“I don’t think necessity is the mother of invention. Invention, in my opinion, arises directly from idleness, possibly also from laziness, to save oneself the trouble.” – Dame Agatha Christie
With all due respect to Dame Agatha, I beg to differ. I believe that innovation is the key to success, especially in the New Economy. As we know very well, things have been changing rapidly. In the world of intellectual property (IP), even the process of innovation has changed. Today, there is an increasing awareness among companies that IP rights may be one of their most valuable assets. In fact, if strategically managed, IP may represent an organization’s most valuable capital asset. Consider the two examples below.
Priceline.com burst onto the Internet in 1998 with a revolutionary e-commerce concept: It allows a buyer to name a price and give vendors of a variety of products and services the chance to accept that price. Consumers embraced this type of reverse auction. Priceline also obtained a patent for its novel method of doing business. It thus was able, all at once, to exclude competitors from using the concept and add to the net worth of the company. The recent decline in the price of the company’s stock in no way resulted from the mismanagement of its intellectual property.
In the U.S., Expedia.com, an on-line travel service, tried to employ a similar service for hotel accommodations, but Priceline sued for patent infringement in October 1999. On January 6, 2001, Reuters reported that Expedia will have to pay royalties to Priceline for using the method. Priceline’s stock rose 16 percent as a result. Were it not for the patent, Priceline would have been unable to block the competition. The patent also facilitated Priceline’s continued growth, and provides it with the option to licence its innovative method of doing business to others on terms that are attractive to it.
The term IP refers to patents, trademarks, copyrights, trade secrets and confidential information. Each of these IP rights is a form of property that exists only on paper and has no monetary value. Its value resides in the owner’s right to prevent others from commercializing that same property. While the property right, for example a patent, is entirely an abstract one, the embodiment of what is patented is entirely, or at least partly, physical and tangible.
Priceline’s innovation was the subject of a patent. The current embodiment of its invention is tangible, in the form of an Internet-based service.
IP rights, like any form of property, can be bought and sold, licensed, used to obtain credit, transferred on death, taxed, seized or expropriated.
Traditionally the exclusive preoccupation and domain of “rocket scientists” and “lab chemists,” IP is now a hot topic for everyone. Young entrepreneurs, start-ups and established, mid-sized businesses hear about IP and are counselled to build “intellectual capital.” But many do not know what it really is, what they have to do to go about getting it and the time and resources they must commit.
Businesses that innovate need to know what IP is, how to capitalize on and protect their innovations, and why the rights of others must be respected. Intellectual property is frequently a factor in business transactions. It needs to be identified, evaluated and managed, is often the subject of a security interest, and must be properly described and preserved. IP rights may also affect the right to tender on a contract. In the day-to-day activity of innovating, businesses need to know what may be protected, what is worth protecting, and what competitors may be doing to protect their products or services.
THE GLOBAL FRAMEWORK FOR OBTAINING PATENTS AND OTHER IP RIGHTS
While the strategy for protecting and commercializing IP will necessarily differ from business to business, the process of obtaining rights is the same for everyone. For example, in the case of patents, protection is available for inventions which represent “any new and useful art, process, machine, manufacture or composition of matter, or any new and useful improvement in any art, process, machine, manufacture or composition of matter.” The invention must be novel, useful, and not obvious to a person skilled in the relevant field.
In Canada, and most countries, the patent system is based upon the “first to file” principle. This means that if two people file a patent application for the same invention, the first one to file it will have the right to obtain the patent. This underscores the need to be diligent in applying for patents in a timely fashion. The date that an application is filed is called the “priority date.” If an applicant, the “patentee,” files patents in other countries within 12 months of this date, the other filings will be deemed to have been made on the initial priority date. This allows patentees to claim the earlier date of the initial filing in their worldwide patent filings. In the U.S., however, it is still a “first to invent” system. As such, an earlier patent filing may be trumped by a later one if it can be shown that the latter deals with an invention that was actually invented first.
Particular concern should be paid to the scope of disclosure of information relating to an as yet unpatented invention. Once public disclosure of an invention is made, an inventor has a limited time in which to file a patent application in either Canada or the United States. A prior public disclosure of the invention might entirely bar the inventor from applying for a patent protection in many other countries. Consequently, inventors must pay particular attention to the announcement of new products, to the timing of new product launches and to forwarding their prototypes to suppliers, licencees or manufacturers.
While all of this may seem quite pedestrian, proper use of the system will allow a business to reap the benefits that a proper IP strategy can deliver. The priority date concept, part of the Paris Convention of 1883, allows for time to formulate a worldwide strategy. Obtaining global protection requires filing on a country-by-country basis, so that costs can quickly escalate beyond $100,000 to protect a single invention. A global filing strategy takes into consideration the cost/benefit associated with obtaining exclusive rights in each country. Rather than file everywhere, a person files an initial application and then sits back and analyzes the market over the next few months, while deciding where else to seek patent protection. For example, patented “banana harvesting machines” may not be of much use in Canada, and there may not be much demand for innovative snow tires in Africa.
There is also a system which allows a patentee to “buy” more time in which to enjoy the priority date in other countries. The PCT (Patent Cooperation Treaty) allows a patentee, for additional filing fees, to defer deciding where else to file for up to 30 months. The advantage of this system is apparent when one considers that most countries require payment of annual maintenance fees in order to preserve pending applications or patents in good standing.
WHO NEEDS AN IP STRATEGY?
Any business or individual involved in the process of innovating needs a tailored IP strategy. Consider the following typical examples:
The established multinational
These are the seasoned consumer products, industrial or pharmaceutical companies with patent departments. They have a clear IP strategy, but it may change from decade to decade depending on the economy, the competition and their products, experiences with litigation, licensing, and government policies.
The burgeoning multi-national
This is the successful corporation that is about to go “Big Time.” It may not have an IP strategy, likely has no more than one or two persons in its legal department, and probably outsources its IP work.
The mid-sized industrial
This is the successful corporation whose facilities are based in Canada and whose customers are split between Canada and the United States. It has no IP strategy, but its principals know something about IP and recognize it as something they should eventually get into.
Successful in a local or niche area, these businesses rarely have any IP capital or strategy but may have occasional innovations worthy of protection.
The New Economy start-up
This company has no product on the market but only the promise of one. Its promised product is the brainchild of one person, or a small handful, who moonlight between managing and innovating. They have learned that the only way they will obtain financing is through an IPO, or by being acquired or participating in a joint venture. They know that they must have one or more pending patent applications in order to have credibility, but they have little or no understanding of what IP is, what it involves or what it costs.
Colleges and universities
Over the last 20 years, boards of governors have looked for new ways to generate cash. Using the models adopted by universities such as Harvard, Yale, MIT and Wisconsin, other schools have developed their own research and IP policies patterned on those that have demonstrated success. Now that they have a policy, a few patents have been filed or licenced. Frequently, the experience has been an unhappy one, as the fledgling program is plagued by infighting among professors, research assistants, students and benefactors.
A WINNING STRATEGY
The ultimate strategy is to increase business and net worth by using intellectual property. Any winning IP strategy will have at least two goals: to create or acquire intellectual capital, and then exploit it quickly and efficiently.
Creating IP capital
Creating IP capital is a strategy used to establish an exclusive market. If an organization can successfully obtain IP rights that apply to the whole concept of a product, it can successfully exclude the competition from coming onto its turf. An aggressive IP program will protect market share by applying to protect not only the core aspect of a product, but the many individual features associated with it.
Several inventions can be patented that relate to a single product. For example, the Gillette razors, from the Sensor to the Mach 3, have dozens of patents among them, from the handle design to the technology, all the way to the manly ripping sound of the package when it is opened. By building a fence to protect the products as Gillette did, one can ensure that a simple design-around alternative will not be possible, or at least, will not be easy. Procter & Gamble and Kimberly-Clark share hundreds of patents protecting almost every conceivable improvement associated with their Pampers and Huggies disposable diapers. Save for a few others, no one else could ever break into and survive in that market.
Creating IP capital is a strategy that is not limited to manufactured products. Recently, the U.S. patent office allowed certain types of business methods to be patented, as illustrated by the Priceline patent discussed earlier. While entitlement to obtain business-method patents has not yet been determined in Canada and many other countries, one should be aware that it is possible to do so in the U.S. and perhaps certain other countries.
Acquiring IP capital
From the example set by companies such as HewlettPackard, IBM and, more recently, Corning, large companies are beginning to realize that they cannot produce all the new products that the market requires in-house. For them, the “old way” of doing business was to develop a product and stick with it until it turned a profit.
Often, there was little concern for what the demands of the market actually were, as the companies would invent merely for the sake of inventing, and demand would eventually follow. Today, however, the value of innovation resides in where and how it can be found, acquired and used to satisfy immediate demand. As to where they can be found, innovations are typically developed in corporate and institutional research and development laboratories, in smaller companies set up to produce a specific type of product, or in the garages and basements of entrepreneurs.
Exploiting IP capital
A winning strategy not only needs to be developed but also deployed quickly. Most IP rights have a statutory life of 10 to 20 years and a market life that is less than that. Accordingly, IP rights are no different from fruit and other commodities: They are assets for only a short period of time and may be useful to others if not to you. IP rights can be exploited in many ways:
A company may own a patent that it is not using but which may interest others. Or a patent owner may not have sufficient, or any, production capacity to make a patented product. In these cases, a business may be able to exploit unused patents by licensing them. For example, since 1990, IBM has increased its patent royalty stream from $30 million to well over $1 billion per year. Nortel and AT&T have portfolios of literally thousands of patents, many of which they may not be using, but which might enable them to obtain a cross-licence for other technology that would allow them to freely compete in their area of interest. Their patents are simply “baseball trading cards.”
Where royalties are involved, they can represent enormous sources of free cash flow going straight to the bottom line. Texas Instruments, during its impending bankruptcy in the 1980s, began to licence its patents. Reports suggest that, to date, it has earned $4 billion, with annual licensing revenues estimated at $800 million per year. These are but a few examples of how an aggressive patent-licensing strategy can increase revenue from money already spent.
OBTAINING TAX BENEFITS
Some patents, though no longer regarded as useful, still require their owners to pay annual maintenance fees. In this case, it may be possible for the owners to donate them and receive a tax write-off, like the $64-million one DuPont got when it donated 23 patents to universities.
Another important aspect of managing an IP portfolio is raising capital. While the methods for valuing IP vary, it is widely accepted that patents and other IP rights do have a tangible value, and as such increase the value of a company.
ENHANCING COMPETITIVE POSITION
With a firm grasp of the IP system, a company can use patents and other IP rights as very effective weapons in any battle against competitors.
COLLECTING COMPETITIVE INTELLIGENCE
Trademark applications become public the moment they are filed. Many are filed on “an intent to use” basis. Patent applications are laid open for public inspection 18 months after filing. These may be monitored on subscriber databases, or for free on the Internet. By searching routinely for recent filings by competitors, one can determine what they are doing and what direction their research is taking.
BUILDING A KNOWLEDGE BANK
Patent databases are a knowledge bank, and each application in it is a report on the state of the art of a particular product or process. If one is patent-conscious, the costs and delays associated with reinventing the wheel can be avoided by keeping track of the state of the art in any given field.
With the knowledge of what others are protecting, a company can design its products “around” the IP rights of others and stay in the game without getting sued.
With the knowledge of where others are going, a company can head competitors off at the pass by focusing on the next wave of ingenuity and by seeking patents on those improvements.
OFFERING AN OPEN-SYSTEM TECHNOLOGY
Despite having an established patent portfolio for a newly developed computer operating system, a patent owner might elect to let everyone use it free of charge so that it becomes the technology of choice. With everyone migrated to the patent owner’s platform, the patent owner can dominate that market by generating revenues from the sale of its also-patented hardware or the software and upgrades needed to use the base technology.
ESTABLISHING A PROGRAM FOR CREATING IP CAPITAL
Once a company has firmly grasped the commercial significance of IP, the only remaining challenge is for it to incorporate an IP strategy into its business plan. This should include finding out what IP exists, incubating new ideas, and beginning to think about commercialization.
1. Conduct an IP audit
In today’s economy, businesses can’t afford to let any assets go to waste. The same is equally true for IP assets. Since IP rights are intangibles, it is a challenge to know what capital exists at any given time. To address this concern, an IP auditing system is necessary. There are several steps in that system.
Do an audit to find out what you already own. This involves a check of inventory and the assembly of all the pertinent information and records regarding the status of IP rights in the business. Records would include: patents or patent applications; trademarks registered and not registered; copyrights; confidential information and trade secrets; industrial designs; employment agreements; consulting R&D agreements; and licences and distribution agreements.
A second step in the audit is finding out what is happening on the outside. Determine exactly what IP others are using or may be attractive to them. A critical analysis of the information gathered in this process will enable a business to determine what it has, what it needs, what it doesn’t need, and what others may want.
2. Incubate new ideas
To foster innovation, establish an environment for the creation of ideas. This is the process associated with think-tanks and brain trusts, in which the free flow of ideas and concepts are encouraged and facilitated. At this point, it is more important that the thinking and discussion encourage unrestrained, original thought rather than practicality. In 1976, when I graduated from engineering, some of my fellow graduates were snapped up by Bell Northern Research and given the 12-month task of figuring out what they would do to change the world. This may be how Shallow and Townes invented the laser, and how Roy Weber invented the 800 service. While fostering creativity to this extent may not be feasible for everyone, it is still achievable at a lower level. The incubation phase demands that a proper regime of confidentiality be in place by way of need-to-know work environments, non-disclosure agreements and employee confidentiality agreements.
3. Reduce the ideas to practical form
This step will involve a critical analysis of the broad concepts in order to select the best ones and make them work. Reducing an idea to a practical form will be needed so that it can be adequately described in a patent application. There will necessarily be some weeding out of those ideas that are impossible to realize or to narrow down to a practical form. Nonetheless, it may still be possible to market the raw concept to someone else who can make it a reality.
4. Protect the idea
This can be accomplished by a patent application, an application to register a trademark, an industrial design, by registration of copyright or by adequately dealing with the idea as protected confidential information. This is the step in which the idea becomes more tangible, i.e., a patent application. At this stage, one needs competent legal advice. The drafting of a patent application is very demanding and time-consuming, as is the preparation of a reliable confidentiality agreement.
5. Exploit the idea
The commercialization of an idea will be facilitated if there is already a pending patent application to parade before investors, prospective purchasers or licencees. Think of it as the “technology business plan.” If the concept cannot be patented, preserving the information as confidential will nonetheless ensure that the concept retains its value and does not enter the public domain.
Exploitation comes in many forms, ranging from actual commercialization, licensing or dressing up for a takeover or buyout. The New York Times recently reported that Corning has revamped its previously long-standing mission. The company had traditionally opted to market only those products that it had developed itself, but with market demand changing at an unprecedented rate, it decided to shed its grown-at-home approach. Rather than only concentrating its efforts on developing its own technology, Corning now also tries to seek out and acquire small, attractive companies that will open new doors for it. For example, while Corning is still pushing its optical fibre technology, it has also sought to acquire companies that make the pump lasers for use on fibre optic networks. This should allow it to deliver a more complete package to its customers.
Corning is not the only one with something to gain from this new approach. Smaller businesses, particularly those in Canada, are in a position to benefit hugely as target companies in an acquisition. Any presentable niche technology company in the Montreal-Toronto-Windsor corridor may be just what the doctor ordered for Corning, Lucent, IBM, AT&T, Federal Express or others.
Not too long ago a senior IP lawyer and friend from Philadelphia commented about the fact that IP was now part of mainstream business thinking and activity: “People are finally realizing that we, the computer geeks and science nerds, are on to something big here.” How right he is. IP is here to stay. It’s no longer a question of whether one can afford to get involved, but whether one can afford not to.