Recent Patent Wars Provide Important Survival Lessons, Contributed by Gerson S. Panitch, Finnegan, Henderson, Farabow, Garrett & Dunner, LLP
In the last few months, major companies have gone on high profile patent buying binges, paying billions of dollars for large patent portfolios. While most companies could never afford to pay a billion dollars for patents, every company, regardless of size, can learn valuable lessons from this emerging trend.
Patent prices continue to escalate. At the end of last year, a consortium made up of Apple, Oracle, EMC, and Microsoft purchased 882 patents of Novell for $450 million. A few months later, a consortium including Apple, Microsoft, Sony, Ericsson, RIM and EMC spent $4.5 billion to acquire more than 6,000 patents from Nortel Networks. In doing so, they beat out a $900 million dollar bid by Google. Google reacted by purchasing over 1,000 patents from IBM in July for an undisclosed amount, and then, in August, spent $12.5 billion to acquire Motorola Mobility, in a deal largely attributed to Google’s desire to obtain Motorola Mobility’s 17,000 patents and 7,500 patent applications.
These numbers dwarf HTC’s purchase in August of U.S. mobile Internet applications company Dashwire Inc. for a mere $18.5 million in a deal that analysts attribute to a desire to gain access to patents. In the last few weeks, Kodak announced that it is offering 1,100 patents for sale. Analysts expect Kodak’s portfolio to sell for over $3 billion. The media reports that other billion dollar portfolios in the wireless space are being eyed by the likes of Apple and Samsung. And in the background, the major wireless manufacturers are all suing each other in a maze of patent infringement litigations.
There are a number of lessons that can be gleaned from this trend, which apply regardless of the technical field in which a company operates.
Patents Are Becoming the New Currency of Technology Businesses
Now more than ever, in order to compete, companies are recognizing the value of patents. As technology becomes more complex, a single product can be covered by hundreds of patents. In the wireless handset field, for example, separate patents may cover antenna designs, data transfer protocols, docking features, touch screens, codecs, and user interface features, to name just a few. For example, the Motorola Mobility portfolio is said to include an important patent covering the feature of automatically disabling the touch screen when the handset is held to the ear, so that contact between the touch screen and the user’s face will not inadvertently disconnect the call.
The owner of a valid patent has the right to prevent others from using the patented feature. Anyone else making and selling products with the patented feature could be sued for infringement and potentially put out of business. Therefore, some companies prefer to ensure that for each of their products, they own as many patents as necessary to protect that product.
If a company is unable to own all the patents it needs, however, the company can sometimes use its patents in a trade to gain access to a competitor’s patents. Sometimes the trading occurs explicitly, such as in deals where competitors agree to cross-license each other. But often, “trading” occurs indirectly when companies quietly opt not to sue each other for patent infringement because each knows that the other has troubling patents.
Google, who is coming to the wireless handset field later than most of today’s major players, realizes that in order to avoid being blocked out by the patents of earlier players, it needs its own chips to trade. When it lost its bid for the Nortel portfolio, Google found itself at an even further deficit, which may explain its willingness to acquire Motorola Mobility at what some analysts have referred to as more than a 60 percent premium. Google lacked sufficient patent currency, and had no choice but to buy a space in the industry.
From high profile companies like Google and Apple to smaller companies whose acquisitions are simply footnotes in the evening business news, many companies are recognizing that the ability to participate in competitive fields requires access to controlling patents.
Patent Quality Is Much More Important than Patent Volume
The sizes of the portfolios that are being acquired are staggering. However, a number of analysts have recently recognized that the major value in these large portfolios is defined by a relatively small group of patents. Although Google paid $12.5 billion for thousands of patents, analysts have recently suggested that the major value lies in just 18 of those patents. Other analysts have reported that the value in two other recently acquired huge portfolios is primarily defined by just 20 patents.
All patents are not created equal. Some convey enormous value, while others can be dead wood. The difference typically lies in the care that was taken to generate the patent. With careful strategic planning focused on isolating and testing value before a patent application is even written, it is possible to skew a portfolio toward patents that investors and competitors will notice.
One of the author’s telecom clients recently learned that a few carefully crafted patents can provide millions of dollars in protection. The telecom company was approached by a giant international telecommunications company who insisted that the telecom company pay tens of millions of dollars to license a large patent portfolio. The telecom company evaluated its own portfolio, found three very strong patents infringed by the giant, and insisted that in any deal, the giant must agree to pay money to the telecom company. Negotiations were intense, but in the end, the giant walked away. It realized it had far more at risk for infringing even one patent, than it had to gain even if it could prove that the telecom company infringed many patents.
How Much Patent Currency Does a Company Need?
While the current patent wars involve wireless technology, similar smaller, but still significant, acquisitions occur every month in virtually every field as companies realize that patents are the currency needed to compete. The amount of patent currency that a company needs depends on its business goals. At the very least, every company should strive not simply to receive patents, but to obtain patents targeted at critical features that the market will greatly value. Whether in high tech, life sciences, software, or clean tech, today’s competitors and investors are more savvy than ever. They employ lawyers experienced in patent litigation and IP due diligence to assess a patent portfolio’s true blocking power. Most companies cannot afford thousands, or even hundreds of patents. So they need to ensure that the patents they do receive are sufficient to achieve the company’s business goals. By focusing on quality patents crafted through a strategic planning process that identifies and protects core value, even a handful of patents may provide huge reward.
Gerson Panitch is partner at Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, focusing on patent infringement litigation and strategic patent planning. Mr. Panitch can be reached at email@example.com or 202.408.4080.
This document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. Bloomberg Finance L.P. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy.
© 2011 Bloomberg Finance L.P. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of Bloomberg Finance L.P.