6. Recommendation 4
6. Recommendation 4:
Establish a Flexible Intellectual Property Strategy
Now you’ve got a handle on your growing intellectual property portfolio. You’ve gotten each of your key, creative employees to sign well-crafted employment agreements. Your portfolio includes a slew of patents, many copyrighted works, many trade secrets, and a few crucial trademarks and service marks—and there’s more in the pipeline.
The hardest question of all is what to do with the intellectual property in your portfolio. Here’s where the metaphor of the sword and the shield completely breaks down. Yes, you can use it to protect yourself from others or harm your competitors. But there’s much more to be done with your intellectual property than that.
You have a broad range of choices in terms of what to do with your intellectual property. One size does not fit all. Your approach might range from fully excluding other freely allowing use of your intellectual property by others. Some of the most successful businesses adopt different approaches to different aspects of their intellectual property, depending on the circumstances. For many organizations, this blended approach is the optimal way to compete.
Your strategic starting point should instead be a model of limited exclusion: Is there a way to license your intellectual property to others in a manner that will help your business thrive over time? While this premise works best in certain contexts (say, for a patent in the computing industry), it applies in varying degrees to copyright and trademark interests as well.
The opportunities afforded by the licensing market in intellectual property—whether you are a buyer or seller— are worth considering across your intellectual property portfolio. And nontraditional modes of acquiring and sharing intellectual property may serve your business in surprising ways. The most innovative organizations in any given market often have the most innovative intellectual property strategies.
For the intellectual property rights that you have acquired by license, the answer tends to be simple. Just use the rights for which you have paid. You’ve licensed the rights to Dora the Explorer on your product for kids, and you do exactly as the license says—no more, no less. That’s the easiest answer. The corollary to using intellectual property rights that you develop is to simply use them yourself and don’t worry much about what anyone else is doing.
For most of your intellectual property rights, think of a spectrum of possibilities for what you might do with them. This spectrum starts with full exclusion on one end. That’s the sword-and-shield mode. In the middle is limited inclusion, where you let some people use your intellectual property for some purposes. That’s the licensing approach. And then there’s open access on the other end of the spectrum, where you permit unlimited use by others.
Limited Exclusion: The Revenue Stream
The intermediate option—limited exclusion—enable others to use your intellectual property on a limited basis to, for instance, generate revenues, extend your brand, or build your core market position through a network effect.
The primary reason to pursue a limited exclusion model is to make money in the near term from your intellectual property assets. The visible money in intellectual property is in the licensing business. Organizations that build major intellectual property portfolios and take licensing seriously can generate many millions or even billions of dollars per year in free cash flow by licensing intellectual property to one or more parties. Sometimes organizations even license their intellectual property to dread competitors—and profit handsomely from doing so. Notably, Intel and Advanced Micro Devices have long cross-licensed their intellectual property in their competitive pursuit to develop ever-faster processors.1 Intel has also engaged in important cross-licensing agreements with NVIDIA, another of Intel’s main competitors.2
Licensing is big business in a wide range of industries. There are two major categories of intellectual property licensing. The first major category in licensing is patents. The market for patent licensing is enormous, in fields such as computing, telecommunications, and the life and health sciences. The other category is the licensing of trademarks and copyrighted material for the purpose of merchandising. Typical examples include major brand names like Coca-Cola, sports leagues such as Major League Baseball or European League Football, and character and entertainment licenses like Disney’s Hannah Montana.
Many of the biggest players in patent licensing are in IT and the life sciences. Some of the most eye-popping numbers come from the computer industry. Oracle, Microsoft, Symantec, and IBM have each earned a billion dollars or more in given years.
The chemical, pharmaceutical, and telecommunication industries each produce similarly remarkable returns from intellectual property licensing. Merck, Eli Lilly, Abbott Laboratories, and Johnson & Johnson, for instance, also generate substantial intellectual property revenues. Other leaders in these fields include:
Trademark and Copyright Licensing
But companies are not the only ones that develop technologies in the intellectual property business. Companies in the apparel industry, too, make millions per year by licensing their intellectual property—for example, designs and trademarks—to other organizations. Nike and VF Corporation, which owns the Wrangler and Lee jeans brands, are likely among the biggest licensors. Other organizations that generate impressive returns through licensing include:
In the beverage business, Coca-Cola earns revenue by licensing its more than 450 brands to other organizations. Pepsi and Anheuser-Busch do the same thing. Molson Coors makes much of its intellectual property revenues through an “own-branding” strategy. In the food business, Pepsi is again a leader, along with Kraft Foods, Sara Lee, General Mills, and others.
And entertainment companies—content-based indus-tries—are also enormous licensing machines.
In licensing, you have an almost-limitless range of options for how to structure deals and charge for the use of your intellectual property. A common strategy involves extensive price discrimination. As a patent licensor, for instance, you are likely to charge different rates to different consumers in different settings. Your pricing may vary based on what the organization is likely to do with your intellectual property, how badly they need it, what geographic region they are using it in, and so forth.3 Within the pharmaceutical industry, it is common to set different prices based on geography—in other words, to define a market in geographic terms where the licensed intellectual property may be exploited or charge differential prices for a finished product based on where it is sold.4 Computer organizations often make equipment that works more or less effectively based on what the consumer will pay; consider the IBM LaserJet printer Series E that was cheaper because it had the “extra” functionality of a chip that introduced delay, such that it printed only five sheets per minute instead of ten.5 Price discrimination of this sort may involve some risk of annoying those who paid more for the same product or rights as others, but it also can result in an optimized revenue strategy if done right.
Companies that fail as operating businesses, too, can generate profits even after they have ceased making products. In the 1990s, despite brilliant minds and a lot of hype, Thinking Machines did not make it as a high-end computer manufacturer. But turnaround CEO Richard Fish-man, brought in after the company had nearly failed, spun out T.M. Patents. This offshoot ended up generating hundreds of millions of dollars for shareholders by licensing the organization’s technology to erstwhile competitors. Even if you are not going out of business, the exploitation of intellectual property assets is an increasingly common strategic move in lean times, as companies seek to shore up revenues.6
The notion of limited exclusion can also help by encouraging others to do something with your technology that you want them to do, but for which you don’t require payment. In the computing industry, the developer of the most popular platform or programming language stands to benefit from the work of others. The epic battles between Microsoft, Sun, Novell, and others in the 1990s and into the twenty-first century demonstrate the many ways to profit from intellectual property. Each company has adjusted its strategy along the way; each continues to innovate in these ways today, as they compete aggressively in the sales process against one another.
Four graduate students founded Sun Microsystems in 1982 to develop computer workstations. From its inception, Sun embraced open systems. Its strategy involved publishing its own specifications and protocols to encourage others to create complementary products. Sun gained substantial a market share through the 1980s and 1990s in the enterprise computing business as a result.
Microsoft, founded in 1975 by Bill Gates and his high school friend Paul Allen, began as a software organization to serve computer developers. Microsoft soon became the dominant provider of operating systems for personal computers and applications for business use. Its strategy with respect to intellectual property started in a proprietary mode: Microsoft tended to develop its own software or buy code from others.
Sun and Microsoft have often been positioned as opposite one another in terms of their intellectual property strategy. Sun is frequently described, quite rightly, as a longtime supporter of open-source technologies and open standards in software. Microsoft was once pegged as a bête noire of the software industry because of its historically proprietary stance on intellectual property.
But on one level, the strategies of Sun and Microsoft to develop their enormously profitable, and usually competing, business lines are more similar than they are different. Both companies realized that they needed to let others connect to their systems in order to succeed. It is certainly true that Sun adopted a more open approach to the software community, while Microsoft long resisted aspects of the open-source and open-standards movements. Consider that a key aspect of the Microsoft strategy was to enable the applications of other companies to run in Microsoft’s Windows operating system. Think of the many software packages that one runs regularly on a Windows PC that Microsoft did not make: Intuit’s TurboTax, Apple’s iTunes, Mozilla’s Firefox Web browser, and so forth.
In functional terms, both the Sun and Microsoft intellectual property strategies over the past few decades are examples of limited exclusion, where the purpose was to let others have certain access to the code base in order to make systems that could interoperate. A recent agreement between Microsoft and Novell—long archenemies in the sales process—establishes a means for developers from the two companies to work together to make their systems more interoperable. A crucial part of this agreement is a covenant not to sue the other organization for intellectual property violations in the process.
The dynamic environment of Web 2.0—the social web that has emerged online—provides rich examples of the limited exclusion strategy. One of the keys to the explosive growth of Facebook has been its openness to other organizations developing applications that can work in Facebook’s online environment. These “Facebook apps,” similar to the development of iPhone and iPad applications, themselves have generated a mini-industry complete with venture organizations devoted to investing in companies that build them and advertising networks that seek to profit from them. Google, Yahoo!, Amazon and other online giants have opened their systems to allow other organizations to use data and code that they have developed to create interoperable systems.
Each of these systems is backed up by a series of legal agreements. In Sun’s case, for instance, it licensed its widespread Java technology to anyone who wanted to use it under a special license—the 1998 Community Source License. The most prominent open-source license is the GNU Public License, popularized by Richard Stallman and his Free Software Foundation. Facebook offers access to its systems under its own separate license, as do other Web 2.0 companies. The process of codeveloping software standards has a similar quality: companies are required to declare and check their rights at the door, agreeing to co-operate on certain terms together to develop a common standard for a given purpose.
In each of these cases, the goal is to create an ecosystem around your product or a system of value to multiple parties. There is an endless variety to the kinds of limited exclusion strategies that you might pursue, depending on the context. The underlying principle is simple: some-times it makes sense to let others have limited access to your intellectual property in order to benefit in other ways over time.
Consider one further case that makes a strong argument in favor of limited exclusion. In the agribusiness world, in 1974, Monsanto came up with the blockbuster product Roundup, which enables farmers to kill weds effectively. The product has sold well for decades. But Monsanto has in fact made more money on the intellectual property that it developed as it sought to build on its Roundup success. Monsanto engineers invented a product that made crops—the ones that the farmers wanted to grow and sell, like soybeans—immune to Roundup. The resulting invention, Roundup Ready, used a parasitic micro-organism known as Agrobacterium tumefaciens to create genetically modified soybeans. The company then made a key decision: instead of making the seed available only through the company’s own seed companies, it decided “to broadly license” the technology to other companies. As of 2009, 91 percent of the soybeans planted in the United States were genetically modified, of which 92 percent contained Monsanto’s Roundup Ready trait. By the early 2000s, the sales of Roundup Ready through this licensing strategy eclipsed those of Roundup itself.7
A central argument about strategy in this book is that limited exclusion, not full exclusion, should be the starting point in your analysis. There is likely more to be gained by licensing some of your rights to others than there is to keeping it all to yourself (the sword-and-shield approach). And where it makes sense, giving it all away (the pure open-access approach) may also surprise you with its ability to provide greater longer-term advantage than exclusion-oriented strategies.
Full Exclusion: The Sword and the Shield
With full exclusion, you decide to exclude everyone else from using some or all of your intellectual property, and exploit it yourself to the greatest extent allowable under law. Sometimes this approach makes perfect sense. Let me start with the conventional wisdom about intellectual property as a sword and a shield, and then go from there.
In using intellectual property as a sword, you are assertively enforcing your own intellectual property rights against a competitor. This enforcement may take multiple forms. You might send the infringing party a letter that tells them to cease and desist from using your intellectual property. When they call you back, you enter into a licensing agreement that allows them to continue, but requires them to pay you and follow certain guidelines in their usage. That’s what many organizations are after when they send the letter—a revenue stream, not a protracted lawsuit.
Perhaps, after you send the letter, you find that they don’t call you back. They continue to violate your rights. Or more likely, you talk in guarded terms for a while about what a license might look like, but cannot agree to terms for a license. You decide to spend the money required to take them to court. Generally, they countersue you for something at the same time.
Intellectual property litigation has become a major field of law as a result of this practice. Some of the brightest lawyers in the world try these cases. Intellectual property litigation involving patent disputes often involves hundreds of millions or billions of dollars in disputed profits. Intellectual property litigation can drag on for many years, sometimes bringing down the organizations involved along with it. The costs of the legal fees involved are frequently in the millions of dollars. As two authors put it, “An average patent case will cost between $3 million and $10 million, and take two to three years to litigate” in the United States. And as an empirical study has shown, 75.6 percent of accused patent infringers ultimately win against those seeking to enforce patents through litigation.8
Few organizations wish to enter into intellectual property litigation if they can help it. That’s not to say that it never makes sense. Sometimes it is the only way to stop another organization from infringing on your rights—in this way, the sword and the shield are effectively doing the same thing. And of course winners, using intellectual property as a sword, can come out much richer than they went in. The net effect, if you are successful, is either to block your competitor from copying what you have done or at least make them pay you for doing so. You often end up with a license agreement to govern the future usage of the intellectual property.
As a shield, you might use your intellectual property portfolio to block others from suing you for infringing on their intellectual property. The notion is a little bit like dé-tente in the nuclear arms business. During the cold war, both the United States and the Soviet Union established huge arsenals of nuclear weapons. At a certain point, one of them wondered: Why do we need any more nuclear weapons? A possible theory was to ensure that the other side would never fire the first weapon, since they would then be assured of wiping one another out—or what’s known as mutually assured destruction.9
The same theory holds for some organizations with respect to patents. If IBM and Microsoft ever got into disputes over patents, it almost certainly would become clear that each party—dread competitor of the other—was violating many of the other organization’s patents. The effect would be massive claims against the other side. As a result, these titans rarely tangle over their intellectual property rights.10
You don’t have to be as big as Microsoft and IBM to use your intellectual property as a shield in this way, however. You might imagine a scenario in which a competitor sues you for an intellectual property infringement. You respond with a notice that they are in fact violating your separate intellectual property rights. The net effect is not a huge penalty paid through a court decision but rather a cross-license between your two organizations—effectively canceling out the two infringing acts.
A few limitations to the sword-and-shield strategy are worth noting here. Intellectual property protections tend not to block big breakthrough innovations. Your use of intellectual property as a sword and a shield can be effective in blocking follow-on innovation by your competitors, where their new product or service is similar, but slightly different, from what you have done. You are not going to be able to block someone from coming up with a radically better drug, computer algorithm, or mousetrap. That particular battle has to be won in the research and development labs, not in the courtroom.
There are also legal limits concerning the extent to which you can rely on intellectual property as a sword and a shield. Put another way, there are limitations on the degree to which you can exclude others fully from using your intellectual property. The government will sometimes force you to license to others (compulsory licensing). In 2001, the US government (in)famously used the threat of compulsory licensing to authorize imports of generic cipro-floxacin for stockpiles against a possible anthrax attack.11 In 2005, the US Department of Justice cited its right to use patents under compulsory licenses when it opposed injunctive relief for patent infringements relating to the BlackBerry email services supplied to both the government and private organizations that used the BlackBerry device to communicate with the government.12 In other cases, the public has rights to use your intellectual property in limited ways (under the fair use doctrine in copyright, for instance, which allows for social commentary, among other socially desirable things). And if you succeed too wildly, you may even bump up against antitrust concerns—but that’s a problem for another day.The premise of this book is not that as a client, you should tell your lawyer never to sue a competitor to enforce your intellectual property. It is not to say that the courts in the eastern district of Texas, where many of these claims are brought, or the Court of Appeals for the Federal Circuit, where appeals of these claims end up, ought to shut their doors to litigants. The idea is instead simply to highlight the range of other, less costly and more collaborative op-tons that an organization has in managing its intellectual property as well as creating long-term value in competitive ways.
Open Access: The Loss Leader
The open-access strategy falls at the other end of the spectrum from full exclusion. Sometimes it can make sense to give away certain forms of intellectual property in part or altogether. This strategy is a close cousin of the limited exclusion strategy, of course; the rationale is similar in that you are deciding to let other people use your intellectual property even if the law would allow you to prevent it. What’s different in the open-access context is that you may find it makes sense to give away use of your intellectual property even if you aren’t paid for the privilege.
The best example of this strategy is the extraordinary field of open-source software. Many other books have told this story well, so I will just offer the core idea here. In many instances, businesses, nonprofits, and individuals choose to create software, and then contribute their creations (which they otherwise could copyright or possibly patent) back to the public. This open-source software model has produced every imaginable type of computer code—some of it the most important code in a given domain. The Linux operating system, Apache Web servers, Mozilla Firefox Web browser, OpenOffice word processing software, and man other open-source projects have hundreds of millions of users between them, and are some of the best programs available.
In the open-source model, the creator generally does not give away all the rights free and clear to their creations. Under most open-source licenses, the creator puts their work into the public commons subject to a license that requires those who make use of the code to do the same. In other words, those who take the free software must give it away just as freely to others. As the open-source software leaders like to say, free software is free beer.”
As the open-source software example shows, there are sometimes strong reasons to let others use your intellectual property with fewer restrictions than the law establishes on your behalf automatically. It is possible to give away certain rights in certain creative works, as the Creative Commons model shows. Hundreds of millions of creative works have been licensed generally to the public under “some rights reserved” terms. Under the Creative Commons licenses, those who make works that are protected under copyright in turn give their works away to others according to the terms of a range of possible licenses. For instance, one such license says that someone may reuse your photograph as long as the user gives you credit or attribution. Another license is similar to the dominant free software licenses, which require those who use the work to “sh alike” with others who might come after them.
Some pharmaceutical companies choose to freely license their drugs in order to spur work relevant to developing countries. GlaxoSmithKline recently created a “patent pool” of eight hundred granted or pending patents that researchers can license freely in order to develop and produce new products and formulations to combat neglected tropical diseases in least developed countries.13 Not only does this generate public goodwill for GlaxoSmithKline collaborators with whom the corporation can license IP for profit.14
The important idea is to experiment within a given organization with different models for building and exploiting your intellectual property portfolio. The global knowledge economy calls for flexibility in intellectual property strategy. This flexibility can take many forms with respect to how you acquire, manage, and use your intellectual property, and how you work with others with respect to their intellectual property.