How to Win with Patents without Going to Court
I wait for his question every meeting. You know this person. The self-appointed spokesman for the group. The seeker of all that is true and just. The person that’s more impressed with the question he asks than any answer you could give. I call him Jim Genius.
As Chief Technology Officer of a small industrial company, a legal colleague and I were responsible for the company’s “innovation engine”. The innovation engine was the means by which we intentionally created the patents and trade secrets necessary to operate and protect our business. The means to do so included gathering our key innovators a few times a year for workshops and similar exercises to focus on capturing intellectual property that was important to the business strategies of our company, our customers and our competitors.
As I was wrapping up the introduction segment at one of these innovation workshops, Jim asks, “Why are we spending time on this stuff? We never use these patents anyway.” He then looked around to count and appreciate all the nodding heads (My memory may be fabricating that part). What he was really asking was, “Why have these patents if we aren’t going to sue someone for infringement or create a royalty stream?” His smug smile made it hard to admit, but he unintentionally made a very important point (I may be fabricating the smug smile part, too). I had not done a good job of explaining why patents were important to protecting our customers, limiting our competitors, improving our profits and assuring our continued employment.
So, I replied, “Jim, I hope you never do anything in this company without knowing why you are doing it. You don’t have to agree with the reason, but you should at least know why you are being asked. We are going to scrap the workshop agenda for this morning and I am going to share with you the three valuable ways we use these patents in our company. None of the three requires us to sue someone or extract a licensing royalty. Here are the three valuable ways we use our patents.”
Limiting Competitors
We use our patents to protect important features of our products, especially features our customers directly appreciate. By doing so, our competitors must find other ways to achieve necessary functions, which is damaging to them if we’ve patented a superior approach. For example, our company holds a patent on a mechanical feature that enables comfortable one-handed use of our products. The product’s application benefits from freeing up a hand and the repetitive nature of the application made comfort a valuable benefit. Competitors did their best to create a comfortable one-handed product, but our patent protected the superior approach. It helped that the protected feature was obvious to the naked eye, so competitors stayed clear of its design. By limiting what our competitors could do, we win business based on this superior design that is patent protected.
Bundled with OEM Products
We have a product line of Original Equipment Manufacture (OEM) products. These are products that get designed into other people’s products. The camera inside your cell-phone is likely an OEM product. The phone manufacturer doesn’t make the camera. It sources it from an OEM. When we provide an OEM product to a customer we also extend a license that covers the patents related to our OEM product. By doing so, we are providing the OEM product and the right to use that product without worry of patent infringement.
Yes, the “use” of a product with patented technology is considered infringement, if the user does not have a right to use the patented technology. Also, the patents we’ve bundled with the product gives our OEM customer the peace of mind that we have the right to manufacture and sell our product they are designing into its product. After spending the time to design-in and qualify our product, there is nothing that will make an OEM customer burst into flames faster than a call saying we can’t deliver the product.
Including the license to the applicable patents plays a role in avoiding price erosion and can even earn a premium for your widget. Your customer’s procurement agent will negotiate for a lower price suggesting your margin is too high based on their estimated bill-of-material cost, but how can they discount the right to operate in the market worry-free from infringement claims? Does that mean if they source from someone else, they should have infringement claim worry? We certainly suggest that.
Cross Licensing
Cross licensing might be the best way to stay out of costly patent litigation. Patents are company assets that can be traded for assets at other companies. There is usually a lot of positioning, misrepresentation, and threats, but when you break through the noise, cross licensing opportunities usually go like this:
Company 1: Your XYZ product is violating my patent(s). Cease and desist or I’ll see you in court.
Company 2: We are not violating your patents. Plus your patents are invalid. By the way, your ABC product is violating my patent(s).
Company 1: Let’s cross-license our patents and compete freely in the market.
Company 2: OK.
Of course, the exchange above is an over simplification, but it is the essence of how that works. Usually, the dominant player can extort cash from the minor player in addition to the patent licenses, but that is just a variation on the theme.
Back to Jim Genius
Jim Genius was actually pretty happy with the explanation of how patents are an important business tool even if we were not going to sue someone for infringement or create a royalty stream. Limiting our competitors, bundling with OEM products and cross licensing all made sense to him and were appreciated as valuable uses of patents. Jim may have frequently made me bristle, but he was someone I wanted on my side of an initiative. People did follow his lead. Jim and the team’s good work with the innovation engine allowed us to have an excellent intellectual property position within a litigious industry. That position proved valuable, as you’ll read in the following true story.
True Story
We were a small, up-and-coming company with technology that would disrupt our industry. The biggest company in our industry had the most to lose by our technology becoming accepted. They tried to bury us in legal action by starting litigation with us on over 50 patents. This was unprecedented and clearly a strategy to divert our time and money away from R&D and marketing our technology and toward patent litigation.
What they didn’t properly consider was that we had a patent that covered a profitable, high growth product line of theirs. We also had products in this space, but a very small part of our business. The patent was originally developed because this innovation was important to THEM, not because it was important to us.
I’ll never forget the meeting when the two companies and all the lawyers got together, at our request, to talk about settling the litigation. Our competitor had no interest in settling since its intent was to drain our coffers through a drawn out litigation process. When we revealed our silver bullet, the patent that covered a profitable, high growth product line of theirs, every person on the other side held a blank stare. It was like they were frozen from shock.
After quickly recovering they, of course, posited our patent was invalid. That being the response we expected, our position was simply “Yeh, you may be right. But what if you are wrong?” The point being, risk is a function of the probability of an event occurring and the magnitude of that event. So while the probability of our silver bullet being valid and enforceable was debatable, the magnitude of its consequences was enormous to our competitor. They would be liable for tens of millions in past damages for having sold their existing product, and for the future, either be prohibited from selling this product line or pay a royalty to us for using our patented technology.
Shortly after that meeting, we received a very fair cross licensing proposal from our competitor. It basically was a broad exchange of patents that enabled both of us to operate freely in the market, and yes of course, included our silver bullet patent. This extensive cross-licensing agreement and means to operate freely in the market was very attractive when Fortune 100 suitors came calling for our small, upstart company. Strategic buyers value certainty and this cross licensing deal contributed to the certainty we could operate freely in the market.
What if we had not patented technology that was important to our competitor? There are various scenarios but they include either our company hemorrhaging cash until there was nothing left or being acquired at a fire sale value. Instead, the company was purchased at a favorable multiple of EBITA, I retired early with the company sale, and get to share my lessons learned with you.
