The Self-Limiting Myth of the Sword and the Shield
Copyrights: Your Sword and Your Shield.
—S&E Entertainment–Music Publishing, October 1, 2009
The sword and shield of patent protection: Nokia v. Apple/ Apple v. Nokia.
—Chris F. Lonegro, Ober Kaler law firm, February 2, 2010
In the first instance, intellectual property rights in patent, trademark or copyright are used as a sword. . . . [In other cases,] litigation becomes a shield.
—Intellect Law Group, 2010
[Intervention by a competition authority is justified w]hen a patent owner uses his patent rights not only as a shield to protect his invention, but as a sword to eviscerate competition unfairly.
—Atari Games Corp. v. Nintendo, 897 F.2d 1572 (Fed. Cir. 1990)
In conventional wisdom, intellectual property strategy is about the sword and the shield. As a sword, intellectual property can be used to attack a competitor who seeks to exploit some aspect of your intellectual property in a way that violates your rights. As a shield, intellectual property can help you to stave off the attacks of your competitors. That’s still true—but only to an extent. This outdated metaphor, invoking the battlefield, suggests that you should control and exploit your intellectual property to the greatest extent allowed by law in every instance, no matter the context and no matter who you are. This theory no longer describes the best approach for most institutions, much of the time.
In this book, I argue that intellectual property should first evoke images of the boardroom and its deal-making table—and only later the courtroom, if things go terribly wrong, but as a last resort. The people who benefit the most from these disputes ending up in court are the lawyers who make their living on the fees generated in these disputes, which routinely run into the millions or tens of millions of dollars. As someone responsible for your organization— whether a business or nonprofit, a government agency or university—you are much less likely to benefit from an exclusive sword-and-shield strategy with respect to your intellectual property than is your lawyer.
If you are like many managers, you probably don’t pay much attention to your organization’s intellectual property. This book, a short briefing intended for an audience of senior managers, is designed to change that. I contend that intellectual property strategy deserves greater attention from both senior managers of corporations and administrators of nonprofits like universities in a wide range of fields. This argument is not only relevant to those who run high-tech, for-profit organizations. I claim that the traditional way of thinking about intellectual property within the organization will have a negative and limiting impact, leading to shortsighted decisions if you don’t look beyond it. Flexibility and creativity are essential to a profitable long-term intellectual property strategy. Strategies grounded in openness and connectedness to others (in technical terms, “interoperability”) can offer surprising benefits to those who are willing to experiment with new approaches.
You should instead think of intellectual property as a flexible asset class that can help your organization in a broad range of ways. In formulating your overall strategy, you should give special consideration to strategies of openness rather than exclusion, especially in the information context. This advice holds true regardless of the type of institution you are leading, whether a for- or nonprofit, whether you are well established or a start-up.
At the broadest level, intellectual property is a way of describing what the people in your organization know and are capable of doing. It’s the collected knowledge, work product, and skill set of all the people who make up your team. Even the know-how of your staff at large explicitly has value. Sometimes an intellectual property-related transaction requires the hiring of staff members who know how to implement the intellectual property, whether as part of a licensing deal, merger, or acquisition, or in a bankruptcy setting. Those who think about “knowledge management” as part of the organization’s overall strategy will get this concept intuitively.
At the same time, intellectual property is also an essential, flexible asset class that can help you accomplish a range of goals, from accessing new markets to improving existing products to generating new revenue streams. By “flexible,” I mean that intellectual property can be more than just a line item on the balance sheet; it can be used in a wide range of ways to help achieve your organization’s mission in short-, medium-, and long-term ways. What I mean by “asset class” is that intellectual property is an important set of resources available to any senior manager as you seek to achieve your overall mission, which has intrinsic value that can be worked into a balance sheet.
In many organizations, intellectual property should be viewed as a key strategic class of assets. The global intellectual property licensing market for trademarks and copyrights alone tops one hundred billion dollars per year. Organizations headquartered in the United States and Canada earn nearly seventy billion dollars of that total annual patents adds billions more.1 If that market size alone doesn’t get your attention, consider the fact that intellectual property makes up 40 percent of the net asset value of all corporations in the United States.2 In a cultural institution, think of the value—which can also reach the millions or billions of dollars—of the collections you hold. For any organization, the brand value in your name and logo may be extraordinarily worthwhile in its own right.
The primary message in this book is simple: you need to think broadly and creatively about how you invest in your organization’s intellectual property asset base, and how you use it. As you might guess, that’s much easier said than done. Whether or not your organization is already an active participant in the emerging marketplace of ideas and skills, there are opportunities to increase your licensing of intellectual property to achieve your business goals. A licensing strategy might involve looking at the valuation of your intellectual property (IP) portfolio in a new way. This strategy might involve licensing what you already have in your IP portfolio. It might mean acquiring more IP one way or another. Or it might mean giving away some of your rights for long-term strategic reasons.
The simple argument that runs through this book is that you should consider each of these approaches as part of your tool kit. The secondary and subtler assertion is that you should favor strategies of relative openness where they can offer greater long-term benefits than strategies of exclusion. Regardless of the approach you choose in any given situation, it’s increasingly important to get your intellectual property strategy right—and focus on its evolution, in a fast-changing marketplace—to be competitive in a global knowledge economy.
Key Strategic Moves in Intellectual Property
There are many crucial strategic moves beyond the concepts of the sword and the shield that you can make using intellectual property. First, there is a wide range of ways that you can acquire intellectual property in the first place. When you innovate, whether in a for- or nonprofit set-ting, you are almost certainly establishing some form of intellectual property rights. You can also obtain rights by licensing intellectual property from someone else in a way that will help you to grow your business or expand your margins. It might mean entering into a joint development agreement to pool your intellectual property with others to create something innovative together. You might even get your customers to contribute intellectual property to you as they use your products or services. In many cases, customers will generously contribute this intellectual property to you for free. You should open yourself up to the opportunity to receive their contributions.
Second, there’s a broader range of things you can do with your intellectual property once you’ve established these rights. At the most basic level, you can exercise your rights to their fullest extent to exclude others from using your intellectual property. I call that strategy “full exclusion.” That’s the classic approach, and it sometimes makes good sense for an organization. But it might sometimes pay off handsomely for you to license, sell, or give away certain rights, while retaining others for yourself. You might also offer it to others to use on a limited basis, or “limited exclusion.” Finally, you might offer it up for any-one to use for any purpose, or “open access,” in ways that may help you gain a market share or fulfill your organization’s mission. Each of these potential strategies could constitute part of your organization’s overall intellectual property strategy. Which of these strategies you apply in a given situation will depend on a host of factors.
The best intellectual property strategy will be flexible. A flexible strategic approach will prompt you to ask hard, context-specific questions about which approach along this spectrum makes sense for any given type of intellectual property at a given time. The most innovative organizations employ multiple types of uses, depending on the situation. Advanced intellectual property licensing strategies can also help build market share, improve the quality or attractiveness of existing products, develop productive relationships with your customers, and grow your organization and industry or field as a whole. Intellectual property can help build a thriving business or nonprofit ecosystem from which many players as well as consumers or patrons stand to benefit.
The most vibrant ecosystems may prove to be those in which consumers don’t just “consume” products but in fact volunteer their services to help innovate with and alongside organizations, as we’ve seen in parts of the soft-ware and Web 2.0 industries. This shift is easiest to see in the context of nonprofits, such as universities, libraries, and museums. But it can be just as true in the business context, especially in information technology (IT) and con-tent-related sectors. It’s true, too, in the context of design, fashion, biotechnology, and a range of other unexpected domains.
Just as the rewards for getting and using your intellectual property today are higher, the risks involved in this aspect of business are also higher than they were just a few decades ago. The intellectual property business is “high beta”—the term that investors use to describe an as-set that offers high risk and high reward, unlike, say, cash reserves. The costs of licensing someone else’s intellectual property can be extremely high; the costs of not licensing and using it anyway can be even higher.
On the bright side, if you can become an entity that licenses intellectual property to others—a “licensor,” in legalese—you can generate attractive rates of return on your investment. Intellectual property licensing is such a big business in part because it can generate so much free cash flow. It’s also a big deal because it can help both par-ties to grow. And it’s on many managers’ minds because the downside of getting it wrong in the first place can be enormous.
Intellectual Property Matters to Your Organization (Yes, Even Yours)
You might think, off the bat, that intellectual property is just a matter of concern to big, established for-profit companies in fields like biotech, software, or publishing that have large licensing operations. It is certainly crucial to those firms. But as the global knowledge economy grows each year, the importance of intellectual property strategy also grows for nonprofit organizations such as universities, libraries, museums, public media producers, and a broad range of cultural heritage institutions.
Intellectual property can mean many different things to different kinds of organizations. That makes it a broad topic for a short book. Intellectual property generally takes the form of rights that vest in creators of innovative ideas, expressions, processes, and brands. These rights are established by law, and granted to people or organizations through four primary types of interests: patents (for ideas and methods, which in time are made public), copyrights (for expressive works), trademarks (for protecting and eliminating confusion with respect to brands), and trade secrets (for methods of doing things that are not made public).3
Pretty much every organization has an intellectual property portfolio of some kind and value, whether or not the organization realizes it as such. As a result, virtually every organization needs an intellectual property strategy, even if it’s a simple one. The easiest way to see this point is that every organization has a brand that describes it to the outside world, which is itself an important form of intellectual property. That’s true of a fancy university like MIT or Ole Miss in the United States, Oxford in England, or Keio in Japan. Think of all the sweatshirts that a big collegiate sports program sells for major public institutions like the University of Nebraska or the University of North Carolina. It’s true, too, of institutions such as the Smithsonian, the Tate, or the Hermitage. And it is certainly true of a business of any kind.
There’s a second, more subtle point that draws most organizations into the intellectual property field as well. We are increasingly operating in an economy that revolves around the production and management of information rather than physical production. The more that an organization is involved in managing information, the more likely the firm is to be operating in the realm of intellectual property, as opposed to physical property, in a variety of respects.
Consider the case of Triumvirate Environmental, a leading company in the US hazardous waste business. John McQuillan, the CEO of Triumvirate Environmental, once told me, “I’m not in the environment business. I’m in the information business.”4
Yes, it’s true that Triumvirate Environmental is a company that makes most of its money in a literal sense by charging its consumers for treating hazardous waste and carrying it away in their signature green trucks to a safe place. On another level, though, what McQuillan is really doing for his clients is providing and managing the information about this waste along with the fact that it was properly handled. This information is of great importance to regulators, business partners, and the public. This information itself is intellectual property. If, like McQuillan’s Triumvirate Environmental, you’re really in the “information” business on any level, you need an intellectual property strategy.
Like the global information economy at large, the field of intellectual property is emerging quickly. It is very much in flux, which is a key reason why a flexible strategy is so critical. Things are changing in terms of everyday practice; “social norms,” or the way in which people think about and act with respect to intellectual property; and the law itself, especially when one takes a worldwide view. With every passing year, the marketplace for intellectual property becomes ever-more global. Major markets, like China and India, are fast becoming intellectual property creators rather than just net intellectual property consumers (or worse, pirates). As the world shifts away from an industrial economy to a knowledge economy, intellectual property is increasingly becoming a coin of the global business realm.
But it’s much more complex than other asset classes. Depending on the kind of organization that you run, intellectual property might seem more like a minefield, commons, and/or public relations tinderbox. These multiple facets of intellectual property call for careful, proactive management, which is one of the key premises of this book.
No matter what industry you are in, you need to think about intellectual property more flexibly and expansively than your predecessors once did. The law is changing, and sometimes rapidly, on an international basis. That’s true whether you are talking about copyrights, patents, or trademarks. The biggest changes are coming in terms of how business leaders are thinking about intellectual property in strategic terms. Strategy in this area is dramatically different today than it was even a decade or two ago. This book is designed to suggest ways to establish an intellectual property strategy that will be up to date for today’s global information economy and also endure the inevitable changes of tomorrow.
Intellectual Property Strategy presents the state of the art in thinking on intellectual property to CEOs, senior managers, and those aspiring to lead any type of organization. The twin goals of this book are to point to the areas of greatest importance in this fast-moving field and offer practical insights to senior managers on how to create a strategy to enable an organization to address the challenges and opportunities that these areas hold.
In full disclosure, along the way I intend to nudge you toward exploring strategies of openness on the basis of their long-term business promise as well as the relation-ship between your intellectual property strategy and your brand. In doing so, I refer, one way or another, to each of the four essential areas of intellectual property—patent, copyright, trademark, and trade secret—from the perspectives of a range of types of organizations.
This book is built around four recommendations. I suggest that regardless of the type of organization you run, you should:
Consider intellectual property to be an asset class (rather than solely as a sword and a shield). You need first to establish this asset class, understand its near- and long-term value, then manage it, and find ways to use it to expand the range of opportunities to achieve your core mission, whether that is profitability for your firm or a broadly public-interested outcome.
Be open to what your customers, competitors, and others can offer you in terms of intellectual property. Your most important intellectual property might come from unlikely sources. And in many instances, your organization is situated in an intellectual property ecosystem that can support the growth and profitability of multiple participants if the ecosystem itself thrives in a cooperative environment.
Build from the premise that intellectual property is most valuable insofar as it creates freedom of action for your organization rather than serving as an offensive weapon against others. As a related concept, you should understand the extent to which your brand value is inter-twined with intellectual property rights in ways that you can’t disentangle.
Establish a strategy that enables you to be creative and flexible in what you do with your intellectual property— by thinking beyond the sword and the shield. In so doing, you should be sure to consider strategies—more than you have in the past—that harness the power of greater openness and interoperability as among your key options.
If you ignore, neglect, or fail to manage your intellectual property, you are probably running unnecessary risks as an organization. And you are almost certainly missing opportunities. That’s increasingly true in many industries as the knowledge economy grows. By taking the four basic steps outlined in this book, you can mitigate these risks. At the same time, you can lead your organization to greater success, whether you define that as higher profits, a stronger balance sheet, better products, closer relationships with your customers and business partners over time, or more visitors to your institution or Web site. You will be contributing to the development of a knowledge-based ecosystem from which your organization will stand to benefit over the long term. All the while, you will be positioning your organization for success in the global information economy.