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Rembrandts in the Attic

Are patents nothing more than defensive shields for protecting products and technologies from copying? Do they stifle innovation and scientific discovery? Should they be left for corporate lawyers to deal with? No, no and no, according to Kevin Rivette and David Kline, authors of Rembrandts in the Attic: Unlocking the Hidden Value of Patents (HBS Press). In this interview, they describe patent portfolios as "the new currency of the knowledge economy" and tell how companies like IBM have shown the way toward using patent strategy as "a core competency of the modern enterprise."

Rembrandts in the Attic

Q: IBM's enormously profitable patent portfolio has received a lot of press. Why don't more companies follow its lead?

A: The vast majority of companies are simply unaware of the often-huge economic and competitive values that lie untapped within their patent portfolios. Most senior executives still consider intellectual property (IP) the domain of corporate lawyers, and patents themselves merely as defensive shields for protecting their technologies or products from copying. But a rising generation of business leaders at companies like Microsoft and Lucent, Intel and Dell, Dow Chemical and Gillette — now regard patent strategy as a new core competency of the modern enterprise and an important factor in their success. These companies have largely kept their strategies and tactics for IP management secret from rivals. But now, various factors are enabling all kinds of companies to systematically employ patents and other intellectual property as strategic weapons of business competition for the first time. For example, new data mining and visualization tools are now available that can reduce the time it takes to analyze the competitive landscape for patents from months to days or even hours.

Q: How big is the potential for companies that maximize their IP assets?

A: The $1 billion IBM rakes in annually from patent licensing royalties or the $30 billion of patent related deals it has done in 1999 are the most impressive, but certainly not the only indication of the staggering value a firm's patent portfolio can generate. Patent licensing revenues have shot up 700% in just the past 8 years alone, from $15 billion in 1990 to well over $100 billion in 1998. Experts point out that the licensing market is still in its infancy, and predict that revenues could top half-a-trillion dollars annually by the middle of the next decade. In addition, the findings from a recent survey suggest that American businesses are ignoring an astonishing $1 trillion in intellectual property asset wealth. We believe this represents the single greatest asset utilization opportunity to be laid in the lap of corporate chief financial officers in a generation.

Q: This isn't the first time we've experienced a "patent gold rush." What makes this era so different?

A: As with the emergence of the railroad and telephone industries, or the rise of the personal computer and other high-tech industries — we are again witnessing an economy-transforming renaissance today, and a corresponding stampede for patents. But while the increase in patenting itself may not be all that unusual, the nature of what is being patented in some cases is. Particularly controversial are recent patents not for tangible inventions but for technology-enabled methods of doing business. In January 1999, the U.S. Supreme Court (State Street Bank v. Signature Financial Group) affirmed that software-enabled business processes are indeed patentable as long as they are novel, unobvious, and produce tangible results. Since then, the patenting of business models, marketing strategies, and other abstract innovations has mushroomed. The new currency of the knowledge economy is here.

Q: There has already been considerable debate over various on-line business model patents. Which side do you come down on?

A: The real heart of the debate is essentially whether it is appropriate in our knowledge-based economy to view nonphysical or intangible inventions as patentable subject matter. What is ironic about the debate over the patenting of business methods and other intangible inventions is that it is nowhere more heated than on the Internet, itself a nonphysical and intangible realm in which "virtual" businesses are nonetheless creating very real and substantial wealth in the form of new products, new services, new jobs, and new economic growth for society. We find it odd that those who have no problem accepting the Net as a nonphysical yet economically viable business medium should get stuck in industrial-age conceptions of what should and should not be patentable.

Q: What about the argument that patents threaten to stifle innovation?

A: Whenever you try to expand patentable subject matter into new and more abstract realms, you meet with resistance. Software patents were sharply condemned ten years ago, as were biotechnology patents twenty years ago, and even patents involving telephony or other processes 130 years ago. In each case, critics warned that these new kinds of patents would be harmful to scientific discovery and innovation. And yet in each case, innovation and discovery actually intensified. It seems reasonable then, to suppose that the patenting of technology-enabled business ideas will likewise not inhibit innovation. The wealth of research that has been conducted on the patent system's effects on innovation and economic growth overwhelmingly supports this notion. Far from hindering innovation, the evidence shows that strong patent protection may actually be the most effective means of promoting innovation, knowledge sharing, and economic growth yet devised.

Q: That seems counterintuitive.

A: The key thing to remember is that while patents do exclude others from copying your technology, they do not deny others the knowledge of the new technology itself. Patents by law are required to disclose sufficient detailed information about a technology such that anyone "skilled in the arts" can replicate it. Moreover, all evidence suggests that when you prevent others from copying your technology, you force them to innovate by designing around and improving upon your patent with more advanced discoveries of their own.

Q: What are "trash patents" and "kitchen sink patents"?

A: These are very serious problems that have proliferated as a result, among other things, of an overworked and underexperienced Patent and Trademark Office being simply unable to conduct the sort of due diligence in patent applications that is required today. Trash patents refer to those patents that don't really cover unique new inventions — but are being used by get-rich-quick Internet carpetbaggers to intimidate competitors or extort money from businesses that can't afford to face the possibility of a costly patent suit. Many such patents don't cite any "prior art" — a critical issue in patent validity because it is the only means of showing that a technology is truly novel and represents an advance over previous work in the field. Just as problematic are what we call "kitchen sink" patents — wildly broad claims that seem to assert ownership over everything under the sun. For example, there is a patent owned by a company called Sightsound that reportedly claims exclusive rights to all downloading of music or video over the Internet.

Q: A big opponent of the patent stampede is the Open Source community — developers of "freeware" like the highly publicized Linux operating system. How do you think this battle will play out as the patenting frenzy intensifies? Will Open Source developers survive?

A: Open Source developers managed to create a stable software infrastructure for the Net because they freely shared their designs — their intellectual property — with other inventors and worked collaboratively to achieve success. And even today, they remain a potent force in Internet software innovation. But as the Net has become more commercialized, companies have inevitably (and understandably) sought to protect their costly investment in software R&D and their tenuous market advantages through patents. This process is as it has always been in the birth and development of new industries: invention is initially conducted "cottage-industry"-style by inventors motivated by passion, but then later fostered by firms whose commercial interests compel them to protect their innovations with patents. To survive in a world where patents play an increasingly powerful role in shaping both innovation and competitive outcomes, the Open Source community must come up with a strategy for dealing with the irreversible fact that patents are here on the Net to stay. For while the growing power of Internet patents can indeed cause serious problems for Open Source developers, it also offers them new opportunities to increase their commercial and inventive success.

Q: How can they do this?

A: One idea would be for Open Source developers to take the lead in establishing a central repository of patent and non-patent prior art — a "Trash Patent Bin" if you will. Any company hit with a patent infringement claim or demand for licensing fees could search the Trash Patent Bin for prior art and gather the evidence needed to defend itself. Indeed, the mere existence of such a database would reduce the incentives for initiating extortionist patent claims in the first place.

Q: Some argue that large corporations use patents as bludgeons to beat smaller rivals into competitive submission. You disagree.

A: Over the last two decades, the number of patents granted to first-time patentees (small start-up firms and independent inventors) has more than quadrupled. In addition, research shows that although small firms spend only a small fraction of the amount large corporations devote to research and development (R&D), they produce 15% of all patented innovations. Far from oppressive weapons, we contend that patents are actually the great equalizers in today's new economy frontier — sometimes the only power on earth capable of reducing the financial and marketing might of a corporate behemoth to naught. Take Stac Electronic's $120 million patent victory against Microsoft in 1996, for example, or tiny Fonar's $128.7 million verdict in 1997 against General Electric. With the recent creation of both a "contingent patent bar" and affordable patent insurance that covers litigation costs, small companies will have an even better chance of asserting their rights against big firms.

Q: Obviously not all the news about patents is good. Beyond trash patents, what are some of the biggest problems companies employing patent strategies — or defending against them — need to know?

A: The new power of patents certainly poses new dangers as well as opportunities — especially for firms that stumble into a patent infringement situation. Indeed, large-scale R&D projects are often "bet-the-company" affairs that put enormous capital and strategic investments at great risk. A failure to properly address IP issues in R&D can lead to catastrophic losses, not only in infringement costs but in the loss of market share, margin erosion, and reduced competitiveness in the market. As well, the failure to patent the results of innovative research can also lead to huge financial and strategic losses. Consider Xerox's decision in 1979 not to patent its invention of the graphical user interface that later formed the bases of Apple's Macintosh and Microsoft's Windows personal computer operating systems. There are scores of examples out there today of companies that are missing tremendous patenting opportunities that will surely come back to haunt them down the road.

Q: Some argue that the increasing boom in patent litigation is among the major challenges that CEOs of innovative organizations face. Do you agree?

A: There is no denying that some companies today use patent suits — or simply the threat of patent suits — as key elements of their business strategy. One may disapprove, but this is a fact of life that no company can safely ignore today. Indeed, patents have become potent competitive weapons in today's knowledge economy, and therefore smart companies will want to develop offensive and defensive strategies for dealing with the new role that patents are now playing in shaping competitive outcomes. Thus the real challenge for CEOs today is to learn how to manage and deploy their patent assets not just as legal instruments but as valuable financial assets and potent competitive weapons that can enhance their commercial success and increase shareholder wealth.

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