“In the tech sector, it is quite possible that nearly every major company is now violating someone’s patent.” Only Lawyers Win in Patent Wars, Bloomberg BusinessWeek
Patent wars have been part of the intellectual property landscape since the middle of the 19th-century and the frenetic innovation of the early days of the industrial revolution. Many of modern history’s most famous inventors were central figures, and their fortunes based on fortuitous legal decisions that concurred with their oral arguments and written claims.
Most of Thomas Edison’s fortune and renown came from success in a saga of 600+ lawsuits associated with the incandescent light bulb. Alexander Graham Bell would have not gained “Father of the Telephone” fame without victory in a series of telephony and telecommunications lawsuits – both as litigant and defender – in the 1880s. In the ensuing 125 years, announcements of new technologies and the creation of new product categories have kept patent litigators busy arguing about the originality of automobiles, airplanes, radio, lasers, medical stents, disposable diapers, smartphone and biomedical innovations.
While new markets worth tens of billions of dollars are difficult to ignore, it’s worth noting that all patent wars have commonalities.
In this article we synthesize some history and some of the wisdom of leading Silicon Valley intellectual property leaders — some customers, some colleagues — on the virtues or otherwise of patent wars.
One: Patent wars are expensive
Patent wars aren’t cheap. According to 2013 data from the American Intellectual Property Law Association, the median costs for each each party in a litigation regarding patents worth < $1 million is $700,000. For patents valued at more $25 million, the costs can increase up to $5.5 million.
Recent disclosures (CRISPR patent fight: The legal bills are soaring) by sides in the CRISPR patent war, a fight for control of a promising and high-profile genome editing technology, illustrate the table stakes when the outcome will likely be monopolization of a multi-billion dollar market. By August 2016, the costs of litigating the war had reached almost $20M.
Two: Patent war outcomes are unpredictable
Study the portfolio of any large company employing a professionally managed IP department and you’ll probably find a patent portfolio of sufficient size and breadth that they could probably sue almost every important competitor.
Why don’t they? Patent infringement lawsuits are risky endeavors. They can scale out of control very quickly. Outcomes in terms of current product sales, future product development, distribution and market access are often unpredictable. The risk of damages and injunctions can be high. The law of unintended consequences can be both sobering and financially humbling.
Caveat Three: Getting the timing right is hard
If you’re a potential aggressor, the decision to start a war is challenging. Much of the impetus will likely arise from macroeconomic trends such as the rise and fall of technology categories, as well as microeconomic realities such as shrinking product sales or the portent of something everyone will want in the next 24 months.
Are you a dinosaur or disrupter? Are you the newcomer ready to shake up today’s status quo en route to becoming tomorrow’s standard? Do you understand how your company makes money? What technological and industry trends are affecting your revenue streams? Are your markets mature? Is there growth potential or is market growth flat? Are you, like American cell phone carriers, resigned to enticing the customers of your competitors however you can.
While there’s no patent war blueprint, and warring parties on both sides are usually large companies that operate with rational deliberation, here are 10 reason to start a patent war.
- Protecting Market Share
A company that has invested a lot to develop a profitable revenue stream is likely to invest a lot to ensure it keeps flowing. Common solutions are to protect complementary products and alternative manufacturing processes for the short-term future and even longer. Companies will often protect inventions in areas they have no plans to develop. If a market is growing but your share of it is shrinking, someone is growing faster than you. As the incumbent leader, what can you do to check their success, slow their growth or possible increase their costs?
Note: Recent Jawbone/Fitbit litigation is a good example of a war pitting a company (Jawbone) with declining share of an existing market (audio devices) looking to expand into new market opportunities (health tracking) and running into a well-funded and entrenched competitor (Fitbit).
- Protecting Product Features and Exclusivity
If your product category requires certain key features or narrow functionalities, you could protect (you probably should have already protected) their exclusivity. This is often the case when there is a leap forward, such as we’ve seen since the 1990s in technology and telecom (3G and 4G cellular, for example). If you can convince others in the industry to agree to your terms, and potentially prevent or delay copycats, you’ve entered a state of licensing bliss (see Microsoft Android reference below). If not, litigation may be your best route.
- Increase Competitors Costs
Yahoo’s March 2012 patent infringement lawsuit against Facebook is an example of the “do whatever you can to increase your competitor’s costs” approach. Yahoo alleged that its longtime business partner infringed ten Yahoo patents related to advertising, privacy, customization, messaging and social networking. Facebook’s response was to buy 750 patents from IBM and then countersue Yahoo for infringement. Within four months, the fight was over, and a new partnership accord had been reached.
- Slow a Competitor Down
Your company hasn’t had a hit product in three years. The CEO wants to know what the IP department can do. You reply to the CEO that you can pursue an injunction and perhaps create time the R&D department needs to catch up and reach parity with the competitor’s offerings. As with #2, you could try and argue that some of the claims and patents cover very specific features and that an injunction is an appropriate judgement in your favor. Another option is to go for the kill. If the competitor’s fortunes are in the other direction, it’s really struggling and resource-poor, you could even try and put it out of business. Alternately, you could try and force it to make changes favorable to your fortunes and priorities.
- Create Distraction
A distraction can be anything that forces a competitor to adjust its priorities, reallocate resources or even compensate you for halting litigation. Sometimes you don’t have to win your case; your objective by asserting your IP rights may just be to cast a cloud of uncertainty over a competitor and affect its stock price, or potentially destabilize an important one-time event like an IPO.
On the eve of its 2004 IPO, Google paid off Yahoo to end its lawsuit alleging that Google’s search technology, its revenue foundation, infringed on patents Yahoo had obtained from acquiring Overture. Ten days before going public, Google agreed to grant Yahoo millions of additional shares.
- Tax Competitor’s Success
When companies know they’ve lost, have resigned themselves to second-tier status, or envisaged a long, maximally profitable decline, they may want to extract a “success commission” from the leader. Probably the simplest method is licensing revenue. Yahoo’s 2010 Facebook lawsuit could be viewed as an attempt by then-CEO Scott Thompson to secure some easy revenue this way.
Another way to piggyback on a competitor’s success is to threaten their revenue streams by targeting high-dollar revenue silos. If you’re a smaller company considering taking on a much larger competitor, they have a lot more at risk if they lose. Both sides will know this and the risk management downside in your favor can give you the upper hand in negotiating a “mutually beneficial” outcome.
- Generate Licensing Revenue
Cross-licensing is probably the most common outcome of patent litigation. Once the early euphoria has diminished, and the realities and legal costs of drawn-out trench warfare are clearer, licensing agreements are often the quickest and cheapest ways to return to normal. Licensing revenue is also a favored solution for established companies that have seen their market share decline while still possessing significant patent portfolios, and the revenue model for most NPEs.
Note: Microsoft didn’t need a massive patent battle to generate a licensing cash cow from its Android patent portfolio. In recent years, Microsoft has received billions in royalties from licensing agreements signed with Android device manufacturers such as Samsung, which has sent several billion dollars to Redmond, WA. Unfortunately, the market has changed; manufacturers are now selling far more low-cost Android phones. Microsoft attributed a 26% decrease in licensing revenue in the most recent quarter to a decline in licensed unit sales and license revenue per unit.
- Influencing or Controlling New Markets
If you operate in an industry where the market’s viability depends on standards that everyone can or must adopt, then the IP tends to become very relevant and valuable. We’re in the early days of this kind of maneuvering as far as the Internet of Things (IoT). There are so many parts necessary to create a massive network of millions and millions of IoT-connected things that there will be much jockeying and entreaties exchanged among those with relevant IP. A similar reality exists in terms of the IP necessary to create, control and grow ecosystems such as Amazon Marketplace in etail, Apple iTunes and Netflix in media distribution.
How do you demonstrate that you’re not a soft target? You can set a precedent by moving first to preempt or discourage similar future claims against you, or send a particular message to others about you. Setting a precedent that you aren’t a pushover or will not be coerced into rolling over in a spurious dispute may be the most important reason for you to choose litigation.
“We have always seen litigation as a last resort, and we work hard to avoid lawsuits. But BT has brought several meritless patent claims against Google and our customers—and they’ve also been arming patent trolls.”
This was Google spokeswoman Niki Fenwick’s version of “revenge is a dish best served cold” in February 2013 to explain why her company sued British Telecom. Sometimes, it just comes down to companies wanting to flex their muscles and smack somebody.
Patent Wars and the Upside of the Downside
Patent violations do not inevitably lead to litigation. Nor does litigation inevitably expand from individual case to a full-blown patent war. Often, the risk management analysis concludes that licensing at a royalty rate that prospective partners will find reasonable is optimal for everyone. Deals are then announced in press releases and the subsequent years are a quiet exchange of documents and wire transfers from one company to the other.
The alternative is publicity, hyperbole, uncapped legal fees and the unknown. For some companies, the upside of this downside is worth it. An impulsive factor can be the CEO. If s/he is determined to make a stand (see the Yahoo and Apple litigation examples above), litigation is probably unavoidable, and it’s “prepare for battle” time.
“I will spend my last dying breath if I need to, and I will spend every penny of Apple’s $40 billion in the bank, to right this wrong. I’m going to destroy Android, because it’s a stolen product. I’m willing to go thermonuclear war on this.” Why Steve Jobs Went ‘Thermonuclear’ Over Android