Cross-Licensing Technology Agreements Spring 2005 Pete Perlegos

2 Outline Introduction Motivations Offense, Defense Negotiations Dangers Types of Licenses Benefits over Unilateral Licensing Limitation of Cross-Licensing Benefits

3 Introduction What is cross licensing? Businesses share patent rights through licensing agreements so that they can use each others’ inventions

4 Introduction How does such a relationship begin? I think this Patent is relevant Do not want to initially precipitate a lawsuit If the other Party says no: The only remedy is to file a lawsuit Intel v. Via: Before Intel filed the lawsuit, Via did not come to the negotiating table

5 Motivations to Cross License Litigation is Expensive David v. Goliath Can a small company afford to litigate? Normal case cost $2-5Mn from start to end of trial. Large case can cost $10Mn/quarter Dangers of Litigation Patent might be held invalid (attacker) This can cripple your business Judgment might be huge (target) Can put you out of business Access to complementary patents

6 Offense How strong is the patent? Previously Litigated How easy is it to design around? Fundamental v. Improvement A fundamental patent can be Blocking and is worth more money Process Patents Cut across entire product lines More valuable in negotiation Injunction – can put target out of business

7 Offense Everyone is licensing “…interest in licensing our…patent is an important validation of the value this patent holds within the industry and of the technology we create…” US courts (CAFC) more favorable to patent holders Treble damages and attorneys’ fees for willful infringement Do not want to risk injunction An injunction can shut down your business Patents have become much more important to business (major assets)

8 Defenses Design Around If you can design around the patent you can still make the product Value of the patent is only the cost of designing around and implementing the design around Legal Defenses Previous Art: if not disclosed at the time of the patent, patent can be invalidated Pay less: the payment should be proportional to chances of the patent not being invalidated and found to be infringing

9 Negotiations Look at accused products How many are sold? What is the prevailing party going to get in damages if they win? Settle Not prohibitively expensive As long as you are not out of market Margins might be thin Can I still pay the fee and make money?

10 Same Patent -> Different Result Wang v. Msft Microsoft bought $84Mn of Wang stock Kodak v. Sun Kodak won on Patents bought from Wang Sun paid Eastman Kodak $90Mn

11 Dangers Agere v. Atmel Agere sued Atmel on manufacturing process patents (Bell Labs) Agere sued Atmel for $100Mn Agere had licensed these patents to other companies Result? Three patents were found invalid because previous work was not disclosed Fourth patent was found non-infringing

12 Types of Licenses Fixed Cost – Straight Fee “paid up fee”, “fully paid fee” Per Item Running Royalty per item: flat fee, % Volume discount Declining prices over time Straight Cross License Very common in the 1980s-90s Broad cross license

13 Benefits over Unilateral Licensing Cross-license to reduce fee Might not be able to fully utilize patent Monopoly deadweight loss Use patent to barter with Cross-license results in future collaborative relationship Complementary inventions

14 Benefits over Unilateral Licensing Added knowledge flow between cross- licensing parties for post-licensing innovations Cross-licensing is a forward-looking alliance, not merely a barter of patents Duopoly profit attained through cross- licensing can be greater than expected monopoly profit (both technologies) Firms prefer cross-licensing if they can assure higher profit Allows for design freedom by leveraging access to other firms’ technologies

15 Benefits over Unilateral Licensing Large companies want to avoid litigation when launching new products (Sony & Samsung) companies don't want to be surprised by litigation for patent infringement of non-ground-breaking products there may be too many patents to look at practically to not pay any money, they have to be roughly equal in the harm they could do to each other

16 Benefits over Unilateral Licensing Technologies such as semiconductors are distributed among many firms A single merger or license is not likely to fulfill all technological requirements for the industry participants Firms need to have access to other firms’ technological assets through contract Semiconductor patents are highly complementary Cumulative Innovation Accelerated innovation Higher Appropriability Exchange of future innovation possibilities

17 Intel v. Via Intel sued Via over patents used in chipsets for Intel/AMD processors Via countersued on patents used in P4 Settlement: Cross-license of Intel, Via patents Via pays royalties to Intel on some products

18 Benefits over Unilateral Licensing Cross-licensing transforms the transaction into “mutual reliance relation” Unilateral Licensing – Appropriability Problem Follow-up innovations and patents are captured by the licensee against the intention of the original patent holder Cross-Licensing Can mitigate hazards of appropriability problem A’s license to B is tied with B’s license to A Safeguarding mechanism for transfer of knowledge

19 Limitation of Cross-Licensing Benefit Core patent has broad innovation potential Produces many follow-up innovations Core technology has greater hazards Continuing innovation is a key asset for the licensor and blocking innovation jeopardizes the competence Companies are reluctant to license core technologies Selective cross-licensing of non-core patents

20 Conclusions Cross license can bolster both companies’ patent portfolio Decrease risk of litigation Cumulative innovation Complementary inventions Mitigate appropriability problem Be reasonable Gambling to win big is a huge risk Everyone makes money => Everyone wins

21 Questions/Comments