Markets for technology1 Topic 5: Patents, licensing and basic strategies A. What is a patent? B. Three distinct uses of IP as business tool –As a strategic tool to exclude rivals –As an asset to use in bargaining –As an asset to sell C. Dangers –Poor choice of licensing strategy: the GIF patent –Gaming the system & changing legal norms D. Buying patented technology –University/industry licensing: Founding of SUN

Markets for technology2 A. What is a patent? Inventor gains right to exclude others for 17/20 years –Usually wants to exclude an imitator –Provides “incentives to innovate” What the patent office does in the US –Non-obviousness (to someone schooled in the art) –Novelty (beyond what already is patented) –The patent examiner has LOTS of discretion (but is subject to later review by courts & *rarely* by own supervisors) –First to invent  first to file Examples & other stories –Does anyone here have a patent in their name?

Markets for technology3 B. Patents as a busines tool to exclude rivals The intended public policy behind patent systems –Frames traditional analysis & most examples In practice: A variety of strategies –Clustering (e.g., Xerox in 1960s, Polaroid in 1970s) –Bracketing – sometimes w/an eye toward a later bargain (e.g., HP medical systems division) –Often used w/other mechanisms (to slow down rival) Sometimes not used b/c disclosure required –Worldwide: disclosure 18 months after filing for patent & contesting of patents prior to issuing

Markets for technology4 B. Patents as an asset to be used in bargaining Impede another firm’s “design freedom” –Holders of chip patents threaten Intel Collect a pay-off through the threat of suit –Shut down another business w/preliminary injunction (e.g, the TI approach) –Collect royalties & damages after the fact (e.g., the Kodak/Polaroid suit) Entry into cross-licensing deals & patent-pools –How big is your stack of patents? Any way else to use it as a bargaining tool?

Markets for technology5 B. As a tool to collect revenue Large firms w/large R&D labs –Classification s/w makes it easier not to “lose one” Why license out and not exploit it themselves? –Generates revenue w/o hurting profits too much –Foreign market: Either b/c it is cheaper to trade in license than trade output or foreign firm understands local demand –The patent of more value to another firm (who already has key assets in place – e.g., biotech & big pharma) –The growth of niche firms (e.g., specialized engineering firms in chemicals or VCs in biotechnology) A new trend: To control versions do not use patents –Sun & Java trademark

Markets for technology6 C. Dangers: poor licensing of patented technology What happened to the GIF patent? –A patent within a standard format... What is LZW? What role does it have in GIF? –Why did CompuServe develop GIF in the first place? Unisys’ June agreement –Costs/benefits of action –How was the license structured? CompuServe’s 12/29 announcement –Costs/benefits of action –What position did they put themselves in?

Markets for technology7 C. Lessons from looking back Did management blunder? –Public relations: Timing of actions/announcements –Business relationships with developers: Implicit norms about paying for IP when it is already widely in use Was it worth the trouble? –To Unisys? To CompuServe? Structuring licensing deal that makes sense –What would you do differently? –Matching the structure of the license w/structure of market

Markets for technology8 C. Another danger: Gaming the system Sneak one by patent examiner –Biotech, computing and other young technologies Find a sympathetic judge for a new ruling –Take advantage of changing norms –When are the courts an effective weapon? –The higher court tends to favor IP holders since 1982 Lawsuits slow, but business cannot tolerance delay –Ex: Microsoft views lawsuits as cost of doing business The future is cloudy: Patents for algorithms and Internet business methods????

Markets for technology9 C. An example of shifting legal norms: Lotus/Borlund Patenting at the edges of legal convention An example: Lotus’s best case –Protect “look and feel” which they developed –It is popular b/c it is original Borland’s best case –Method of operation –Enable interoperability Risks/returns of this sort of strategy –On the edge of shifting norms –Legal maneuvering back and forth

Markets for technology10 D. Buying patented technology Firms acquire technology –Through hiring knowledgeable personnel (e.g., SUN) –Through licensing a patent –Through investing in own talent and own R&D –Through acquisition of business unit (e.g., Cisco) The trade-off b/w personnel/license –Own personnel may be necessary for smart licensing practices (e.g., complement not a substitute) –Lawsuits over trade secret (e.g., Walmart/Amazon). –Boundaries of non-compete clauses always challenged

Markets for technology11 D. An example: The founding of Sun Microsystems Technological incubation at universities –Also at government labs Who owns what? –Government funding and the Bayh/Dole Act Move technology to the commercialization –Which is more mobile? Licensing or personnel? Why did VC want the inventor & not just license? –What benefit goes w/hiring personnel? –What is the drawback with hiring personnel?

Markets for technology12 Learning points Strategic use of patents –No cookbook –Possibilities for careless decision making –Licensing Difficulties/possibilities for acquiring knowledge through market mechanisms –Dependence on legal norms If you ever find yourself with one of these problems  hire a good lawyer!