In a tribute to Allen posted on the firm’s website, his co-workers at NautaDutilh wrote: “He was a person with many talents, and in addition to his professional contribution to our firm he generously shared his musical and athletic abilities with us as well. All of us who had the privilege of working with John during his 18 years at NautaDutilh came to know him as a kind, down-to-earth and humorous man and many of us have also lost a friend. He will be dearly missed.”
Along with many others in the global IP community, IAM extends its sincere condolences to John Allen’s family, friends and colleagues.