NOTE TO READERS: Since I am on vacation this week (well, sort of), I have asked my friend Scott Garrison to pen a piece about IP Strategy for me. He has been so gracious to do so, and the post follows. At bit about Scott: Scott Garrison is Chief IP Counsel and Assistant General Counsel for Scientific Games which, among other things, makes scratch off lottery tickets. Prior to joining SciGames, Scott was a senior IP attorney at Kimberly Clark and, prior to that, was a law firm patent attorney. Scott Garrison is a true IP Strategist and I am pleased to present him a forum to express his views on this blog.
Scott’s blog post:
A short while ago I had an interesting conversation with an out of town acquaintance named “Mike” who works at a large international B2B (“business to business”) corporation. I was interested to find out that his opinion was that patent protection was useless in the B2B field. It seems that since his consumer base is much smaller than a B2C (“business to consumer”) business he believes the nature of the business requires deals to be cut and IP is often a nuisance to be worked around.
As we continued to talk I learned that he was the lead inventor on a couple of critical and groundbreaking patents in his field. In fact, it seems that a few years earlier he had been a major shareholder in a relatively small corporation when he received the patent grants. At that time he believed they held great value to his company. As he tells it, his present employer acquired his former company predominantly in order to procure these very same patent rights.
I at first assumed that his opinion was driven by feelings real or imaginary of being slighted by his present employer with respect to these patents for any number of potential reasons. However as we continued our discussion I was shocked to learn what had actually happened. It seems that the company which had bought the patents for the purpose of building value for itself and carving out a niche it could wield against its biggest competitor in fact had inadvertently destroyed the value of the patent family. As we discussed the details the following story unfolded–
In the B2B category where Mike and these companies exist, it was quickly recognized that the patents were a revolutionary and innovative gem. Mike’s current employer, Big Co. did successfully acquire his former company and hence the patents for a sum in the high 7 to low 8 figures. At once Big Co’s patent attorney added them to the company’s patent portfolio and the business leaders began to push the technology onto their customers.
For Big Co to reap the most benefit from this technology it needed to license the patents to a number of distributors who would in turn sell to the end consumers. However these distributors were represented by Big Co’s actual customer, a single overarching B2B entity, and Big Co had to work through this entity. Big Co’s business leaders were able to create the necessary interest with the B2B entity and negotiations began. Over the course of those negotiations Big Co’s patent attorney created a very complex license arrangement to license the patented technology.
The arrangement consisted of a single agreement providing a license directly to the B2B entity for a specific sum to be collected from each sublicensee interested in the technology. The sublicensees consisted of each distributor that was willing to enter the agreement under the terms negotiated with the B2B entity. Each distributor in turn had to acknowledge this arrangement by entering a written agreement acknowledging the arrangements between each party. These sublicenses were in turn signed by Big Co and the B2B entity to tie up all loose ends. Due to the nature of this business it was contemplated that some of the products would have the patented feature whereas some would not. A complex and detailed structure was specified to address this, including sliding royalty scales, most favored nations clauses, etc. Although one could certainly argue the complexity of this arrangement was unnecessary, as Mike said it seemed to work for those sublicensees who signed.
Meanwhile Big Co’s competitor was not sleeping. Due to the nature of the industry, the competitor had access to the same distributors and learned that those who did not enter the above license arrangement were interested in working with the competitor. After some time, Big Co filed a lawsuit against this competitor for patent infringement. This lawsuit was handled by a major patent litigation firm, which in turn was overseen by the litigation department at Big Co, and after many months and much money, just prior to trial, a settlement between the parties was signed.
The settlement provided the competitor with a world wide license for the patents. Past infringement was forgiven for a settlement amount and future royalties were dependent upon product lines, upon which type of technology was used, upon which claims in which patents were impacted, etc. Again the terms of this settlement, like the license, were very complicated and required one to undertake a great deal of analysis to determine whether a product was covered by the settlement and what royalty if any was due. Moreover, after a period of about three to five years from the settlement date the license would convert to a royalty free license.
Somewhere during this entire time, one of Big Co’s business units not connected to any of the above matters was attempting to work out a deal with another major account. In order to coax this account into entering this deal which would prove very lucrative for that business unit, it was decided that a royalty free license would be given to these patents to sweeten the deal. With that, the deal was signed and the final nail was hammered into the coffin of this IP. <!–nextpage–>
After hearing this story I was stunned. How could a company of Big Co’s size and with its leadership position that so obviously placed a high value on these patents when purchasing them a few years previously just lose control over them? The answer is quite obvious. There was no central oversight, no overriding strategy on how best to monetize the patents, no single person who knew what was going on. In this case they had the patent attorney structure the license, the litigation team handle the lawsuit, and the business unit work with an in house general attorney to hammer out the business deal since other than a single license clause there was nothing more on IP. The result was that no one talked to anyone else nor did any of them fully appreciate that other agreements were being penned, each of which could and in this case did impact terms with previously licensed parties. From what Mike told me, certain of these distributors learned of others having royalty free licenses. In short order Big Co was forced into giving all parties royalty free licenses.
Mike and I discussed how this could have been averted. My answer was to create some form of central oversight. This oversight should not be a function of the legal department but should be a high level business function. Many people, including myself, suggest the creation of a Chief Intellectual Property Officer who would ensure that the overall business objectives and strategy are being followed and that the appropriate IP protection is put into place to maximize market position and value. Such a function could readily be handled by a business person who wears a legal hat, but I do not believe that a legal person wearing a business hat would suffice.
Although I did make some headway with Mike in explaining that his patents could have reaped profits in a manner consistent with his original beliefs, I think it may take a few more dinners and some good examples to completely convince him.