BREDEMA

Enhancing Patent value : A strategy in itself 

Source: L’Usine Nouvelle
Publication no. and date: 2967-9/06/2005

Profit.

Intellectual property is gradually becoming an essential part of the strategy of technology- based firms, generating an escalation in terms of licensing options. Though some are as yet still confined to just a few sectors.

Three hundred and seventeen patents for Renault, in France in 2004, 294 for l’Oréal, 248 for Valeo… For the first time, the French National Institute of Industrial Property (INPI) announced the hit parade of the firms and organizations to which it issued the most patents. Now under the spotlight of financiers, this activity is steadily gaining ground with innovative firms. “For several years now, France Telecom has been reinforcing its intellectual property activities. Between 2001 and 2004, the group doubled its number of new patent filings, 454 in 2004 worldwide, and by the same token doubled its workforce with a total 75 people in charge of this activity today”, said François Jamet, director of Intellectual Property and Licensing for France Telecom. Even IFRS accounting standards now require the assessment of intellectual property assets following acquisitions. In a nut-shell, patents are gaining status and are no longer considered as just another weapon against the competition. “Besides heavily protecting innovations, patents are a way of achieving a financial return on major R&D investments and are the best possible way of managing relationships with partners”, went on to say François Jamet.

Opening doors to partnerships

This isn’t just idle talk since a significant portion of group revenue comes from patent and software licensing. It isn’t the only one in this case. “Thomson Electronics revenues, for the most part, come from royalties paid to use its patents. In the extreme, some groups maintain this activity exclusively. Alcatel for example, dropped the manufacture of cellular telephones in China but remains the owner of the brands at issue”, says Alain Kaiser, a partner in the BDM intellectual property firm.

Likewise, licenses concerning optical storage brought in 478 million euros for Philips in 2004. Many strategies are implemented to enhance the value of patents as much as possible, whether filed to reinforce the company’s position or within the scope of licenses, exchanges, standards, donations, etc.” A wide variety of daily uses for patents currently exist outside of any perspective of litigation”, adds Francis Hagel, Head of Intellectual Property for the Compagnie Générale de Géophysique.

Beyond reflecting the technological position of a company, the patent is an indicator in terms of research and development (R&D) investment levels and the quality of research management. A company with a solid patent portfolio will have that much more weight to throw around when it negotiates partnerships, especially when a sizeable difference exists between the partners. “In the pharmacy sector, the major groups are running into hard times developing their own product portfolios and quite a few innovative molecules come from biotechnology firms” said Franck Tétaz. These small-size players choose the technological bottleneck to maintain a dominant position. ExonHit, a Paris-based biotechnology firm, filed 13 patents concerning a very specific technique for analyzing alternative splicing, a biological phenomenon that allows a gene to produce several proteins, some of which can be associated with pathologies. “If a third party wants to penetrate our field of activity, he’ll have to cope with a whole set of claims already accepted in several countries”, explains the CEO of ExonHit, Bruno Tocqué. In this case, industrial property is deployed as an umbrella to protect the company’s know-how and very existence.

Then again, a company’s best bet is to look at filed patents that fall within the scope of its developments and acquire them to maximize the value of its portfolio. “In-licensing is just as important as out-licensing. Since a company rarely holds all of the patents in a field”, adds Alain Kaiser. In the electronic and telecommunication sectors, major players go even further with license exchanges: they enter into agreements that involve all of their patent portfolios on classes of products. “IBM and Dell have exchanged several hundred patents between themselves in the electronics field. This two-way cross-licensing works quite well”, says Kaiser. Philips used cross-licensing in the lighting and medical fields. Similarly, STMicroelectronics basically operates with this licensing policy, by exchanging licenses with all of its competitors. Over the last few years though, a new kind of protagonist has taken a seat at the intellectual property negotiation table: companies with a portfolio composed exclusively of patents, with no trace of products. Very developed in the US, these companies are also present in Europe. “In the field of semi-conductors, these companies are making their rounds of the principal players in the field to pick up royalties. In this case, there’s no room for cross-licensing, a classic process in the field”, says François Guette, Head of Intellectual Property and Licensing at STMicroelectronics in France.

Rallying around a standard

Another sector, another policy. The major telecommunications and audiovisual players had to pool their patents for technological and accounting standard reasons. The “Patent pools” were consequently born of this need. This is about pooling product patents so that a manufacturer can acquire the right to exploit them through a single license at a set price. Philips, as a result, participates in the CD, DVD, Blue ray, Digital Rights Management (via Intertrust) and MPEG (digital video compressing technologies) patent pool.
The scope of the patent pool is determined by the entity that manages it. Which also manages marketing for pool participants. Licensing fees are pooled according to the weight of each patent. This tool structures the offer and simplifies patent management. Each participant brings clients in to speed up the patent promotion process.

It’s no bed of roses however. “The company doesn’t have a handle on revenue, it can’t enter or leave the pool whenever it wants either. It's bound by the contract for a specific term”, Alain Kaiser points out. Another danger is the pool’s acceptance of new patents that fall within the scope of your own and so devaluate them. By the same token though, if the company doesn’t decide quickly enough to enter the pool, it could find itself with very few licensed patents or actually end up being excluded out from the field. This strategy, which remains the prerogative of certain sectors, involves a high concentration of patents, technical complexity and complications to be negotiated on a case-by-case basis. An alternative: the “mini-patent pool”. To avoid having to join big pools, a manufacturer can apply this strategy that involves a reduced number of participants. For example, France Telecom markets a set of patents on turbo codes, used to optimize broadband use, developed by TDF (Télédiffusion de France) and GET (Groupe des Écoles de Télécommunications) researchers.

Filing left, right, and centre to maintain leadership.

In the IT sector, companies are engaged in a genuine dash for patents to ensure their technological position. IBM filed no less than 3,248 US patents in 2004. Likewise, Microsoft is making no secret of its 3,000 patent filings per year objective, all in the name of a strategy said to be purely defensive. It spends roughly 100 million dollars a year in legal costs and is confronted with forty or so infringement suit actions. The risks are considerable. In June 2004, Microsoft was sentenced to pay no less than 520 million dollars in damages for infringing a patent related to Internet technology. The IT sector isn’t the only one filing patents every which way as a means of “cornering the market”, L’Oréal implements the same policy. “This strategy has a deterrent effect on the competition. When there are large numbers of patents, companies looking to gain ground in this technology will think twice”, explains Franck Tétaz,[…]. But you have to have the financial means for this policy!

Not only that, but when prohibitive numbers of patents are involved, there is inevitably background noise. It’s therefore essential to get rid of any portfolio deadwood even if it means letting go of a few rights. Which is pretty well the norm in the US, and with good reason! “In the US, patent donations to universities or academic laboratories generate tax savings”, says Alain Kaiser. Not to mention an enhanced corporate image.

In short, innovative paths for developing patent value are emerging, like those of securitization. Take, for instance, the case of an American company holding a sizable patent portfolio and a US tax credit on the verge of being lost. There’s no question it needs to show profits to cover this tax credit. “This company consequently assigned its patents to a French bank and drew out capital, while signing exclusive licenses to continue to use the patents”, he explains. Since, ultimately, you don’t have to hold patents to use them!

By Anne Pezet