Intellectual Profit

On the move

2011-05-18T18:53:00.004+02:00

Announcement

I must apologize for the gap in postings. From the end of March, I have started working for Intellectual Ventures - the World's foremost invention capital company - as Vice President of Global Licensing in Europe.

It will be very busy as we build the team over the next few months to grow our business.

I would like to thank everybody who has stopped by this blog, especially those who have contacted me to give comments and feedback.

For more information about Intellectual Ventures in Europe, click here.

Newsworthy week in European IP

2011-03-10T20:36:00.006+01:00

What a week for IP in Europe!

Big news 1: Rejection of EEUPC

First the European Court of Justice (ECJ) rejected the proposal to form a new European and European Union Patent Court (EEUPC). It seems to be a polarizing decision.

I was speaking to a German professor of IP who thought it was an eminently sensible outcome.

On the other hand, many people are very disappointed and feel that it is a disastrous decision. There is a considered analysis by Dr. Jochen Pagenberg on the IPEG blog.

Big news 2: Agreement on European unitary patent

Hot on the heels of that news was the announcement from the European Council this afternoon that 25 of 27 member states have voted to go ahead with the unitary European patent. The 3 official languages will be English, French and German. This single filing system will save costs for inventors compared with the current system of having to file applications in each individual member state with applications translated into local languages.

Italy and Spain had resisted such a move because they wanted their respective languages to be included in the list of official languages. Under the "enhanced cooperation" rules, unanimity is no longer required.

The 25 member states will now press ahead with preparations for a system for a single European patent. Italy and Spain will have the opportunity to join in the future, if they so wish.

Emigration

2011-02-04T20:37:00.002+01:00

Martin Murphy, managing director of Hewlett Packard in Ireland had an important opinion piece in the Irish Times newspaper today. It prompted me to comment with the following rant.

I agree with almost all of this opinion piece apart from the opening premise. There is a broadly-held view that emigration is a bad thing for Ireland.

In some ways it is true. Splitting up families and tearing people away from their roots is always a huge personal sacrifice. When people are forced to emigrate because of lack of options at home, it is tragic. Similarly, it is a huge waste of national funds and effort to educate our young if the result is that other economies will benefit unilaterally from Irish investment.

However this misses out on some important questions.

Are we ignoring how international experience provides training that is just not possible in Ireland? As an example, Irish doctors who go to England or the USA will see exotic diseases on a weekly basis that they might only see once in a lifetime in Ireland.

The experience of living and working in another country allows us to open our minds and develop as people. To quote Mark Twain – “Travel is fatal to prejudice, bigotry and narrow-mindedness.” That would cure a lot of ills that have afflicted Ireland's modern history.

Academic training or on-the-job experience has never been the barrier to career development in companies. In the 1970s, Irish industry already identified lack of international experience as the biggest limitation to development of middle managers and future leaders.

High value-added jobs typically are knowledge intensive. One of Ireland’s biggest opportunities from the future lies in the network of educated people who are globally welcomed and not afraid to travel.

Just because many commentators see emigration as a failure of the Irish economy does not mean the solution is to do everything in our power to retain them at home. That is NOT the issue. The missing element is the welcome for them to return.

“No one realizes how beautiful it is to travel until he comes home and rests his head on his old, familiar pillow.” Lin Yutang.

In my years of living and working overseas, I have observed an interesting phenomenon in the Irish abroad. Many Irish leave our shores with huge intentions of returning after (say) 2 years. About 18 months after leaving, a change comes over them. They start complaining about Ireland. Blaming Ireland. They talk about the traffic, the weather, the cost of living, the politicians. Most of all they talk about the tax.

Again, I am hearing about the 53% marginal tax rate. Even worse, there is an ugly undercurrent in the current political discourse that anybody earning over EUR 100,000 per year is fair game for increasing taxes further. Just like talk about increases in the corporate tax rate makes potential FDI nervous about committing to Ireland, personal taxation increases will discourage any successful person from coming back to Ireland.

The result is the following:

1) We invest huge amounts in educating people.
2) They go abroad and gain invaluable experience.
3) We create a clear barrier to educated and experienced people coming back and rebuilding our economy.

That sounds mad to me.

Economic policy - IP commercialization as a stand-alone discipline

2010-11-29T22:17:00.004+01:00

Below is my opinion piece from Innovation Magazine published by the Irish Times, reproduced with permission:

We need to develop a specialised competency in commercialisation to build this route to the market

HOLLYWOOD has perpetuated the myth that any inventor with a patent is on the road to great riches.

In the UK, James Dyson is a poster-boy for inventors. Many see him as the man who struck it rich with a vacuum cleaner that he started manufacturing in 1993. The romantic image is one of overnight success.

In fact, Dyson’s first product came 23 years earlier in 1970, when he designed a “sea truck”, a flat-hulled, high-speed watercraft. He also got a patent for the Ballbarrow, a modified version of the wheelbarrow, and other products such as a Trolleyball and a Wheelboat.

When perfecting his product, he made more than 5,000 prototypes. The reason for his success is that, apart from being in possession of perseverance and inventiveness, Dyson is an unusually good communicator who has become the face of his invention.

Dyson achieved mass-market commercial success only after a TV advertising campaign. That happened more than 10 years after his original idea for the cyclonic vacuum cleaner. As we can see from Dyson’s story, many patents are of limited commercial value.

John Wanamaker, American retailer and advertising guru, is reputed to have said: “Half the money I spend on advertising is wasted – the trouble is, I don’t know which half.”

Some people apply the same quote to patents, suggesting that just half of them have commercial value. The reality, however, is much worse.

Tony Clayton of the UK Intellectual Property Office surveyed almost 10,000 owners of patents in France, Germany, Italy, the Netherlands, Spain and the UK. His research shows that the top 0.8 per cent of patents in Europe account for 42 per cent of total patent value. The same research found that the top 3.5 per cent of all patents account for 77 per cent of total value for single patents. This means the remaining 96.5 per cent of all patents account for only 23 per cent of total value.

So the challenge is to identify potential blockbusters among the bulk of competing inventions and then find a way to bring them to the market.

The idea behind the smart economy is that the payoff for Ireland will come from the “commercialisation” of ideas and processes. The ideal process involves inventing something, patenting it and then commercialising it.

There is huge pressure on researchers to commercialise their efforts. This is unfair, however. Asking top researchers to become commercialisers is like asking car headlight designers to race against Michael Schumacher because they are both in the car business.

This may seem logical because researchers are intimately familiar with the subject matter – but commercialisation involves more than knowledge of the product. It demands extensive knowledge of the market for the product, as well as an ability to exploit that market.

Most Irish inventors do not have the resources to manufacture and market their product for global markets.

Licensing is the typical route to market envisaged for products of the smart economy. A licence is not a physical product, though – it is a legal one, so it requires a different business model.

A licence agreement is a special form of contract. It is underpinned by intellectual property in the form of patents, copyright, trademarks and know-how. It is also often supported by and subject to litigation.

Managing all of this requires specialist knowledge of intellectual property (IP) law. Typically, the minimum entry requirement for legal personnel is a master’s degree in law, often with an additional IP specialisation.

Commercialisation is more than just law. By definition, it requires a deep understanding of business. To get the best return from potential licensees requires formidable effort. Structures are often complex and special negotiation skills are involved.

Because IP is at the heart of business for both the licensor and potential licensee, negotiations can be heated and intensely emotional. It takes special skill to work through a deal and still maintain a relationship that may have to continue for decades.

We should not forget that the subject matter is usually scientifically complex. A scientific vocabulary is essential in order to understand the technical needs of the market and communicate the specific attributes of the product. Without technical sensitivity, it is impossible to identify potential infringements by non-licensees and to manage compliance of existing licensees.

This means the commercialiser needs a combination of legal, technical and business credentials to achieve commercial success working with the fruits of Irish research and development.

It takes 10 to 20 years to make a top-class researcher, and it takes just as long to make a top-flight commercialiser. We need to develop a specialised competency in commercialisation to build this route to the market.

This is not a mere matter of adapting the efforts of researchers. No political bullying should divert our researchers from focusing on what they are good at: producing world-class research outcomes.

Innovation Dublin 2010

2010-11-25T19:02:00.005+01:00

Last week, as part of the Innovation Dublin 2010 festival, I was invited to give a lecture to the MBA class at Michael Smurfit Graduate Business School.

I spoke on the topic of IP commercialization with the title "Invention or Innovation?"

The interchange with the audience was stimulating.

It is encouraging to see how conciousness is growing in the area of IP commercialization.

Also, while I was in Dublin, I attended the launch of the Innovation Academy, a collaborative initiative by the Innovation Alliance to educate PhD students about matters of innovation and commercialization.

At these difficult times it is good that there are endeavors that are focussed on the future.

Now THAT's smart

2010-11-11T18:47:00.002+01:00

If I had a hat, I would raise it to the principal of St. Aidan's primary school in Wexford, Ireland.

His contribution to developing young minds is not to just accept the laptop and projector for each class, as offered by the Government. He said he needs to get an iPod into the hands of each pupil. He went about raising the funding and had educational software loaded in each unit.

The verdict of the students is that it is "cooler than laptops and a deadly way to learn." (If you know Irish colloquialisms, you will know that "deadly" is high praise.)

The article in the Irish Independent is here.

No doubt: China is a World Power in Patents

2010-11-08T21:04:00.004+01:00

I saw it reported in the Economix blog of the New York Times that China is about to take the global lead in patent application filings.

There is nothing surprising about this.

Indeed it is almost exactly a year since I mentioned in this blog about China passing out Japan to lead the world in Chemical patents and also about the country's academic commitment to IP.

Of course you will hear the usual chorus about quantity-versus-quality and they-don't-respect-our-patents-so-let's-not-respect-theirs.

The more enlightened might just get get a little more scared and a bit more respectful.

The case for commercialization

2010-11-01T13:34:00.003+01:00

I was asked to write an opinion piece for Ireland's Sunday Business Post with the title "Working smarter, not just harder" making the case for IP commercialization a key element of the Smart Economy strategy.

The edited version is a bit sanitized, but the main message gets through.

As always, I welcome and enjoy your feedback.

IP in Divorce

2010-08-29T10:06:00.002+02:00

Of course it stands to reason, but it was interesting to see in a blog from Indiana (USA) that intellectual property can be considered "as marital property for purposes of dividing property" in divorce cases.

Sources of growth - Part 4

2010-07-23T20:54:00.004+02:00

(This is part 4 of a 4-part series. If you want to view the series from the start, click here.)

In previous parts, I have described 2 sources of growth from IP commercialisation activity, namely managing and growing existing licensees and recruiting new licensees.

To round out the discussion, there is another source that is often underestimated.

It is often assumed that an IP portfolio has a fixed value. One unheralded source of growth is the growth due to improving the value of the portfolio.

Among the various methods of valuing portfolios, several are variations on present worth of future licensing cash flows.

If the activities of managing existing licensees and developing new licensees increase the future royalty volumes, the value of the portfolio also increases. Simply put – if there is an unexpected increase of 50% in royalty streams, that in itself will allow an upwards revaluation of the portfolio by a similar percentage.

And it does not even stop there ...

The value of the portfolio is not simply the stream of royalties. If quality and efficiency improve, there is a further boost to valuation.

Success breeds success

A well-run licensing operation will in itself add to the valuation. As the process of managing and recruiting licensees becomes slicker, subsequent victories will become easier to achieve. If it is not a perpetual-motion machine, it certainly is an efficient machine.

Learning curve effects mean that you can improve the quality of agreements to optimise returns. The experience may even give the opportunity to go back and improve on aspects of existing agreements through renegotiation.

The cumulative effect of the sources of growth mentioned in this series is illustrated in the chart below.

(This is part 4 of a 4-part series. If you want to view the series from the start, click here.)

Sources of growth - Part 3

2010-07-22T22:18:00.005+02:00

(This is part 3 of a 4-part series. If you want to view the series from the start, click here.)

Part 2 of this series dealt with maintaining and growing business from existing licensees. The next source of growth is the glamour area – recruiting new licensees.

Because of natural attrition of licensees, it will always be necessary to recruit new licensees to replace them. Recruiting new licensees refreshes and extends the scope of the business.

It is also the most visible activity in business development.

However, in contrast to maintaining and growing business from existing licensees, the results often take longer to show and are more difficult to predict.

When an established roster of licensees is built, it facilitates growth through recruitment of new licensees. In non-exclusive competed markets, existing licensees will be cheerleaders for this licensing activity – after all, they are paying a premium to be legitimate licensees. They do not want to see their competitors getting a free ride. Instead of a licensing activity being an “attack by an outsider” on an industry, it now becomes a way of protecting the legitimate players within the industry and making the others pay their fair share.

Experience

Experience also plays a part. As more licenses are created, the licensor becomes more sophisticated at identifying partners, setting pricing levels and generating effective agreements. The negotiation process can also be shortened through building experience of the key sticking points and establishing the limits of flexibility.

The graph below illustrates the effect of new-licensee recruitment as an element of growth.

If recruiting new licensees is the most visible activity, Part 4 will deal with the least visible source of growth.

(This is part 3 of a 4-part series. If you want to view the series from the start, click here.)

Packing for Munich

2010-06-18T22:59:00.002+02:00

I am getting ready for my trip to Munich, Germany this weekend.

I will be speaking at the 2010 IP Business Congress.

If you are going too, be sure to pop over and say "Hello".

Blinding flash of light - why people don't "get it"

2010-06-09T21:08:00.005+02:00

Why have they not “got it”?

In a post at the end of last year, I wondered why I had got it wrong. I searched for reasons for companies not jumping into IP commercialisation.

However, there is another explanation of why governments, policy makers and even sophisticated companies have not “got it”.

First let me set the scene:

Often I have quoted the Ned Davis Research that found that in 1975, 16.8% of the market value of the S&P 500 companies was attributable to intangible assets. By 2005, the ratio had grown to 79.7%. This is an impressive change in economic structure over a relatively short period.

But the story does not stop there.

If there is a flip from roughly 83-17 to 20-80 in the relationship of tangible to intangible, then management should also have totally flipped (in the conventional sense of the word). The IP community is frustrated that the rest of the world has not “got it”.

There is a perfectly good reason

Maybe nobody has ever seen it, but I can explain in a simple way. It is simple but provocative. Modesty prevents me from describing the next sentence as “profound”.

If most policy and senior businessmen are the same age or older than I, then they had their formative years and were educated in the era when everything was tangible.

(Read that again)

If they stick with that paradigm and follow the respected Pareto’s Law, then they will naturally look to that 80% group of assets that they expect are tangible. Looking at the beach, they miss the sea of intangible assets spread out in front of them.

Any evidence that the 80% has now flipped to the intangible realm conflicts with the bedded-in paradigm.

"Does not compute" "Does not Compute"

Maybe I should stop preaching to the CEOs and hope that their kids will listen instead ....

Curious newspaper article

2010-05-31T00:11:00.004+02:00

It was surprising to see myself quoted so extensively in Ireland's Sunday Independent newspaper today.

I was never interviewed for the article, but it was reasonably consistent.

Ah well, it is always good to see IP being promoted in the mainstream press.

Sources of growth - Part 2

2010-04-30T23:33:00.007+02:00

In Part 1 of this series on sources of growth, I mentioned that if licensing business is not managed well, the stream of income could fall through such factors as natural attrition, royalty erosion, underreporting of royalties.

The corollary is also true. That is, if licensing is well managed, income from existing customers can be maintained and even grown.

It is generally accepted that existing customers are an easier source of growth than new customers. This should not be surprising. If they have already decided to do business with you and have had a positive experience then they should have little resistance to doing more business with you.

To maintain and grow existing licensees, they need tender loving care. Natural attrition can be reduced through understanding the customer’s business and making suggestions to help them boost their activities. This can reduce risks of the licensee falling away due to business failure or just lack of interest in the IP.

Closer communication is also a way to control royalty erosion. When a licensee takes the IP for granted, the royalty starts to be viewed as a tax. It is a matter of continuous education to underpin the perceived value of the IP to the licensee’s business.

Having an effective system of licensee audits supported with penalties for discrepancies identified will be a disincentive to underreport. Understanding the market and communicating with other licensees also helps to identify potential sources of royalty “leakage”.

So what does it mean?

In Part 1 it was stated that neglected licensees could contribute to a drop of 25% in license income over 5 years. If you stay in close contact with the licensees and regularly introduce new IP to them, it is similarly possible that you can maintain and grow them by 25% over those 5 years. Such a scenario is represented below graphically:

Part 3 will explore a further source of growth.

Ahead of the times?

2010-04-10T14:31:00.003+02:00

Ahead of the times?

I had an opinion piece in the Finance section of the Irish Times back in January. It was intended to be mildly provocative to stimulate debate. I have heard that there was a lot of feedback, so it served its purpose.

A few people in Ireland who understand IP told me that the idea was “ahead of its time.” That phrase conjures up images of Leonardo da Vinci or musician John Cage.

In truth, it is more often used as a polite dismissal of a nutter.

I resigned myself to the possibility that the IP age has not yet arrived and that I should not spend any more effort persuading Irish policy makers to be ready for the big wave.

Here is the news

This week in Business Week magazine, there were 2 separate articles about intellectual property. It reminded me that IP really IS in the mainstream.

Ireland says my article is ahead of its time. I have got news – the time is NOW.

Ireland is not there, so they have missed it.

You can bring a horse to water .....

Sources of growth - Part 1

2010-03-03T00:10:00.003+01:00

Sources of growth for IP management

When a company has managed an established program of licensing IP, it generates a stream of income from its intangible assets.

This is not a guaranteed stream.

Without active management, a number of factors will undermine the flow of royalty income:

Natural attrition: There is natural attrition where licensees’ sales volume is reduced or where the licensee goes out of business.
Royalty erosion: As I have mentioned previously, a royalty is like a tax. Initially, the licensee sees it as a necessary part of doing business and is prepared to pass on the cost to the end customer. However, it is payment for an intangible asset. With the passage of time, the perceived value of this asset is reduced and the licensee becomes reluctant to pay the premium. Depending on relative positions of power, the licensee may try to negotiate a lower rate. This is an erosion of the royalty rate.
Underreporting of royalties: Just as in tax, there can be a temptation to cheat by underreporting the level of royalty payments due. In the case of the state tax system the moral obligation is supported by legislation, audits and threats penalties. A good licensing system depends on selection of committed licensees but supported by a system of strong contracts, audits and penalties.

If the licensing business is not managed actively, the above factors could contribute to an annual reduction of (say) 6% - amounting to a fall of over 25% in 5 years.

Part 2 will outline some of the areas of growth to focus on in IP licensing.

Economic Policy - IP commercialization as part of national economic strategy

2010-01-05T17:43:00.004+01:00

I had an opinion piece in the Finance section of the Irish Times with the title Overcoming R&D's Law of Diminishing Returns (republished here with kind permission).

Did I get it wrong?

2009-12-28T21:54:00.004+01:00

Did I get it wrong?

As the year draws to a close, I look back at my big prediction for the year.

A perfect storm for IP?

I thought this year would be the year for IP to come into its own. It was based on 6 streams of reasoning.

Changing asset composition

According to Ned Davis Research, the proportion of intangible assets as a percentage of market capitalization in the S&P 500 companies has risen from 16.8% in 1975 to 79.7% in 2005. Research by Deloitte and others has also put the proportion of intangible assets in the region of 80%. A logical consequence is that 80% of corporate consciousness should be directed towards getting the full value from the intangible assets.

Big awards

The NTP settlement of 612.5m with Blackberry-maker Research In Motion in 2006 put intellectual property on the global corporate map. However it was not a once-off event.
This year, big court awards and settlements continued to hit the news. Some examples are Uniloc Vs Microsoft ($388m verdict, later vacated), Visto Vs RIM ($267.5m settlement), Versata Vs SAP ($138.6m verdict), i4i Vs Microsoft ($200m verdict). These continued to hammer home the fact that intellectual property has a value in itself.

Credit crunch

Even the biggest organisations had problems getting financing this year. Entrepreneurs used to present their business models relying on bank or VC financing based on potential future profitability. That model no longer holds. Companies have to show that they can be self-sufficient to cover short term financing with internal cash flows. One way of doing this is by licensing IP.

Profitability problems

As profits continued to be hit, companies are changing their attitude to keeping their markets closed. CEOs are trying to make the best use of existing assets and are looking for alternative sources of profit. The news about big awards (above) called their attention to the possibility that their own IP may have marketable value.

President Obama

Early in his term, President Obama announced that he was targeting offshore assets in “tax havens”. If you ask any company about their assets in offshore jurisdictions, there are 2 types of asset – cash and IP. With the threat of closer scrutiny by US revenue authorities, it was believed that companies would avail of the opportunity to come onshore to more acceptable jurisdictions.

Favourable tax regimes

For countries struggling to set a future economic strategy, the received wisdom is that the future will be in intellectual property. Many of those countries have changed their laws to encourage IP management activities. The theory is that it will encourage both indigenous innovation and foreign direct inward investment. Whenever I spoke to people in the Big 4 accountancy firms, they were very confident that there was huge interest and that the new laws would be a spur to action.

The logic for the Perfect Storm

So there you have it – intangible assets becoming predominant, CEOs realizing they have a value, need to raise cash, need to find new profits, President Obama forcing IP onshore and countries creating a welcoming nest for the onshored assets. It sounds like the perfect recipe for a sea-change.

But it never happened

When I talk to the Big 4 guys, they are still talking coyly about the “huge interest”, but in fact very few projects have been announced.

In defence of my predictions, I can say a few things happened:

Patents have been under attack. Alleged infringers are using the re-examination process as a defensive tool. Sometimes they are even using it as a pre-emptive defensive or offensive weapon. The result is that there is less certainty about the presumption of future validity of a patent.
There was further uncertainty in advance of the re-run of Bilski regarding software patents.
With the drastic reduction in venture capital activity in IP and the cash needs of inventors, the achievable sales prices of patents has fallen. I have seen patents that were valued at over $300,000 selling for less than $40,000. Ocean Tomo was criticised as a failure when their auction this year fell dreadfully short of expectations. The reality was that Intellectual Ventures, previously the predominant supporter of the Ocean Tomo auctions just stopped buying new IP at auctions this year.
CEOs are more cautious. Even though they know that they should be looking out for new sources of profit, they are not adventurous. Even if a project will yield clear profit streams within a very short time, they do not want to make any investment in a new activity right now.
Another source of hesitancy is that most companies have never actively commercialized their IP, so they just don’t have the will to start right now.

Big thank you

I have enjoyed the feedback from various readers during the year. You challenged my thinking and helped me grow.
I thank you all and send you warm wishes for success in 2010.

New Intellectual Property Academy in Beijing

2009-11-30T21:01:00.003+01:00

Further evidence of increasing IP sophistication in China

According to CRI English, a new intellectual property academy has been established in Beijing.

Already there are 2 post-doctoral and 41 PhD students studying IP law as their minor. The Intellectual Property Academy of Renmin University already includes 5 foreign students.

China is top in chemical invention patents

2009-11-27T11:35:00.002+01:00

I see that according to the Chemical Abstracts Service (CAS), China is now the top issuer of patent applications in the field of chemistry. It passed out Japan, the former number 1.

A further significance of this, according to the article is that 35% of all invention patents involve chemical substances.

IP Humour

2009-11-26T08:55:00.003+01:00

A frustrated journalist at ABA Journal was not able to get an interview with David Kappos, Director of the US Patent & Trademark Office. He wrote a faux business method patent application on how to get an interview.

The story has a happy ending. He has made an appointment with the USPTO chief to do the interview in the next few weeks.

Managing IP in China

2009-11-25T20:29:00.005+01:00

In a previous posting on managing intellectual property in China, I said I would outline some practical steps involved. An integrated approach is required to the multiple elements that make up the "secrets to success".

I will deal with one aspect here.

Litigation Approach

Let us examine the case of a company with strong patents experiencing infringement in China. The litigation-approach would be to instigate infringement proceedings against all the offenders. In practice, it does not make sense to sue everybody even when there is widespread infringement. It would be too costly and there are risks involved. Prudent management would say that you cannot pick fights with everybody.

The fight does not even have to be in China

When people talk about the sheer size of the Chinese domestic market, they sometimes forget another point - China is also described as "the World's factory". Most damage done to western companies through Chinese patent infringement is not done within China. It occurs in international markets. This has a very important implication for IP management strategy.

Business in China is all about relationships. That cannot be managed by remote control. If China is an important market, you have to have a presence on the ground there and and senior management should visit there often. Managing IP in China is not just about blocking infringers and signing up new licensees. You have to also maintain close relationships with existing licensees, ensuring that they continue as committed, compliant partners.

A real example

On one such visit to China, I was involved in an intense meeting with one of our licensees. The president of the company said to me that he is often approached by international buyers. The buyers say that they like his product but do not want to pay a premium for a license fee. The threat is that if the licensee does not supply them unlicensed product, they will go to his competitor who will. "What should I do in that situation?", the president asked me.

The immediate answer is that the licensee must respect the terms of our agreement. Otherwise it all falls apart. But it raises a question. A compliant licensee is at a cost disadvantage to an infringing competitor. This is a structural disincentive to recruiting and retaining licensees. It stands to reason that a perceived disincentive would block any chance of building a business relationship.

Why do people buy Chinese products?

Let's take a step back. Let's ask the question "Why do people buy Chinese products?". The simple answer is that they are cheaper. International buyers seeking cheaper product know that they must accept some compromises in getting the cheaper product. That could be inferior raw materials, reduced quality, lower wages, poor employee welfare or non-payment for intellectual property.

So are the Chinese cheating?

When I hear people talking about China not respecting IP, I must admit I have some sympathy for the Chinese companies. People use emotive and judgemental words such as "cheating". It is not a matter of cheating or morality. It is business. Chinese businessmen are resourceful and entrepreneurial. They are good at playing the game, whatever it is. If the game is to supply unlicensed product, that is what they will do.

Changing the game

Our business is to change the game. I do not dwell on the morality of Chinese manufacturers as much as the morality of the people who buy the product. Patents protect products against being made, imported, used, sold or offered for sale. Before considering legal action within China, it is possible to also deal with the demand for unlicensed product by addressing the international buyers.

Licensee-friendly environment

It can be much more effective to address the international buyers in their own jurisdictions. If it is clear that they will suffer sanctions for importing or selling infringing products, they will turn to legal products, especially if the premium is reasonable. That is what I call "creating a licensee-friendly environment". If the international buyers insist on only buying licensed product, the manufacturers are prepared to pay the license fee. They know they can pass on the cost directly to the buyer. In that case, it is similar to a sales tax. For the licensee, it also brings the advantage that they will be sought out by respected buyers. They can become respectable suppliers to global markets.

Of course nothing is ever simple

Just like the license could be considered similar to a "sales tax", manufacturers are happy to pass on the cost to their customers. Happy, that is, for a while. Just like sales taxes, after a while they will try to avoid paying what is due. I will deal with that in a later post.

Also, what is described above applies to exporting companies. After a while, companies adjust their behaviour and try to partition their business into export and domestic, to partially avoid responsibilities. That will also be a matter for a future article.

Innovation Lecture

2009-11-16T22:23:00.005+01:00

Myths of Innovation

I am taking a break from the IP commercialization discussion to look at where it all comes from.

Here is an interesting talk given by Scott Berkun last year to Carnegie Mellon, his alma mater.

It is a bit over 50 minutes long, so maybe you should wait until you can set aside some time. It is worth it:

Click here for the video.

IP in China

2009-11-14T00:19:00.003+01:00

How many times have you heard the following two linked statements?

(1) "We cannot afford to ignore China with its population of 1.3 billion people"
Followed by
(2) ".. but we cannot avoid being ripped off because they have no respect for intellectual property".

Both stereotypes are wrong. They serve as an excuse for bad business and bad management.

The population question

On a trivial level, the first part is incorrect. Official population figures are 1.3 billion but the reality is probably nearer 1.5 billion. Of those, approximately 200million have disposable incomes.

Being "ripped off"?

However this blog is about IP, so my main gripe is about the second stereotype. I want to challenge the image of all companies getting ripped off in China.

Of course you see the knock-off DVD copies and Gucci bags. While this is a serious issue, it distracts from the overall picture.

Intellectual property law has come a long way in China. In the 25 years since China acceded to the Paris convention in 1985, the laws have evolved almost as much as they did over 220 years in the USA. That is not to trivialize the USA development - it is just that China has learned from it.

Reasons for increased interest in IP in China

What has caused this improvement in attitude towards IP in China?

I see two driving factors:

There is a large increase in Chinese research and development, including from Western-educated Chinese researchers. As more intellectual property becomes generated from Chinese R&D activity, China will find it more important to protect IP.
As China becomes a global economic power, its reputation will also become more important. This is not merely theoretical. The Swiss pharmaceutical giant Novartis just announced that it has decided to locate its new $1 billion R&D operation in China rather than India, because "China has made tremendous progress in IP".

In my experience, it is possible to have extremely successful IP business with Chinese partners. Many of the horror stories are based on lack of knowledge or simply poor management.

In a future article, I will outline how to increase the probability of success in China using systematic IP management.

Bilski back on the menu

2009-11-10T19:57:00.002+01:00

The patent world was tossed into confusion at the Bilski decision. In its aftermath, there was a lot of debating about the implications. What became clear from those discussions is that nobody was satisfied with the outcome and wanted more clarity.

Yesterday the case went to the Supreme Court. It seems to be a high-energy event. The judges have obviously prepared themselves and immediately fired probing questions at both sides of the case.

The world awaits wisdom.

For more in-depth updates, I suggest that you look at Dennis Crouch's Patently-O, Peter Zura's 271 Patent or Gene Quinn's IP Watchdog blogs.

Google's disruptive play

2009-11-03T14:05:00.004+01:00

Google's strategy regarding GPS map data is worthy of the label "disruptive". This article shows the attraction for Android as an alternative to iPhone and Blackberry.

The result is cheaper-than-free licensing.

An historic step

2009-11-02T06:58:00.003+01:00

ICANN have concluded their meeting and have agreed to introduce non-roman characters in top level domain names. This agreement allows names to be created using Chinese, Japanese, Korean, Cyrillic and Arabic characters.

It is a huge step in bringing the internet closer to people where English-language dominance would have been a barrier.

A more conservative approach

2009-10-29T21:16:00.003+01:00

Previously, I outlined 10 reasons to create an independent IP commercialization business unit. Of course this is not a trivial decision and there are a lot of barriers. Here is a practical route to achieving it.

According to the National Bureau of Economic Research, R&D is centralized in 63% of large public US firms. Indeed, 48% of all R&D heads report directly to the CEO. As an output of R&D, intellectual property is seen as an essential part of the firm and is closely held.

In those firms, this is a structural impediment to decentralizing management of IP. Job-security issues are even more prevalent in decision making these days. However, apart from that, there are very valid concerns about removing intellectual property from direct control of HQ.

Some concerns:

Lack of understanding about the underlying technology and market issues
Risk of exposing valuable IP through reckless litigation
Risk of disturbing industry relationships

A safer route can be a partial decentralization with some of the following activities:

IP administration. Patents that have been registered worldwide have to be renewed each year with fees paid on time in each country of registration. These fees become due at different times of the year in each country for each patent. Failure to pay the annual fee can cause the patent to lapse in that jurisdiction without any prospect of reinstating it. It requires careful management to ensure that all the patents are kept up to date. This management activity can be a low-risk pilot of the decentralized unit to steward the intellectual property assets.
Geographical territorial limit. Because the USA is the most developed IP market in the world, it is entirely possible for a firm to be the largest company in the world and yet have its activities principally concentrated in the USA. It may be a low-risk strategy for the company to extend its “global footprint” by setting up another business unit to manage its non-USA activities and avoid disturbing the home-market.
Establishing ground rules. Litigation is an expensive proposition. Despite the attraction of showing strength, litigation may have a negative impact on the firm’s reputation in the industry. But above all, litigation puts the core intellectual property asset in jeopardy because of the risk of an invalidation attack on the IP. Even if it is decided that the stand-alone unit should manage litigation, the decision to “pull the trigger” should still remain with the parent company.

A partial adoption of a combination of the above may be more palatable than fully delegating all IP commercialization to a remote unit.

What a typical patent licensing company does

2009-10-22T00:31:00.003+02:00

In a previous posting, I talked about a standalone intellectual property commercialization unit. This post gives examples of the typical skills and activities involved in a patent licensing company. It can equally apply to other forms of IP, such as copyright and trade marks.

Market investigation

This work involves identifying possible infringers. It could (for example) mean attending trade shows in China, secret buyers visiting superstores in France, performing internet searches and contacting suspected suppliers of infringing goods.
The work involved does not just involve market research skills. It requires technical understanding of the intellectual property and an understanding of the finer legal details of the protected patent claims.

Warning letters

As a result of the market investigations, warning letters may be sent to the manufacturers, distributors or sales outlets asking them to “cease and desist” and requesting compensation for damage already done by the infringement.

These warning letters need to be followed up systematically and may lead to a satisfactory conclusion on their own.

Legal actions

If the warning letters do not achieve their aims, stronger action may be necessary. This can include managing litigation, obtaining injunctions in urgent cases and co-operating with customs in seizures of infringing product.

This may seem like a very negative part of the job, but bear in mind that the license is a covenant to not sue. If the prospect of being sued is not credible, the license has little value.

Contract Negotiation

Despite some highly-publicised court awards, typically the objective of the legal actions mentioned above is not just to collect awards. I contend that the main aims for relationship-focussed licensing firms are: to stop the infringement and to possibly negotiate a license.

Because the patent is a legal document, it is important for the negotiator to understand the legal complexities. Similarly, the end result is a licensing agreement, which is a complex legal document. Lack of sensitivities to legal issues will increase risk of an unsatisfactory outcome.

The underlying subject matter is technical, so the negotiator will have to understand the technical concepts and be sensitive to how the infringement may manifest itself in the target licensees.

Above all, the negotiator needs to be commercial. Often intellectual property negotiations are very emotional. The licensor is giving access to “his baby” and the licensee is being forced to pay fees that he does not want to pay. A skilled negotiator will understand the business of the potential licensee and propose solutions that are compatible with his business.

Licensee management

Despite all the talk about licence negotiation, signing the agreement is not the end of the job; it is the start of the relationship. The licensee needs to be managed to ensure that he is complying with the terms of the agreement. This includes royalty audits to confirm that he is reporting correctly.

It also involves keeping a close communication and bring suggestions of new technology. Apart from keeping the licensee loyal, it has the potential benefit of introducing new developments and expanding the scope of the licensing relationship.

Technology transfer and training

Often licenses include a requirement for technology transfer. As part of the licensee management process, this can be coordinated by the licensing company. It ensures that there is no immediate post-signing “buyer remorse”. It also ensures that the technology is applied in the intended way without debasing the brand value.

Other possibilities

When the licensing company has proven its proficiency at managing intellectual property commercialization, it may expand its activities into other related areas.

Driving the IP portfolio strategy. Advising which of the parent company’s patents should be abandoned (to save future maintenance costs). Identifying other candidate IP for assignment (i.e. selling) or licensing.
Mining other IP within the organization. Searching the parent organization for other IP which has potential for exploitation.
Guiding R&D directions. Suggesting which R&D should be prioritized for development and optimising it for potential commercialization.
Performing IP commercialization services for other patent holders. When the company has established a reputation for commercializing intellectual, that competence can be marketed as a service to other related, but non-competing companies.

University research as the seed?

2009-10-16T19:32:00.003+02:00

You have to love Chris Horn

Chris Horn is continuously working to promote innovation as a strong component of future economic development. This is not just theoretical discourse. When he speaks he carries the authority of one has proven himself to be phenomenally successful at bringing innovation to the commercial world.

This week he gave a presentation to Comreg’s annual conference in Dublin. The body of it is reproduced in his blog.

TCD IP licensing

One figure really stood out for me - it was the fact that the majority of the TCD licensing income comes from a single patent issued in 1994. With a 20-year expiry, that patent income will also disappear (if the technology is not already obsolete by then) in 2014. In reality, it will be harder to sign up new licensees in the last years of the patent life, so there may be an erosion of the income on that "star" patent with the passage of time.

With a total income of EUR 71 million for sponsored research, TCD generated a royalty income of EUR 126,000 with no cash from disposal of equity. If you only take the financial outcome as a measure of success, that is a whopping loss of 99.82%. Of course the financial measure ignores the value to the sponsors of the research results and the educational value of the research activity.

Universities should not beat themselves over the heads about poor licensing performance. It is well known that university research rarely makes a positive financial return. It is a pity that the talk at the conference did not extend to including figures for licensing success by industry rather than just universities.

The real value of university research

My belief – and maybe I am just being provocative – is that university research activities provide excellent basic training that can be exploited afterwards in the industries that employ graduates. It is in those commercial hothouses that the economically-exciting developments are born.

If Ireland’s smart economy is depending entirely on university research to deliver the economic benefits, the strategy is doomed ab initio to disappointing failure.

Leverage global IP

We have to get away from the concept that Ireland’s smart economy will spring out of home-grown knowledge. We have to leverage the global bank of knowledge regardless of its national origins.

With all the international goodwill towards Ireland, we have the possibility of becoming a hub for intellectual property commercialization. That ability to convert knowledge into profits is the Holy Grail and it is eminently achievable.

About the Author:
Raymond Hegarty, based in Luxembourg, is CEO of IP Foundation. He has broad experience of intellectual property and global technology transfer.

Ten reasons for a separate IP commercialization business unit

2009-10-15T23:51:00.001+02:00

In the past 2 years, there has been a strong movement among corporate IP professionals to promote the office of Chief Intellectual Property Officer (or CIPO). I understand the reasons for this. I also support the move to shine the spotlight on intellectual property management and to give it a central role in firms.

However, I know it is going against the tide of my colleagues in the industry to suggest an alternative structure to centralization of the management of IP.

Especially in the area of IP commercialization, there are strong reasons why it can make sense to have an independent business unit charged with the responsibility of commercialising IP. I would go so far as suggesting that it may even make more sense to locate the business unit in another jurisdiction.

Below, I outline ten reasons for an independent IP commercialization business unit. While IP encompasses areas such as copyright and trademarks, for simplicity I will limit my illustrations to licensing of patents.

Mismatch with existing skills
Traditionally, intellectual property has been the preserve of the legal department. That is the place where patents applications, invalidation defences, infringement proceedings, contract drafting, etc. are implemented and managed.

An effort to commercialize IP is an opportunity for the previous cost centre to become a profit centre. Of course this is an attractive proposition for the legal department.

However, while a deep knowledge of the patent processes and the legal protections are essential, the traditional legal skills are not the same as the commercial skills required to run the business of negotiating licenses. Running an IP commercialization business like a legal department is a sub-optimal arrangement. I will deal with this issue in more depth in a future blog.
Potential conflicts of interest at lower levels
Patent protection means that the owner has the advantage of (a) protecting market share or (b) ensuring a premium price.

The decision to commercialize will bring income directly from the IP, but it opens up the market to competitors who were previously blocked. While the IP income may be worth more to the corporation than the incremental profits that would arise from keeping the market closed, opening the market has a direct result on the sales figures of the parent company’s products. This can be strongly resisted by people whose performance is directly measured in sales of products. Locating the IP management in a separate business unit avoids this direct conflict of interest.
Different cost
As an illustration, a manufacturing company may enjoy net profit margins in the region of 10%. An IP company does not have Cost of Sales or manufacturing overhead, so the net profit can be in the region of 90%. If the 2 businesses are combined in one unit, it does not give a correct picture of either business.

Different cost structures will require different measures of performance, staff incentives, investment decisions and styles of management.
Chinese walls, Competition law
Typically, the consumers of intellectual property will be in the same industry as the owner of the IP. Often, the royalty is based on the usage of the patent (e.g. units sold, volumes of material, etc.). This information must be reported for the purposes of royalty calculation.
Licensees will be reluctant to give confidential information about their business activities directly to the owner of the IP, but they may give it to the licensing company if they are satisfied about the safeguards regarding confidentiality.

A further aspect of this concerns the requirements under antitrust regulations. Competition law frowns on any relationships that would reduce uncertainty about the conduct or potential future conduct of a competitor. Safeguards can be built into the structure of the business unit.
Friendly jurisdiction
Globally registered patents may have global application. However nationalistic sentiments are a real feature of international business. Despite valid business reasons, there may be resistance by (say) a French company to do business with a German company. Similarly, a Chinese company may not like the idea of paying licensing fees to a Japanese or American patent holder. Even though it is clear to all parties that royalties will eventually go back to the original owner, it can sometimes lessen the direct “pain” to pay via a licensing company based in a “neutral” jurisdiction.
Defensive barrier
One of the defences against a patent infringement action is to countersue. When Company A tries to exert its patents against Company B, Company B exerts his own patents back against Company A. When a non-practising company sues for infringement, they cannot be sued by Company B because they do not make anything.

Using a non-practising company to assert patents eliminates one of the defensive tools at the disposal of the alleged infringer.
Focussed operation
The activities of the business unit are focussed entirely on the activity of commercializing the intellectual property. There is interlocked activity between the technical, legal and commercial people. Each has a solid understanding of the other’s disciplines. When a potential licensee telephones one of the IP marketing specialists, the legal specialist is able to advise him immediately of the impact on other licensees.

Everybody knows that their focus is to maximize the exploitation of the intellectual property.
Business legal environment
Some countries have legal environments that are more hospitable to IP commercialization. Their legal systems may offer more certainty and be natural homes for such activities. In recent years, several jurisdictions have introduced IP-friendly tax regimes to encourage smart-economy activities in various forms.
Transparency
As mentioned above, in many jurisdictions, IP activity is subject to different tax regimes to the mainstream business. If the IP management activity is in a self-contained entity, its activities will be fully consistent with the tax regime.
Access to skill base
IP commercialization only requires a small number of people to manage a substantial business. However, those people operate in a niche area that requires special skills. When a region develops a reputation for certain competencies, it tends to attract more people of a similar ilk. This leads to clustering of competencies in those areas.

About the Author:
Raymond Hegarty, based in Luxembourg, is CEO of IP Foundation. He has broad experience of intellectual property and global technology transfer.

The missing ingredient in Ireland's Smart Economy Strategy

2009-10-12T21:43:00.004+02:00

My two passions are intellectual property and Ireland, the land of saints and scholars. I believe that IP has a role to play in Ireland's future development.

Below is the text of my opinion piece that appears in the current edition of "Business & Finance" magazine (used with permission).

Illustrations from the history of innovation

A simple history lesson of innovation includes the story of Alexander Graham Bell, who issued his patent for the telephone system at noon on February 14th 1876.

Elisha Gray, another inventor, registered an application for his own telephone invention a few hours later on the same day. Losing that race consigned Elisha Gray to a footnote in innovation history.

Despite parallel inventions by people such as Gray, Bourseul, Meucci, Reis, Manzetti and several others, every schoolchild will tell you that the inventor of the telephone is Alexander Graham Bell.

Apart from notoriety, the invention also brought him great commercial success. He founded the Bell Telephone Company whose successor still survives more than 130 years later as AT&T, ranked #8 in the Fortune 500.

The patent for the telephone is credited with being the most valuable patent of all time. Bell was fortunate to have the support of Gardiner G. Hubbard, a prominent lawyer and entrepreneur. Hubbard gave Bell the finance and access to patent legal advice. He also had the political connections to change the regulatory environment to enable the creation of a telephone infrastructure and industry.

There are numerous similar examples throughout history of parallel development of inventions. The Nobel prize-winning transistor was invented by AT&T in the USA in 1948. It was invented independently in the same year by two German physicists. Canon in Japan and Hewlett Packard in the USA both came up with the concept of the inkjet printer in 1997. Colour photography, the thermometer and the typewriter are other examples of near-simultaneous multiple invention.

The first person to protect the invention with a patent becomes the victor in a winner-takes-all race.

Astronomers looking for new stars have the best chance of being first if they have (a) the most powerful telescope and (b) previous experience in finding stars.

It is the same for inventors. Inventions happen in disproportionately greater numbers where there is a large amount of activity geared specifically towards discovery. According to research at Harvard University, there is a greater probability of success where large multi-disciplinary teams are specifically charged with the task of innovating.

What does this mean for Ireland’s Smart Economy?

It is vital for Ireland to continue investing in R&D. However, it would be foolish to think the country can easily acquire the capacity to punch above its weight on the global stage. As an illustration, Science Foundation Ireland's stated target is to increase patent filings to 500 over the next 5 years. Germany's Robert Bosch company will file more than 6,000 patent applications in the same period.

The title "Smart Economy" carries so much potential. It conjures up the image of our economy being rescued by the brains that have been cultivated in the Land of Saints and Scholars.

The logic behind that goes something like this:
If enough money and effort is invested in R&D, the sheer weight of the effort will produce inventions.

If a sufficient number of inventions are produced, some of them will be novel, inventive and useful.
These inventions are capable of being protected by patents.
If enough patents are produced, some of them will be commercially successful.
With luck, some of them will generate enough income to justify the whole R&D effort.

However, this is like a sequence of funnels. The outputs of each stage cascade into the next one with losses accumulated at each stage. Just like the astronomer looking for new stars, the probability of success is greater if there is sufficient quantum of investment combined with a very large measure of luck.

Push and Pull Strategies

In all the talk of “Smart Economy”, people have become so dazzled by the word “Smart”, that they have forgotten the second word “Economy”.

Successful strategies involve a combination of Push and Pull. Investing in R&D is the smart “push” element. Commercialising the IP leads to a profit, which is the economic “pull” element. Merging these two gives the unbeatable combination of a Smart Economy.

Commercialisation is the process whereby intellectual assets such as patents, copyright, trademarks etc. are put to use and profits generated. The intellectual assets can be home-grown or they can be generated elsewhere. Commercialisation of IP is a lower-risk proposition because it is dealing with IP that has already been generated. While the value of the IP may not be clear, there is no R&D uncertainty about whether or not the investment will generate IP at the end of the process.

It goes without saying that different skills are required to commercialise the knowledge from those necessary for its generation. Patent commercialisation requires the artful combination of three competencies:

Legal, because the patent is a legal protection. It requires understanding of the patent assets, infringement, legal remedies and licensing contracts.
Technical, because the subject matter of the patent is essentially technical. There must be an ability to identify products that potentially infringe the IP.
Commercial, because of the complex negotiations involved in reaching agreement.

Ireland’s advantage, Ireland’s opportunity

The nature of Ireland’s education system and global economic exposure through the recent years means that there are pools of these competencies readily available.

If Ireland can become a centre for commercialising IP from corporations around the world, we build an unassailable reputation as a smart economy by leveraging the fruits of other countries' R&D.

That clear path to profit from knowledge is an economic incentive to invest in R&D that may even outweigh grants or tax reductions.

About the Author:
Raymond Hegarty, based in Luxembourg, is CEO of IP Foundation. He has broad experience of intellectual property and global technology transfer.