Point of View:
As more and more “traditional” companies are offering “digital” product interfaces and controls, it is timely to consider the different type of patent strategies required for the “digital high-tech” initiatives of many traditional “product” companies. For companies offering computer and mobile Interfaces for their traditional business offerings, they need to ensure that both the product development teams doing to the traditional innovation, as well as the software innovation teams, each understand how to best protect what they create. Since traditional products versus software products require quite different intellectual property strategies, the behavior of project teams and the role of patent committees supporting each type of R&D must be differentiated.
Argument in Favor of Thesis:
Companies managing products for sale to other businesses and consumers have traditionally relied on patents to block competitors from offering the same or very similar products[1]. This strategy had, and continues to, work well for those industries wherein the courts have ordered competitors to stop making and selling the offending product. This “traditional” situation is contrasted by the case of “high-tech software and IT based” companies whose products and services rapidly evolve. Because the speed of new product and service introductions outpaces the time required to obtain and enforce patents, the courts, instead of ordering defendants to stop making and selling an offending product, have instead awarded damages and patent royalty fees, but allowed the offending company to stay in business, when competing products and services are offered that infringe issued patents. The damages and patent royalty fees are set by the court and the court requires that the patent owner license the technology to the other infringing company at a fair and reasonable royalty (FRAND). Clearly, in this case, patents do not offer an innovative company exclusivity in the marketplace, but merely a means to make additional revenues at court-set royalty rates. To succeed in this “high-tech software and IT based” environment, a company must focus on obtaining large numbers of patents whose claims cover a multitude of features that can, by preponderance, reduce the profitability of business competitors to the point where they no longer choose to participate in the business[2]. Note that this is a very different business outcome from a traditional patent suit that would enforce exclusivity. Not only is this distinction important as a company considers how it can protect and sustain its competitive position, but the distinction is also important when determining size and nature of the patent portfolio needed to achieve a competitive business position[3].
Implications for Patent Strategies of Project Teams Creating Traditional Products
For R&D Product Teams creating Traditional products, they should continue their current practice of making sure they will not infringe anyone else’s patents. They do so by reviewing any patents and literature related to their new technology area. Usually, they will find few if any existing patents in their area of research. This IP environment affects two very important IP processes that: (1) ensures the project team in fact has the “Freedom to Operate” in their chosen area, and (2) the project team creates a small multi-generational IP portfolio.[1]
With respect to the first “Freedom to Operate” IP process, the Product Development Team and their IP support teams evaluate each and every possible relevant patent, and confirm there are no potentially blocking patents already in existence. This approach is practical because of the fact that there are no, or just a small number of, patents to review. On completing the patent search and analysis, the product development team can almost guarantee their company Freedom to Operate, and that they can secure future market “exclusivity” by fling their own patents.
With respect to the second portfolio building IP process, the field is wide open for the project team to build “patent fences” around their products. The project team’s goal is to create incremental and next-generation work, and patents, that builds upon the breakthrough work of their first “grandfather” research. In so doing, the “new and improved” patent protected products will also be able to exclude competitors, allowing the company to generate value as the sole provider of products in a marketplace.
Implications for Patent Strategies of Digital Team Initiatives
As traditional Product companies enter the arena of Digital Product companies, the Project Teams on the Digital side typically encounter an IP environment is different from those found for the Traditional Product teams. Instead of no, or just a few relevant patents, the project team often finds they are working in an area comprised of 100’s to 1000’s of somewhat similar patents. This IP environment affects the manner in which the two very important IP processes mentioned above are carried out. Guidelines and best-practices in this second type of environment are derived from those developed for Software and IT based companies[4]. These are:
With respect to the first “Freedom to Operate” IP process, a process to make sure there are no prior art patents present in this environment is outside the capabilities and business ROI of the company. Faced with 100s to 1000s of potentially relevant patents to review, a Product Development Team and their IP support teams, cannot cost effectively evaluate and clear individual potentially blocking patents. As such the product, and IP teams, do not try to do so, and thus cannot guarantee the company true “Freedom to Operate”. The most they can offer their company is a path toward “Freedom of Action”. “Freedom of Action” means that a company will have enough patents relevant to the product being developed such that if and when a future competitor sues the project teams’ company, the Project Team will have a patent portfolio in place of sufficient size and quality to force negotiations rather than litigation with the other company. This will happen because the portfolio size will be sufficiently large that a competitor would reasonably consider a lawsuit an exercise in “mutually assured business harm” if a court fight is engaged, so that the rational business choice between the parties is a negotiated “cross-license” without financial penalties.
With respect to the second portfolio building IP process, the development team must focus on creating many patents covering customer needs and high-value wants. The need for a large number of patents is because courts often award damage amounts based on relative patent counts held by each party engaged in patent suit. Thus, the goal of the product team is to create as many patents, of almost any quality, that can be used in a negotiation or damage settlement process.
Note how different this approach is from the Traditional Product company strategy. The IP strategy for Digital Products initiatives is to have enough patents to offensively deter all but a few other patent holders, relying upon cross-license or détente as a defensive strategy.
A Summary of The Distinctions Between the Two Types of Patent Management Environments:
| Distinctive Elements in the IP Process | Product R&D Team Environment | Digital / Software R&D Team Environment |
| Business Goal | Product/market exclusivity | Market share for your product |
| Product Development Posture | Each product often a seeks technical breakthrough position | Each product often a seeks technical “next generation/ incremental” position |
| Typical Executive viewpoint on what IP protection offers the new product | We can “own and control” this product/market | We can threaten “Mutually assured destruction” if sued by competition |
| When is a patent search and IP clearance of prior art done? | Throughout R&D process, linked to Stages-Gates/Agile Sprints; ideally continues post-launch | Generally not done, possibly done reactively to a specific demand letter by competitor |
| What is the scope of the patent search and IP prior art clearance? | Specific patent search done, ideally WW, usually easier to search because of small number of relevant prior-art patents | No specific patent search, but general competitor IP portfolio volume/scale/tech areas are studied and understood |
| Typical IP Landscape found by the R&D Project Team patent search | Few patents in product area | Many thousands of patents per product area |
| Effect of Patents known by the R&D Project Team | Patents may make-or-break product development team’s efforts | Patents rarely define product development team’s efforts |
| IP Licensing Involvement during R&D and commercial lifetime | Seek out specific licenses where needed to secure complete freedom to offer product | Broadly cross-license within industry to secure a “mutually assured business harm” capability |
| If it comes to Litigation, the Goals is: | Litigate to exclude | Litigate for market share |
| If it comes to Litigation, the Experience is: | Often you can get complete exclusivity and injunctions against others to stop them making or selling their products | Litigation rarely excludes; often broad portfolio cross-licenses occur in industry arising from a negotiated settlement |
| Litigation Outcomes | Competitor excluded from marketplace (Injunction) and damages | Competitor typically pays FRAND royalty rates and damages |
Conclusions:
For “traditional” companies engaged in “digital” initiatives, they need to maintain their existing patent creation and management processes, and build alongside, not instead of, patent creation and management processes akin to those of Software and IT based companies. This means they: (a) need to acquire R&D and IP team employees with digital technical skills and abilities, capable of creating and managing patents in a digital environment, (b) this requires management’s budget support for the acquisition of the needed new talent, (c) it requires building patent committee teams skilled the creation, acquisition, and management of patent portfolios in the digital space, (d) it necessitates using internal/external patent counsel experienced in obtaining “digital” patents, and (e) it also requires educating senior management in the differences in the way patents do and do not protect their Digitalization initiatives.
Failure to properly build out parallel patent processes will increase the costs the traditional companies because they will: (a) spend money on early-stage patent analysis that will not generate a business benefit, (b) there will be friction between technology, business and IP managers on the “right way” to be managing their intellectual property, and (c) upon product launch of their digital products, the sustained advantaged position of their digital offerings will be compromised.
References:
[1] Rembrandts in the Attic, Kevin G. Rivette and David Kline, Harvard Business School Press, 2000.
[2] Edison in the Boardroom, Julie L. Davis and Suzanne S. Harrison, John Wiley, 2001.
[4] Edison in the Boardroom Revisited: How Leading Companies Realize Value from Their Intellectual Property, Suzanne S. Harrison and Patrick H. Sullivan, John Wiley, 2011.
