1. ©2009 Prentice Hall 8-1 M738 Management of Technology Lecture 11 Protecting Intellectual Property

2. ©2009 Prentice Hall 8-2 Learning Objectives 1.Explain why firms can easily and quickly imitate most of their competitors’ products and services 2.Define a patent 3.Identify the different types of patents 4.Identify the key parts of a patent 5.Outline the trends over time in the expansion of what is patentable 6.Define patent infringement 7.Discuss the benefits and limitations of patenting

3. ©2009 Prentice Hall 9-3 Learning Objectives 1.Identify the role that secrecy plays in protecting intellectual property 2.Explain when secrecy tends to be an effective mechanism for deterring imitation 3.Define a trade secret 4.Explain why non-disclosure agreements are an important part of efforts to maintain trade secrecy 5.Define a copyright 6.Describe how a copyright is obtained 7.Define a trademark 8.Describe how a trademark is obtained 9.Explain the major differences in intellectual property across countries, and their effect on technology strategy

4. Overview Firms must decide whether and how to protect their technological innovations. Protecting innovation helps a firm retain control over it and appropriate the rents from it. However, sometimes not protecting a technology is to the firm’s advantage – it may encourage others to support the technology and increase its likelihood of becoming dominant.

5. Appropriability Appropriability: The degree to which a firm is able to capture the rents from its innovation.  Appropriability is determined by how easily or quickly competitors can copy the innovation. Some innovations are inherently difficult to copy (tacit, socially complex, etc.) Firms may also attempt to protect innovations through patents, trademarks, copyrights or trade secrets.

6. ©2009 Prentice Hall 8-6 Why You Need Intellectual Property Protection Helps to deter imitation by competitors which will undermine your profits from innovation Competitors can imitate one’s products by:  Reverse engineering them  Hiring one’s employees  Working on similar projects  Reading one’s publications and patent disclosures

7. ©2009 Prentice Hall 8-7 The Amount of Time It Takes to Imitate New Products

8. PATENTS ©2009 Prentice Hall 8-8

9. ©2009 Prentice Hall 8-9 What Is Patentable? A patent is a government-granted monopoly that prevents others from using an invention for a specified period of time in return for the inventor’s disclosure about how the invention works

10. ©2009 Prentice Hall 8-10 What Can Be Patented? Patents cannot be obtained on natural substances or ideas Patents can be obtained only on:  A working process  Machine  Manufacture  Composition of matter

11. ©2009 Prentice Hall 8-11 Novel, Non-Obvious and Useful Patents are only granted for inventions that the patent office determines are: Novel: if it has not been previously invented Obvious: if it is a clear next step in technological development to a person who is an expert in the field Useful: it has to work, have a use, and be functional

12. ©2009 Prentice Hall 8-12 A United States Patent

13. 9-13 Patent Process The patent process can take 2-5 years, and involves a number of costs. Fee Types ($US)Regular FeeSmall Entity Fee Patent Filing Fees Basic patent filing fee—utility1000 500 Design patent filing fee 430 215 Plant patent filing fee 660 330 Patent Issuance Fees (paid after Patent Office approves patent) Utility patent issue fee1,400 700 Design patent issue fee 800 400 Plant patent issue fee 1100 550 Publication fee 300 300 Patent Maintenance Fees (to keep patent in force) Due at 3.5 years after issuance of patent 900 450 Due at 7.5 years after issuance of patent2,3001,150 Due at 11.5 years after issuance of patent3,8001,900

14. ©2009 Prentice Hall 8-14 First to Invent The U.S. patent system differs from the patent systems in all other countries (except the Philippines) because the United States awards patents to the first party to invent something, not to the first inventor to file for a patent

15. ©2009 Prentice Hall 8-15 Nondisclosure In the United States, patents are only awarded for inventions that have not been offered for sale, and have not been publicly disclosed, either in an open forum or in print, more than one year earlier

16. ©2009 Prentice Hall 8-16 Expansion of What Is Patentable In recent years, the variety of things that can be patented has increased and now includes:  Genetically-engineered organisms  Computer software  Business methods Raised issues:  Backlogs in the patent office  More patent disputes  Innovation hindered by property rights  Blocking follow-on research

17. ©2009 Prentice Hall 8-17 Growth in Number of Utility Patents Issued

18. ©2009 Prentice Hall 8-18 Design and Plant Patents There are two additional types of patents other than utility patents:  Design patents: given for the appearance of products  Plant patents: given only for engineered plants that are reproduced asexually

19. ©2009 Prentice Hall 8-19 The Parts of a Patent Two key parts:  Specification: how the invention works, and may include accompanying illustrations. The specification is what the inventor must trade-off in return for the monopoly right that they receive  Claims: identify a particular feature or combination of features that are protected by the patent. The claims are what indicate whether another patent infringes on the patent

20. ©2009 Prentice Hall 8-20 Number of Claims

21. ©2009 Prentice Hall 8-21 Pioneering patents A special case of patents with strong claims, which the control of these patents is important because they can be used to extract royalty payments from a large number of users Pioneering patents and patents with broad claims are especially important if starting a company The more pioneering the patent, and the broader its scope, the more competitor firms one can deter from imitating the new product or service

22. ©2009 Prentice Hall 8-22 Defining the Claims The claims that are allowed to make are limited by what previous inventors, whose patents have already been granted, have claimed To determine what claims should be granted, the inventor has a duty to provide citations to previous patents whose technical art is built upon in creating the inventions

23. ©2009 Prentice Hall 8-23 Who Can Apply? Only inventors can apply for, and be awarded, patents, which they do by applying to the USPTO

24. ©2009 Prentice Hall 8-24 Picket Fences and Brackets Effective patenting strategy often involves the creation of a picket fence of patents around a core invention and bracketing, keeping an inventor from using the invention by patenting around it

25. ©2009 Prentice Hall 8-25 Patent Litigation Patents provide the right to sue others if they infringe on the patent by making, using, selling or importing something covered by the claims of the patent If a company wins a patent infringement lawsuit, it can obtain:  An injunction prohibiting the infringing activity  Lost profits or imputed royalties are common penalties when infringement is accidental  As much as triple damages for willful infringement Because patents that are invalid cannot be infringed, a common defense against infringement is to invalidate the patent by demonstrating that the inventor had disclosed the invention prior to filing for the patent, or that the invention is obvious to a person trained in the art Because small and new firms must spend a large portion of their revenues and senior management time to enforce their patent rights, large, established firms sometimes willfully infringe their patents, believing that they do not have the money or energy to fight back

26. ©2009 Prentice Hall 8-26 Patent Trolls Patent trolls are companies whose purpose is to buy up patents and enforce their claims through litigation or threat of litigation

27. ©2009 Prentice Hall 8-27 Advantages of Patenting Patents can:  Slow imitation  Facilitate legal protection of intellectual property  Enhance value chain leverage  Make markets for knowledge possible  Help new firms to raise money

28. ©2009 Prentice Hall 8-28 Why Companies Say That They Patent

29. ©2009 Prentice Hall 8-29 Barrier to Imitation Patents can be an important barrier to imitation, and a powerful mechanism to capture the returns on innovation

30. ©2009 Prentice Hall 8-30 Legal Protection Patents also help companies to use the legal system to protect their intellectual property

31. ©2009 Prentice Hall 8-31 Value Chain Leverage Patents also give companies control over other firms in their value chain By owning patents that are used by customers or suppliers, companies can more easily influence their behavior, and make them act more favorably towards them

32. ©2009 Prentice Hall 8-32 Markets for Knowledge Having a patent facilitates the sale of technology to other firms Patented technologies can be sold to others; technologies protected by secrecy cannot To license a technology to another company, one needs to obtain a patent on it

33. ©2009 Prentice Hall 8-33 Fundraising Patents help new companies raise money because they provide a verifiable source of competitive advantage. Investors can see the mechanism through which the new venture will deter imitation, reducing their uncertainty about the value of the venture

34. ©2009 Prentice Hall 8-34 Disadvantages of Patenting Not always effective at deterring imitation Gain may be greater by keeping it a secret Pace of change may make patent irrelevant Difficulty proving infringement

35. ©2009 Prentice Hall 8-35 Effectiveness at Deterring Imitation Patents are not always effective at deterring imitation Other firms occasionally can invent around patents, the process of coming up with something that accomplishes the same goal as the patented invention without violating the claims of the patent By inventing around patents, other companies can use the invention without having to:  Pay royalties that reduce their profit margins  Incur the high costs of developing the invention

36. ©2009 Prentice Hall 8-36 Benefits of Nondisclosure Patenting is disadvantageous when a company will gain more from non- disclosure than from a government- granted monopoly A patent gives a 20-year control on the invention, but secrecy might allow that control to last longer

37. ©2009 Prentice Hall 8-37 Pace of Change When technological change is very rapid, the invention that a patent protects will quickly become irrelevant. Given the time it takes to obtain a patent, and the cost of patenting, one probably won’t be able to earn sufficient payback to justify the investment in it

38. ©2009 Prentice Hall 8-38 Difficulty Proving Infringement If evidence cannot be gathered to prove that infringement actually occurred, or the fixed costs of defending a patent are so high that it does not pay to protect it through the court system, then the returns on the investment in a patent do not justify the cost

39. ©2009 Prentice Hall 8-39 The Advantages and Disadvantages of Patenting

40. ©2009 Prentice Hall 8-40 Effectiveness of Patents in the Industry Patent effectiveness varies substantially across industries because of differences in the nature of technology, and these industry differences affect several aspects of technology strategy

41. ©2009 Prentice Hall 8-41 Effectiveness of Product Patents by Industry

42. TRADE SECRETS ©2009 Prentice Hall 8-42

43. ©2009 Prentice Hall 9-43 Secrecy Prevention of imitation can be obtained by keeping things secret and reducing the diffusion of information about products or services or how they are produced

44. ©2009 Prentice Hall 9-44 When Does Secrecy Work? When there are few sources of the information about the new product or service When a new product or service is complex When the process of creating a new product or service is poorly understood When the information that is being kept secret involves tacit knowledge – the knowledge about how to do something that is not documented in written form When there are limited numbers of people capable of understanding the information that is being kept secret Works better for processes, inputs, and materials than for products that are observable-in-use

45. ©2009 Prentice Hall 9-45 Trade Secrets Trade secrecy is a special case of all efforts to keep a new product or service secret Trade secrecy laws provide for legal remedies if someone benefits from one’s trade secret without one’s consent

46. ©2009 Prentice Hall 9-46 Conditions to Have a Trade Secret Three conditions must be met for the courts to hold that something is a trade secret: 1.The information must be known only by people in the company 2.The information must have economic value 3.Must take reasonable measures to keep the information secret

47. ©2009 Prentice Hall 9-47 Secrecy as a Strategy Offers a longer time horizon of protection and it does not disclose information to competitors If the product is well suited for secrecy Generate customer interest because people are more interested in things that they can’t know about than things that they can Requires the adoption of secrecy policies Delay the efforts to work with other companies Inhibits efforts to sell products to many business customers, who need to know about new products long in advance of their release to fit them into their own plans Risks the independent discovery and exploitation of the inventions

48. ©2009 Prentice Hall 9-48 Trade Secrets Versus Patents

49. ©2009 Prentice Hall 9-49 Non-Disclosure Agreements Trade secrecy is enhanced by having employees sign a legal document called non- disclosure agreements that must:  Specify exactly what information is to be kept secret  Provide consideration - employees must receive something of value, like their salaries, in return for non-disclosure  Specify legitimate uses for the information  State what must be done with any documents or materials that are transferred to the employee, both during employment and after the termination of an employment relationship

50. ©2009 Prentice Hall 9-50 Enforcing Non-Disclosure Agreements Many companies are willing to sue the employees and others who help them because the only remedies for violation of non-disclosure agreements come through legal action

51. ©2009 Prentice Hall 9-51 Non-Compete Agreements Trade secrecy is enhanced by having the employees sign non-compete agreements, which bar them from working for competitors for a period of time after their employment has ended

52. ©2009 Prentice Hall 9-52 Enforcing Non-Compete Agreements Non-compete agreements help to protect the company’s intellectual property, but they are hard to enforce Need to be of limited length and limited geographic breadth because they will be declared invalid if they keep people from earning a living in their chosen field

53. ©2009 Prentice Hall 9-53 Non-Disclosure/Non-Compete Agreement

54. ©2009 Prentice Hall 9-54 Ownership of Intellectual Property The rights to technologies that employees develop during their employment at a company reside with employees unless the company require them to assign the rights to them

55. 9-55 The Effectiveness and Use of Protection Mechanisms Wholly Proprietary Systems vs. Wholly Open Systems  Wholly proprietary systems may be legally produced or augmented only by their developers.  Wholly open system may be freely accessed, augmented and distributed by anyone.  Many technologies lie somewhere between these extremes.

56. BLOCKING Prevent entry by competitors through:  unique capabilities  low post-entry price signals Factors pushing for use of the block strategy:  management’s commitment to existing technology  existence of technology drivers and coshared resources in old technology  past history of retaliation  existence of idiosyncratic assets  high MES (minimum efficient scale) for innovation

57. RUN A firm innovates fast enough to build new capabilities and introduce new products faster than competitors

58. Type III Microwave oven Type II HP and RISC Type IV Shrink in Pentium Type I Pentium High Low High Low Obsolescence of existing capabilities Product Cannibalization EXAMPLES OF DIFFERENT RUNS

59. TEAM-UP Almost the opposite of block - rather than prevent entry a firm encourages it. Why?  to win a standard (dominant design)  to increase downstream demands  to build capabilities  to exploit the second source effect  to access markets that would otherwise be inaccessible

60. Block -Protect research capability Idea Generation Team Up -License out design Design Development Block -Protect other developments and intellectual property STRATEGIES ALONG THE VALUE CHAIN AT A POINT IN TIME

61. IMPLEMENTATION & PROTECTION OF PROFITS Block Limit access to unique, inimitable capabilities Signal to entrants that expected post-entry prices will be lower »Management is committed to technology, »Products are technology drivers, »Firm has history of retaliating against new entrants, »Industry’s minimum efficient scale is large. Run Introduce new products / services before competitors do, to: »Keep competitors behind, »Deter entry, »Build new capabilities, »Prove worthiness as partner. Team up Form alliance or other partnerships with co-opetitors, to: »Improve chances of winning a standard or dominant design, »Increases upstream demand »Build capabilities, »Access foreign markets, »exploit second-source effects.

62. COPYRIGHT ©2009 Prentice Hall 8-62

63. ©2009 Prentice Hall 9-63 Copyrights Copyrights give the authors of original works the right to distribute, duplicate and provide derivations of that work, and to preclude others from doing the same

64. ©2009 Prentice Hall 9-64 What Can Be Copyrighted? A variety of things can be copyrighted:  Literary works  Dramatic works  Audio and video recordings  Computer software Works composed of common property cannot be copyrighted along with:  Intangible things  Titles, names and slogans  Ideas  Methods  Principles

65. 9-65 Patents, Trademarks and Copyrights Copyright prohibits others from: –Reproducing the work in copies or phonorecords –Preparing derivative works based on the work –Distributing copies or phonorecords for sale, rental, or lease –Performing the work publicly –Displaying the work publicly Work that is not fixed in tangible form is not eligible. Copyright is established in first legitimate use. However, “doctrine of fair use” stipulates that others can typically use copyrighted material for purposes such as criticism, new reporting, teaching research, etc. Copyright for works created after 1978 have protection for author’s life plus 70 years.

66. ©2009 Prentice Hall 9-66 Who Gets a Copyright and How Do They Get It? A copyright can be obtained:  By the author of any completed original artistic, literary or musical work, unless the work is done for hire, then the copyright goes to the entity commissioning the work  By putting the work into tangible form or by registering the work at the USPTO Registration provides the right to sue for copyright infringement

67. ©2009 Prentice Hall 9-67 Enforcement Through Litigation Courts usually conclude that copying has occurred if the new work is substantially similar to the copyrighted work, and the defendant had access to the copyrighted work The statute of limitations on copyrights only lasts three years

68. ©2009 Prentice Hall 9-68 A Copyright Application Form

69. ©2009 Prentice Hall 9-69 Recent Developments to Strengthen Copyrights File-sharing software poses an important threat to copyrights on recorded music, and its rise has led to a number of infringement lawsuits Recent laws have strengthened the position of copyright holders by allowing them to use physical tools to prevent duplication of their work; however, these physical tools have had problematic side effects

70. ©2009 Prentice Hall 9-70 Fair Use

71. ©2009 Prentice Hall 9-71 Software Copyrights Copyrights can be used to protect the source code, object code, microcode and screen displays in software, but not the ideas, mathematical formulas or equations behind them Because it is impossible to show the exact link between the expression of an idea and the process underlying it, courts interpret the “look and feel” of software to evaluate infringement Copyrights also are much easier to obtain than patents, and are a much less expensive form of protection. Copyrights offer 70 years of protection from the time of the author’s death, while patents offer only 20 years of protection from the time of invention

72. TRADEMARK ©2009 Prentice Hall 8-72

73. ©2009 Prentice Hall 9-73 Trademarks Trademarks are devices to identify the provider of a product or service Offer much less intellectual property protection than patents, copyrights, or trade secrets Do help companies to protect their brand names

74. ©2009 Prentice Hall 9-74 What Can Be Trademarked? Trademarks can be obtained on any non- descriptive, non-generic word, number, symbol, phrase, color design, or even smell that distinguishes the products and services of one company from those of another The same mark can be used by more than one company if that use will not cause confusion amongst consumers about the provider’s identity, and does not dilute the value of another party’s trademark

75. ©2009 Prentice Hall 9-75 Obtaining a Trademark One can obtain a U.S. trademark by using the mark, or by registering it with the USPTO Registration facilitates the ability to obtain similar rights in other countries and allows the inventor to sue to enforce the mark

76. ©2009 Prentice Hall 9-76 Many Companies Obtain a Large Number of Trademarks

77. ©2009 Prentice Hall 9-77 Enforcing a Trademark Trademarks provide a negative right and must be enforced through legal action, which is often more difficult for start-ups to undertake than for established companies to conduct Trademarks are lost through  Cancellation proceedings  Abandonment  If they take on generic meaning

78. ©2009 Prentice Hall 9-78 Domain Names The names used on Web sites to identify an organization providing a good or service They are protected through legal action

79. ©2009 Prentice Hall 9-79 Use of Domain Names

80. INTERNATIONAL ISSUES ©2009 Prentice Hall 8-80

81. International Patent Laws  Countries have their own laws regarding patent protection. Some treaties seek to harmonize these laws. Paris Convention for the Protection of Industrial Property –Foreign nationals can apply for the same patent rights in each member country as that country’s own citizens. –Provides right of “priority” – once inventor has applied for protection in one member country, they can (within certain time period) apply for protection in others and be treated as if they had applied on same date as first application. Patent Cooperation Treaty (PCT) –Inventor can apply for patent in a single PCT receiving office and reserve right to apply in more than 100 countries for up to 2 ½ years. Establishes date of application in all member countries simultaneously. Also makes results of patent process more uniform.

83. International Trademark Protection  Two treaties simplify registration of trademarks in multiple countries: Madrid Agreement Concerning the International Registration of Marks, and the Madrid Protocol. Countries that adhere to either or both are in Madrid Union (70 members)

84. Copyright Protection Around the World  Copyright law varies from country to country.  However, the Berne Union for the Protection of Literary and Artistic Property (“Berne Convention”) specifies a minimum level of protection for member countries.  Berne convention also eliminates differential rights to citizens versus foreign nationals.

85. ©2009 Prentice Hall 9-85 International Issues in Intellectual Property There is no such thing as international copyrights, trademarks, or patents These forms of intellectual property protection must be obtained in each country where a company would like to obtain such protection

86. ©2009 Prentice Hall 9-86 Top 20 Countries for Patent Applications

87. ©2009 Prentice Hall 9-87 Differences in Intellectual Property Regimes Major differences exist across countries in laws governing patenting, including whether they award patents to the first-to- invent or the first-to-file, their policies on the timing of disclosure, and their requirement to manufacture

88. ©2009 Prentice Hall 9-88 First-to-Invent The United States is one of only two countries in the world that awards a patent to the first person to invent a technology Must prove that one invented the technology before anyone else Failure to act quickly to apply for patents in other countries may deter from obtaining patents outside the United States

89. ©2009 Prentice Hall 9-89 Disclosure The United States allows inventors who publish information about an invention up to one year before applying for a patent to be eligible to obtain one Many European countries, and in Japan, prior publication at any time will keep inventors from obtaining a patent

90. ©2009 Prentice Hall 9-90 Requirement to Manufacture The United States imposes no requirement that an inventor actually produce a product or service that uses the patented invention within the country In many countries, one may obtain patent protection only if willing to manufacture the product in that country

91. ©2009 Prentice Hall 9-91 Intellectual Property in Developing Countries Developing country governments often do not enforce intellectual property laws vigorously because companies in those countries generate little value from intellectual property and because weak intellectual property laws reduce the cost of many products Weak intellectual property laws in developing countries lead to widespread piracy, and require companies to formulate strategies that are effective under such conditions

92. ©2009 Prentice Hall 9-92 International Agreements on Intellectual Property Several international agreements make it easier to obtain intellectual property protection in multiple countries The most important of these agreements are:  The Berne Convention  The Madrid Protocol  The European Patent Convention  The Paris Convention  The Patent Cooperation Treaty  The Trade-related Aspects of Intellectual Property Rights Agreement