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In order for a corporation to successfully leverage its intellectual property, the company’s chief executive needs to get with the program. Without someone at the top urging an organization to seek value from its intellectual property — whether by outlicensing for cash or cross-licensing to protect market share — strategy will proceed in a piecemeal fashion. That’s one lesson we learned at this roundtable, convened in October 2004 in the IP Law & Business offices in San Francisco. We invited lawyers, executives, and consultants to discuss how to best maximize a patent portfolio’s value. The discussion stayed friendly until West Coast editor Victoria Slind-Flor wondered who should take the lead on IP strategy. About a year ago we wrote about Hewlett-Packard Co.’s decision to take its IP strategy out of its legal department and place it in the hands of Joe Beyers, an HP veteran — without a law degree [" Licensing's In, and the Lawyer's Out," April 2004]. Beyers attended the roundtable, and strongly made the claim that IP strategy is a business thing. Lawyers think too much like lawyers to do strategy, he said. Not everyone agreed, but Beyers’ presence at the table provoked a lively round of questions and comments. Intellectual property is too complex to lend itself to easy solutions. As one participant pointed out, leveraging IP “requires a number of different strengths to carry off successfully: legal, technical, economic, and business expertise. It has to be someone who knows how to pull together these disciplines in a way that makes sense for the business.” Victoria Slind-Flor, West Coast editor, IP Law & Business: I’d like to know what leveraging intellectual property means in terms of the role you all play at your respective firms or companies. Joe Beyers, vice president-IP licensing, Hewlett-Packard Co.: I’ve been at HP for about 30 years, so I’ve seen the company go through a lot of transitions. HP historically has leveraged IP primarily for our product business. There’s been a strategic shift over the last couple of years — greater focus on IP protection, and on getting greater value from IP beyond product revenue. Carol Mimura, director, office of technology licensing, University of California, Berkeley: Universities leverage IP by outlicensing and stimulating investment in the private sector, where companies produce goods and services for taxpayers to buy. That’s appropriate because the lion’s share of our funding comes from the federal government and other public sources. We also use our IP to draw in resources, collaborations, tools, and people. Our role is to leverage what we have and to combine it with private-sector resources to benefit our entire network. The goal of all this is economic development through translational research. Peter Detkin, managing director, Intellectual Ventures, and former vice president and assistant general counsel at Intel Corp.: I’ve seen IP leveraging from a couple of different contexts. Rather than say what leveraging IP is, I’d like to say what it is not. With all due respect to Kevin [Rivette], who is sitting to my right, I think his book “Rembrandts in the Attic” has been terribly misread and misunderstood by a number of companies, which say, “Hey, I’ve got patents, therefore I can generate a lot of licensing revenue,” without looking at the bigger picture. There are very few companies that can pull off what the companies cited in Kevin’s book have pulled off. Leveraging IP assets is much broader [than monetization]. It [could mean] clearing roadblocks in front of introducing new products, or getting new avenues to sell company products. At the end of the day, [leveraging IP] should be about selling the company’s products. [It's] more than simply trying to get every last dollar out of those patents. Jonathan Retsky, partner, Brinks Hofer Gilson & Lione, and former vice president-patent operations at Motorola Inc.: Leveraging intellectual property in the Motorola context has changed over the last four or five years. Motorola in the late 1990s made a change from doing what I think a lot of companies were doing, which is acquiring IP at a rapid pace. [The company] realized that a more strategic approach was better. So it created [and I ran] an organization, called patent operations, which was structured to leverage Motorola’s vast IP portfolio. The strategy we developed focused on monetization. It made sense to Motorola, which had licensed a lot of IP by virtue of the standards-related aspect of the business. Kevin Rivette, executive adviser, The Boston Consulting Group, and author of “Rembrandts in the Attic: Unlocking the Hidden Value of Patents”: Leveraging IP is more about creating strategic value and achieving corporate goals so you can operate freely and have collaboration, or induce collaboration when people are not receptive. Slind-Flor: The genesis of this gathering was a conversation I had with Kevin, when “Rembrandts” came out. I asked him, Who’s going to be in charge of this business? Is it the lawyers? Beyers: I think I’m the only nonlawyer here, and I have strong opinions on this. It’s a strong collaboration, but at the end of the day, it’s a business strategy. I think you’re executing a business strategy, using IP as a tool. HP realized that, and that’s why two years ago my function was started. Detkin: [Leveraging IP] requires a number of different strengths to carry off successfully: legal, technical, economic, and business expertise. I agree with 98 percent of what Joe [Beyers] says, except for his conclusion that it must be a business person. It has to be someone who knows how to pull together these disciplines in a way that makes sense for the business. That could be a business person, but more often than not business people don’t have the right expertise or experience. They end up saying, “Well, we have patents in this area, therefore we should be able to do this,” without understanding the need to read claims, analyze claims, and understand how the prosecution history might affect your ability to make claims in the legal sense. And they won’t accept that they don’t have that experience. Mimura: Universities have a slightly different perspective because our mission is education, research, and the dissemination of information. We always publish and talk about our work. So we’re forced into patenting before we have a flushed-out invention. We understand that the value of a patent is truly its commercial potential. We think that without the cover of intellectual property, a company [won't] have enough confidence to invest in a new technology. So universities think that it’s not one or another champion that translates basic research into goods and services, but a confluence of science and law. Emily Friedlander, editor, IP Law & Business: Peter, you mentioned before that some companies can do this, and some can’t. How do you make that distinction? Detkin: Let me use the two extreme examples [of successful licensing programs] — IBM Corp. and Lucent Technologies Inc. Lucent had Bell Laboratories behind it, and Lucent had patents that covered a wide range of technologies — far broader than its actual business — when it began its licensing program. As a result it had a strong portfolio, and was able to assert [patents] primarily for revenue purposes in fields where Lucent was not competing. They had no fear of counterclaims. They were able to make strong claims, and people couldn’t claim back, and they were able to make a lot of revenue. IBM is the same way. It has a very broad portfolio, and its business is narrower than its portfolio. Retsky: Having IP and getting licensing revenue makes sense in some business situations, but not in others. If you can find patents that still have a useful life but are not in a business your company is still in — that’s like finding a Rembrandt. That goes to the bottom line. Slind-Flor: We’ve been talking about well-established companies with tangible products, but Victor, you’re with a company in a new area of technology with emerging products. How do you deal with outlicensing? Victor Lee, vice president and chief group counsel, Celera Genomics and Celera Diagnostics (a joint venture with Applied Biosystems): We don’t take an approach where we want to block people by not granting licenses. But then, how do you structure the deal to maximize value? It doesn’t have to be money; it could be collaborations, it could be cross-licensing. Beyers: A lot of companies just focus on getting money for their IP, and that’s a serious mistake. My objective is to increase HP’s stock price. If we get chip discounts or product discounts, I can track those as revenue. In addition, I get involved in situations where I will use IP as a weapon to reduce exposure or gain product freedom. I have to review and approve every transaction in the company that involves licensing IP. In the last 20 months, I’ve had to look at 1,800 deals. It allows me to make sure that there’s a cohesive strategy across the company. Of those 1,800 deals, 50 percent of them went through massive changes because of this process. Stephen Glazier, partner, Kirkpatrick & Lockhart Nicholson Graham, and author of “Patent Strategies for Business”: Is visible, ongoing contact with the chief executive essential to implementing a good IP strategy? Beyers: Absolutely. You could imagine the kind of resistance there was at the company when this was first put in place. But when a business manager running the storage business knows that I meet with Carly [Fiorina, HP's chief executive] twice a month, he’s going to cooperate. He knows that Carly [will] come down on him if he doesn’t. It takes that level of executive engagement to implement and drive an IP strategy. Matt Rainey, vice president-patent counsel, Intellectual Ventures, and former in-house patent attorney at Sun Microsystems Inc. (At the time of the roundtable Rainey was a partner at Howrey Simon Arnold & White.): This isn’t for the faint of heart or the low in budget. It requires board buy-in. It requires a long-term view. A number of companies — including a number of my present clients — think, “Well, we’ve got these three valuable patents, let’s flip them over, and in a year and a half we should have a couple of a million dollars.” Actually, in a year and a half you might have one licensee — if you’re lucky. You might have litigation on your hands, as well. You’re certainly going to be involved in litigation if you carry on. Detkin: [Intel's strategy] developed over time. [In] the legal department we’d see how one strategy employed by one division of the company was contrary to strategy coming in from a different division. The contracts came to two attorneys sitting side by side, who were asked to draft a license, and were reporting to the same person. So we started doing regular reviews with management just to solve these one-offs. We had to do it so regularly that we ended up with a management structure. Management regularly reviews [contracts] to ensure that IP policy is consistent across the company. Slind-Flor: There have been a lot of new IP consultancies riding this trend. Are they valuable to work with? Retsky: There are two types of consultancies that we’ve encountered: ones that want to tell you about the value of your intellectual property [and ones] that want to talk strategy. Motorola has found more value in the strategic consultants. We have worked a lot with the valuation consultants, and I don’t think they’ve added as much as we had hoped. The problem is that the business people want to know what is the value, or what is the number? I think that’s why those consultancies have grown, and I don’t know if they’re successful. Detkin: These people come in who have never written, licensed, prosecuted, or litigated a patent and tell you what they’re worth. They’ve never even read a patent. Beyers: I’ve done M&A for HP, and during that time I learned that I can prove to you a value for something that’s anything I want it to be. I pretty much decide what it’s worth and then I pick an algorithm that proves the number. The one value in using an outside firm for valuation is to provide credibility for the answer you’ve already come up with. I’ve done that several times. Detkin: [At some point] the Big Six each had their own IP valuation outfit. They were all being called to testify [in patent cases] and they said, “Aha! We can make a business out of valuating IP.” They go to Joe [Beyers] and try to sell this gigantic consulting package [that costs] several hundred thousand dollars, and they give him complete misinformation about how to value his patents. Rivette: One takeaway from this group is, it ain’t monetization. Leveraging is not straight monetization, it’s a subset. Beyers: It depends on the nature of the company. If a company has large historical assets, then monetization might be a bigger piece, but if the company is starting up, monetization should be a trivial piece. Glazier: One industry that is an exception to what Kevin said is financial services. Some financial players are becoming very active [in patenting] and are driven to make the patents cashflow. They’re patenting actual products, not just the software systems that provide the trading platforms and data feeds, which are also patentable. Most of [these patents] are still pending at the patent office. I would anticipate that you’ll see an unusual preference toward licensing and positive cashflow in finance patents. People tend not want to be the sole source for a financial structure. Buyers are conservative, and they want everybody to be doing it. They just want their piece of the action. It’s like a giant syndicate. They want the pie to be bigger as long as they can get their percentage. Slind-Flor: Carol, who puts pressure on you to monetize? Mimura: We get pressure from all sides: faculty members and students, who are our inventors; the state, which receives a portion of the revenue; and the university, which receives revenue. In the context of monetization, universities are approached in a couple of ways. First, we are asked to sell our future royalty revenue — [but] taking up-front payments is a relatively bad deal for us. An exception would be an outfit or campus that is just getting started or just getting into the business, but of course then they wouldn’t have the blockbuster patent to sell. Unless you could get some future milestone payments, I think that kind of valuation is definitely going to be a lowball number. The second context is patent donations, which we sometimes accept, although we’re not accepting them now. Unless it comes with research money that forwards research in a way that we could combine with our existing programs, we think it’s just participating in what’s close to becoming a scam. Detkin: Do [potential donors] ask you to buy off on the valuation? Mimura: No, they don’t ask us to verify that that number is right. And if we did, we could easily find a firm that says no, we could find a firm that says yes. Because no one knows the variables to plug in. Slind-Flor: Is the current trend to license IP just a bubble, or will companies never again be able to say, “Oh yeah, we have a bunch of patents, but we’re really in the business of making widgets, so we don’t do licensing”? Retsky: It’s the start of a progression. What’s happening now is that business principles are being brought into the IP arena. Rainey: There’s a lot of excitement about various plans that I have for developing portfolios from the beginning with board and investor involvement. Chief executives are very excited that they can create value that springs from the products they are developing, but don’t have to have a development cycle and milestones for the products. Once they invent and patent it, they have something valuable. Rivette: I’m going to suggest that they don’t at that point in time. There’s a whole business model that has to go behind that. Rainey: I don’t disagree. What I’m saying is that they can expand upon their nuts-and-bolts products and expand the patent portfolio, and then, of course, the work begins. It takes a long time. Retsky: The strategy starts by asking the business person: What do you want your IP to do for this company? Rivette: The better question is: What goal do you have for the company? Management [typically] doesn’t understand all the different mechanisms or business models that can apply to IP. So, if you ask, “What do you want to do with it?” they say, “Huh?” You invert it and say, “What is it that we need to do? I’ll tell you the four business models that apply.” Glazier: To develop an IP program, start with the business plan — then develop IP strategies to protect your markets. There is often an evolution from there: If you get in a budget squeeze, monetize the patents to finance the IP programs. IP driven deals will naturally develop. Patents as a profit center comes later. Beyers: This brings up a really key point — this concept of contextual thinking. In my career I’ve done about everything: business development, R&D, marketing, M&A. The mind works differently in each — it’s contextual thinking. You have an engineering team developing patents, they’re thinking about technology, they can’t think in terms of a business strategy. Same with legal: Some people do a good job around the legal domain, but they can’t quite think around business innovation. Not in an optimal way; the neurons get rewired. I know I’ve jumped around everywhere in the company. Providing the business context to this activity is key. Retsky: We found with executives at Motorola that it takes at least six months of regular systematic meetings before you kind of get it. There’s a nonintuitive part to the IP business, but once you get it, you’ll be just as successful as you are in other businesses. Beyers: Well, this area is so complex some people will never get it. [Consider] that a memo I wrote three years ago is now a key part of a deposition in court today, and every word is being dissected. I thought that through three years ago when I wrote that memo. There are very few things in a business career that you do where you’ve got to think through years down the road. Every contract you do, every business transaction you do, you have to think out eight chess moves. That’s why people don’t get it — they just think through one or two moves. Retsky: That’s why you need to partner with a lawyer. Beyers: Yes, you need the lawyer, but also you need the business context. I’ve negotiated every kind of deal imaginable in the company, and this is the hardest kind. You’re there talking to somebody, asking them for money or value from something that he can’t see or touch. You’re asking them for money or value for things they’ve been doing for decades, or for a long time. This is hard and complicated. That’s the key principle that people need to understand.

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