Friday, May 2, 2014
Wrap Up: Let's Use Social Media Tools
On a typical day, you might find me managing Facebook Page analytics, updating my personal travel blog about my latest trip to Mexico, or, throughout this spring semester, researching and writing about engineering patents for my IEOR 190G blog. I have learned so much- about academic subjects, user engagement, marketing techniques, to name a few- from deploying a range of social media tools for both school work and extracurricular projects since coming to college.
I would like to thank Professor Tal Lavian and our GSI Arezu for setting up our class assignments in this unique way, as it gave me flexibility in combining class material, real-world application, and my own particular areas of interest into my own work. This process was highly effective for learning. Once I glaze the surface of, for instance, a patent case that sparks interests (and tons of questions), I would naturally open several tabs on the Internet to consult multiple sources before synthesizing these perspectives into a summary, or even argument, of the problem at hand.
The blog allows me to keep track of the vast pools of knowledge I'm growing, and more importantly, combined with the Youtube platform, sets up an interactive community. It is in this social media woven IEOR 190G ecosystem that I was able to gain feedback from classmates and spot common interests among ourselves. Unlike the traditional "single learner" assignments most classes distribute, blogging and YouTube definitely made my learning process more interactive and transparent. I strongly believe that these weekly "put your thoughts into writing" exercises were more effective for building critical thinking skills.
To improve this tool in a class setting, it would most helpful to encourage all classmates to follow each other's blogspot URLs from the very start. That includes teaching everyone how to enter our blogs into our mutual feeds so we can broaden our reading list for the weekend commentaries. I would even suggest creating one assignment where we have to reach out to a blogger/ writer in this field and interviewing them to grow the practical learning aspect and build our professional networks.
Wrap Up: Reflections on IEOR 190G
My interest in engineering patents actually arose in a geography class when we were debating the Monsanto case with regards to patented genes, which led to question several themes encircling this article: should we patent life? Having fostered a strong interest in technology, I wanted to learn more, and that is why I enrolled in this class, IEOR 190G.
After a semester, I would definitely recommend this class to future Cal students, whether you're a business/econ student like me, or a software engineer, aspiring entrepreneur, lawyer, or litigation consultant. Coming from little to no background in how patents work, I now have a clearer picture of the web of interaction between businesses, the USPTO, startups, PAEs (patent trolls), and financial institutions. This class is valuable to me for pragmatic reasons because I am interested in valuation in finance where patents will come into play, just think the Motorola buy and sell.
I especially enjoyed hearing the guest speakers and Professor Lavian's broad experiences in industry. I can only hope to return in 5-10 years time and pay it forward, wherever my knowledge building takes me. Good luck, IEOR 190G Class of Spring 2014! It's been a ball.
Monday, April 28, 2014
Patent Value: Amazon 1-Click
Amazon 1-click is a billion dollar patent filed in 1997 and USPTO-approved in 1999. Yes, it is actually a patent! PCWorld disagrees but it has already happened... The value proposition of the Amazon 1-Click feature is that it simplifies online shopping check-out to a frictionless process. The result: extremely high conversion from existing customers. So what’s the problem with protecting this business innovation? The issue lies in fact that 1-click protects a very broad concept that millions of other online retailers would benefit from. In fact, Europe continues to reject Amazon’s ongoing attempt in the past 10+ years to file a patent in that continent.
4 criteria for ability to patent:
Useful. Yes
Useful. Yes
Novel. Perhaps.
Prior art. One-stop checkouts existed in the brick and mortar world but not the virtual world.
Obviousness. This idea seemed obvious to many, but as I mentioned in the Leo case where identifying a need or design meant the difference between obviousness and nonobviousness, perhaps the 1-click option was not obvious.
Indeed, the 1-click is a very powerful patent. Founder Jeff Bezos initially started Amazon as a book seller, quickly mounting in competition with Barnes and Noble. While B&N attempted to set up the 2-click feature on their website, Amazon regarded that as patent infringement and sued B&N, which ended in Amazon's favor. Most retailer companies who recognized the value of this feature decided to partner with Amazon instead, albeit at a price. E.g. Apple: incorporated 1-click into iTunes, iPhoto and Apple App Store through a license.
How much is the 1-click patent worth? In 2011, Amazon made 48.1 billion in revenue. If 1-click increase sales by 5% per year, that’s an additional 2.4 billion in revenue due to 1-click and an additional 40.8 million based on 2012’s 1.7% operating margin. This excludes licensing fees from Apple and multiple other partners
How long will the 1-click's patent value persist after expiration in 2017? Remember that 1-click is just one of Amazon’s 3 big disruptions in the retailer world: there is also Amazon Prime, and One Day shipping. They’re all business services ultimately. With continuous innovation, Amazon will continue to be a force to be reckoned with.
Sunday, April 20, 2014
Provisional Patent Applications Explained
I was pleasantly surprised and encouraged that some of my classmates had recently filed provisional applications for their startup product. This week's post explains provisional patent applications based on this article from Patent Attorney Gene Quinn and Founder of IPWatchdog.
The first misunderstanding Quinn clarifies is that there is no such thing as a "provisional patent." You file a provisional patent application which establishes priority for your new invention. It is crucial is act quickly in the US, very much a first-to-file world.
With no formal requirements from the USPTO, the provisional patent filing fee can be as low as $65, from a standard government fee of $130 for small entities, i.e. individuals, universities, and companies with less than 500 employees. You also enjoy a "patent pending" status without PTO fees or attorney's fees until you move toward filing a nonprovisional patent, which must occur within 12 months in order to claim the benefits aforementioned. Its low cost makes the provisional patent application a very practical tool for those with a limited budget to secure rights and priority early on. Afterward, the team can work on perfecting the invention and seeing if there is a market.
The 80-20 Pareto Principle applies to the filing process, whereby the final 20% of the process takes 80% of the time. Think about it this way: what you initially conceive is unlikely to be what you ultimately test using 3D renderings, engineering drawings, or prototype as you research, develop, and reiterate in the design process. As soon as your invention is tangible enough to describe, this is a good time to file your provisional patent application before further improvements.
Ultimately, you will need to file a nonprovisional patent application to obtain a patent for your invention. Think of the provisional patent application as one step in the process. Once you file a nonprovisional patent application you cannot add more subject matter to the application. However, you can wrap together any number of provisional applications filed within the last 12 months in your nonprovisional application.
Overall, the provisional patent application is ideal for protecting intellectual rights and conserve funds as you prepare for obtain a patent for your invention. But remember, your provisional patent application is only as good as the detail included. Quinn's analogy is on point:
"If you were the first to invent the automobile you would want to have your patent cover the Yugo version, the Cadillac version and the Ferrari version and everything in between."
So that leaves us with 2 critical points to wrap up:
1. Make sure you prepare your provisional patent application supremely carefully because patent protection is worthless in the US if the nonprovisional application is incomplete at the time of filing within 12 months from the provisional application filing. Quinn describes completeness as entailing enough detail to allow someone familiar with the technology to make and use the invention by simply reading the patent application filed.
2. Patent drawings- don't skim on expenses here. While professional drawings cost $50-$100 per page (a Chez Panisse meal, at that), drawings are you BFF (Best Friend Forever) when it comes to providing adequate disclosure on the full scope of your invention. In fact Quinn recommends this as a must.
Good luck, inventors! Especially those in college!
The first misunderstanding Quinn clarifies is that there is no such thing as a "provisional patent." You file a provisional patent application which establishes priority for your new invention. It is crucial is act quickly in the US, very much a first-to-file world.
With no formal requirements from the USPTO, the provisional patent filing fee can be as low as $65, from a standard government fee of $130 for small entities, i.e. individuals, universities, and companies with less than 500 employees. You also enjoy a "patent pending" status without PTO fees or attorney's fees until you move toward filing a nonprovisional patent, which must occur within 12 months in order to claim the benefits aforementioned. Its low cost makes the provisional patent application a very practical tool for those with a limited budget to secure rights and priority early on. Afterward, the team can work on perfecting the invention and seeing if there is a market.
The 80-20 Pareto Principle applies to the filing process, whereby the final 20% of the process takes 80% of the time. Think about it this way: what you initially conceive is unlikely to be what you ultimately test using 3D renderings, engineering drawings, or prototype as you research, develop, and reiterate in the design process. As soon as your invention is tangible enough to describe, this is a good time to file your provisional patent application before further improvements.
Ultimately, you will need to file a nonprovisional patent application to obtain a patent for your invention. Think of the provisional patent application as one step in the process. Once you file a nonprovisional patent application you cannot add more subject matter to the application. However, you can wrap together any number of provisional applications filed within the last 12 months in your nonprovisional application.
Overall, the provisional patent application is ideal for protecting intellectual rights and conserve funds as you prepare for obtain a patent for your invention. But remember, your provisional patent application is only as good as the detail included. Quinn's analogy is on point:
"If you were the first to invent the automobile you would want to have your patent cover the Yugo version, the Cadillac version and the Ferrari version and everything in between."
So that leaves us with 2 critical points to wrap up:
1. Make sure you prepare your provisional patent application supremely carefully because patent protection is worthless in the US if the nonprovisional application is incomplete at the time of filing within 12 months from the provisional application filing. Quinn describes completeness as entailing enough detail to allow someone familiar with the technology to make and use the invention by simply reading the patent application filed.
2. Patent drawings- don't skim on expenses here. While professional drawings cost $50-$100 per page (a Chez Panisse meal, at that), drawings are you BFF (Best Friend Forever) when it comes to providing adequate disclosure on the full scope of your invention. In fact Quinn recommends this as a must.
Good luck, inventors! Especially those in college!
Saturday, April 19, 2014
IP Licensing Strategy: Yamaha vs Bombardier
I suppose you don't tend to think about Personal Watercrafts (PWCs) when it comes to patents.
But that is exactly what Yamaha sued Bombardier about in 2001 for importing and selling US products that infringed on Yamaha's patents, thereby violating of Section 337 of the Tariff Act, so to say in legal-speak. This was brought to trial at the International Trade Commission. Ultimately the parties reached a settlement based on the defense expert's analysis that distinguished Yamaha's use of patent rights from IP used to strategically raise rivals' costs and reduce competition, i.e. create antitrust.
On a side note, I was not aware that Yamaha Corporation offered products and services beyond pianos, since I was semi-forced to sit in front of one and practice everyday for a good ten years of my life. So yes, Yamaha does produce electronics, motorcycles, and power sports equipment on top of good old musical instruments.
The PWC industry is best characterized as a differentiated products oligopoly. Once the new sit-down PWC was introduced in the late 1980s, industry sales quickly picked up (as older stand-up PWCs were not super popular) and four to five competitors came to dominate the market, the top 2 being Yamaha and Bombardier. As with the auto industry, design and innovation are key- any delay in introducing new features can harm the firm's competitiveness in the long-term, therefore strategic use of patents to delay rivals or disrupt their design process can be very effective competition inhibitors.
In pursuing its patent strategy, Yamaha is far more aggressive than its competitors, holding some 90% of all patents in the industry at the time of litigation. Bombardier believed that Yamaha's behavior not only constituted patent flooding, but also wrongful patent filing on the grounds that several patents in Yamaha's portfolio represented merely trivial and obvious modifications of prior art. Nevertheless, Yamaha's strategy indeed forced its competitors to take a all-or-nothing package license with per-unit royalties to avoid infringement. Bombardier called Yamaha out on exacerbating the industry's intense price competition because Yamaha recommended its competitors to simply pass the royalty fee on to customers through a price increase. Eventually, Yamaha reached settlements with 2 of its 4 competitors.
Of course, determining whether Yamaha's strategic use of its patents was anticompetitive depends on whether you agree that the patents in its portfolio are valid, infringed, or practiced in the US. Assuming all 3 are true, Yamaha leaves its competitors with 3 options that all raise their prices: proceed with litigation to test these assumptions, take the license, or design around the patent. With reduced output or higher prices from competitors, Yamaha gains in revenue and market share.
In this example, it appears that a lack of appropriate antitrust enforcement can fail to penalize firms that use vast patent portfolios to hurt competition in the markets. It also underpins the question of where law and economic regulation should draw the line between pro and anti-competitive exercise of patent rights.
But that is exactly what Yamaha sued Bombardier about in 2001 for importing and selling US products that infringed on Yamaha's patents, thereby violating of Section 337 of the Tariff Act, so to say in legal-speak. This was brought to trial at the International Trade Commission. Ultimately the parties reached a settlement based on the defense expert's analysis that distinguished Yamaha's use of patent rights from IP used to strategically raise rivals' costs and reduce competition, i.e. create antitrust.
On a side note, I was not aware that Yamaha Corporation offered products and services beyond pianos, since I was semi-forced to sit in front of one and practice everyday for a good ten years of my life. So yes, Yamaha does produce electronics, motorcycles, and power sports equipment on top of good old musical instruments.
The PWC industry is best characterized as a differentiated products oligopoly. Once the new sit-down PWC was introduced in the late 1980s, industry sales quickly picked up (as older stand-up PWCs were not super popular) and four to five competitors came to dominate the market, the top 2 being Yamaha and Bombardier. As with the auto industry, design and innovation are key- any delay in introducing new features can harm the firm's competitiveness in the long-term, therefore strategic use of patents to delay rivals or disrupt their design process can be very effective competition inhibitors.
In pursuing its patent strategy, Yamaha is far more aggressive than its competitors, holding some 90% of all patents in the industry at the time of litigation. Bombardier believed that Yamaha's behavior not only constituted patent flooding, but also wrongful patent filing on the grounds that several patents in Yamaha's portfolio represented merely trivial and obvious modifications of prior art. Nevertheless, Yamaha's strategy indeed forced its competitors to take a all-or-nothing package license with per-unit royalties to avoid infringement. Bombardier called Yamaha out on exacerbating the industry's intense price competition because Yamaha recommended its competitors to simply pass the royalty fee on to customers through a price increase. Eventually, Yamaha reached settlements with 2 of its 4 competitors.
Of course, determining whether Yamaha's strategic use of its patents was anticompetitive depends on whether you agree that the patents in its portfolio are valid, infringed, or practiced in the US. Assuming all 3 are true, Yamaha leaves its competitors with 3 options that all raise their prices: proceed with litigation to test these assumptions, take the license, or design around the patent. With reduced output or higher prices from competitors, Yamaha gains in revenue and market share.
In this example, it appears that a lack of appropriate antitrust enforcement can fail to penalize firms that use vast patent portfolios to hurt competition in the markets. It also underpins the question of where law and economic regulation should draw the line between pro and anti-competitive exercise of patent rights.
IP Antitrust: Caught in a Thicket
As a economics student with a basic/baby understanding of monopolistic markets, I would like to draw on some research from Berkeley Law faculty Rubinfield and Maness, who investigated patent usage's implications on antitrust. Hurrah!
In my last post on how firms change behavior given impending patent expiration, I introduced the significance of patents as monopoly builders during their active 20 year period. Indeed, the intersection of IP and antitrust continue to be a hotly debated subject in both academia and industry. In the spirit of Rubinfield and Maness' paper, this post is particularly concerned with the ability for firms to use their IP portfolio to raise rivals' costs. This plays two effects: firms may act with predatory motives against competitors, or competitors may collude to raise prices.
In industries where innovation and design are key to competition between rivals, the paper suggests that the price-raising strategy is potentially effective for disadvantaging rivals, whether or not through explicit collusion. I will outline some patent portfolio strategies that caught my attention in this antitrust conversation.
One use of a patent portfolio is what is known as a "patent flooding strategy." Basically, a firm files various patent applications that claim minor variations on a competitor's existing technology. This is especially advantageous for prosecutors with large market power if its patents surround competitors' key technologies. There is in fact some stealth involved. A company can strategically create a patent thicket by patenting new technology and features that it never intends to commercialize- known as "submarine patents." This creates tremendous uncertainty for competitors and makes it hard for them to design and sell products without running the risk of infringement, so we can think of it as an overshadowing threat.
One beneficial solution may be for the firms to sign a cross-licensing agreement, though at the cost of the public. Alternatively, the incumbent might strategically force its competitors to accept a licensing agreement- and the fee that comes hand in hand. While one may argue that package licensing saves resources and negotiation costs necessary to value patents or run litigation, the patent thicket ultimately forces concessions from rivals. The result may be a race to grow one's patent portfolio.
On the other hand, the public may benefit from rival firms who are forced to innovate around the existing patent, which consequently increases the quality, variety, and diversity of product offerings. However, the risk of infringement upon submarine patents persists, and many firms prefer eliminating this costly risk of litigation by accepting a license at unfavorable terms to bring its product to market.
The patent thicket is but one IP strategy in a deep basket of case studies, which I will explore later. To sum up, strategic use of patents to assert "patent floods" or "thickets" raise rivals' costs in three ways: to raise expenses on designing around patented technology, delay the introduction of new products, or accept a license with fees and royalties.
If you're interested, read on in my next post for a case study on the strategic use of package licenses: Yamaha vs Bombardier.
In my last post on how firms change behavior given impending patent expiration, I introduced the significance of patents as monopoly builders during their active 20 year period. Indeed, the intersection of IP and antitrust continue to be a hotly debated subject in both academia and industry. In the spirit of Rubinfield and Maness' paper, this post is particularly concerned with the ability for firms to use their IP portfolio to raise rivals' costs. This plays two effects: firms may act with predatory motives against competitors, or competitors may collude to raise prices.
In industries where innovation and design are key to competition between rivals, the paper suggests that the price-raising strategy is potentially effective for disadvantaging rivals, whether or not through explicit collusion. I will outline some patent portfolio strategies that caught my attention in this antitrust conversation.
One use of a patent portfolio is what is known as a "patent flooding strategy." Basically, a firm files various patent applications that claim minor variations on a competitor's existing technology. This is especially advantageous for prosecutors with large market power if its patents surround competitors' key technologies. There is in fact some stealth involved. A company can strategically create a patent thicket by patenting new technology and features that it never intends to commercialize- known as "submarine patents." This creates tremendous uncertainty for competitors and makes it hard for them to design and sell products without running the risk of infringement, so we can think of it as an overshadowing threat.
One beneficial solution may be for the firms to sign a cross-licensing agreement, though at the cost of the public. Alternatively, the incumbent might strategically force its competitors to accept a licensing agreement- and the fee that comes hand in hand. While one may argue that package licensing saves resources and negotiation costs necessary to value patents or run litigation, the patent thicket ultimately forces concessions from rivals. The result may be a race to grow one's patent portfolio.
On the other hand, the public may benefit from rival firms who are forced to innovate around the existing patent, which consequently increases the quality, variety, and diversity of product offerings. However, the risk of infringement upon submarine patents persists, and many firms prefer eliminating this costly risk of litigation by accepting a license at unfavorable terms to bring its product to market.
The patent thicket is but one IP strategy in a deep basket of case studies, which I will explore later. To sum up, strategic use of patents to assert "patent floods" or "thickets" raise rivals' costs in three ways: to raise expenses on designing around patented technology, delay the introduction of new products, or accept a license with fees and royalties.
If you're interested, read on in my next post for a case study on the strategic use of package licenses: Yamaha vs Bombardier.
IP Strategy: Deterrence in the Face of Patent Expiration
We were very fortunate to have Duane Valz from Google join us last week for an informative talk on how start-ups and patent applications. Valz walked us through a comprehensive look at patent definitions, cost-benefit analysis, trends, threats, and opportunities for start-ups with regards to filing patents. I would like to highlight his point on patents and deterrence. In particular, through a study conducted by the National Bureau of Economic Research on how businesses implement deterrence strategies in the face of patent expiration in the pharmaceutical industry.
Let's start with why businesses use patents: patents protect unique value propositions in the intersection between software, hardware, and user experience, thereby enhancing valuation. They signal innovation to the marketplace, and can serve as collateral for financing, or "failure insurance." While it usually costs start-ups 8000-12000 USD to file a patent, it is worth the time and money to invest in cost-effective counsel to pursue your first patents properly. Of course, if you're a college student like me with a great idea but less than great capital base, you could consider filing a provisional patent too. I will explain that in a blog later.
I learned that patent usage can generally be categorized into 5 buckets, ranked by (1) defensive to offensiveness, and (2) low effort to high effort. In the list before, the topmost use requires least effort and is most defensive, and as you go down the list, they require more effort (in terms of time and investment) and are more offensive.
1. Deterrence- focus on volume and public presence deters other firms from suing the patent-holder
2. Counter-assertion- focus on threats from other inventors
3. Cross-licensing- this more collaborative strategy gives the bi/multi-laterally cross-licensed firms more freedom of action. This is uncommon for biotech firms. See my previous post for a full explanation of cross-licensing.
4. Monetization- focus on markets
5. Strategic offensive- focus on competitive differentiation
In a nutshell, Ellison and Ellison's NBER paper investigates strategic entry deterrence by investigating how a panel of 63 drugs that lost their U.S. patent protection between 1986 and 1992 dealt with the threat of generic entry. I suppose this is not exactly using patents for deterrence, but more so behavioral shifts influenced by a deterrence motive as patent expiration approaches, but it is an interesting case nonetheless.
In Ellison and Ellison's model, it observes a difference in the initial investment pattern (paper calls it "nonmonotonicity) of incumbent firm 1 with strategic entry deterrence motives as opposed to the level of investment made by the same firm without such motives. Firm 2, which enters the market later, would observe 1's initial investment level before entry rather than afterward if 1 had intended to impact future entering firms' cost of entry.
The first two of three key behavioral changes that deterrence-minded pharma companies show before patent expiration are detail advertising and journal advertising. An incumbent might reduce detail in advertising levels to reduce the attractiveness of the market to potential entrants, thereby deterring entry. The study used advertising-to-sales ratios to measure this metric. The third action observed is presentation proliferation. The entry-deterrence motive gives incumbents an incentive to increase the number of presentations in which the drug is sold to make it more costly for entrants to match the incumbents' full product line. Lastly, firms mightd distort prices downwards to deter entry.
Why did I find this study interesting? The expiration of a pharmaceutical patent and the subsequent opening of a drug market to generic entrants is a significant event for drug companies. The Waxman-Hatch Act of 1984 in particular reduced regulatory barriers to generic entry. For example, when Prozac lost patent protection, within 18 months it had lost over 80% of market share to 21 generic competitors. Similarly, Merck performed a reverse acquisition on Schering-Plough in order to strengthen its patent portfolio as key drug patents faced expiration in 2009.
I'm sure changes in strategic behavior regarding patents are broad across other industries too and would love to hear your thoughts. Thanks for reading.
Let's start with why businesses use patents: patents protect unique value propositions in the intersection between software, hardware, and user experience, thereby enhancing valuation. They signal innovation to the marketplace, and can serve as collateral for financing, or "failure insurance." While it usually costs start-ups 8000-12000 USD to file a patent, it is worth the time and money to invest in cost-effective counsel to pursue your first patents properly. Of course, if you're a college student like me with a great idea but less than great capital base, you could consider filing a provisional patent too. I will explain that in a blog later.
I learned that patent usage can generally be categorized into 5 buckets, ranked by (1) defensive to offensiveness, and (2) low effort to high effort. In the list before, the topmost use requires least effort and is most defensive, and as you go down the list, they require more effort (in terms of time and investment) and are more offensive.
1. Deterrence- focus on volume and public presence deters other firms from suing the patent-holder
2. Counter-assertion- focus on threats from other inventors
3. Cross-licensing- this more collaborative strategy gives the bi/multi-laterally cross-licensed firms more freedom of action. This is uncommon for biotech firms. See my previous post for a full explanation of cross-licensing.
4. Monetization- focus on markets
5. Strategic offensive- focus on competitive differentiation
In a nutshell, Ellison and Ellison's NBER paper investigates strategic entry deterrence by investigating how a panel of 63 drugs that lost their U.S. patent protection between 1986 and 1992 dealt with the threat of generic entry. I suppose this is not exactly using patents for deterrence, but more so behavioral shifts influenced by a deterrence motive as patent expiration approaches, but it is an interesting case nonetheless.
In Ellison and Ellison's model, it observes a difference in the initial investment pattern (paper calls it "nonmonotonicity) of incumbent firm 1 with strategic entry deterrence motives as opposed to the level of investment made by the same firm without such motives. Firm 2, which enters the market later, would observe 1's initial investment level before entry rather than afterward if 1 had intended to impact future entering firms' cost of entry.
The first two of three key behavioral changes that deterrence-minded pharma companies show before patent expiration are detail advertising and journal advertising. An incumbent might reduce detail in advertising levels to reduce the attractiveness of the market to potential entrants, thereby deterring entry. The study used advertising-to-sales ratios to measure this metric. The third action observed is presentation proliferation. The entry-deterrence motive gives incumbents an incentive to increase the number of presentations in which the drug is sold to make it more costly for entrants to match the incumbents' full product line. Lastly, firms mightd distort prices downwards to deter entry.
Why did I find this study interesting? The expiration of a pharmaceutical patent and the subsequent opening of a drug market to generic entrants is a significant event for drug companies. The Waxman-Hatch Act of 1984 in particular reduced regulatory barriers to generic entry. For example, when Prozac lost patent protection, within 18 months it had lost over 80% of market share to 21 generic competitors. Similarly, Merck performed a reverse acquisition on Schering-Plough in order to strengthen its patent portfolio as key drug patents faced expiration in 2009.
I'm sure changes in strategic behavior regarding patents are broad across other industries too and would love to hear your thoughts. Thanks for reading.
Friday, March 21, 2014
Tricky Obviousness: Pharmaceutical Case in 2013
Leo Pharmaceutical Products, Ltd. v. Rea, 2013 WL 4054937
I was browsing through some previous cases where nonobviousness plays a critical role and found a compelling example written a couple days before my birthday last year by Dennis Crouch from the University of Missouri School of Law. This case highlights some very interesting qualities about nonobviousness but most of all stresses its prevalent and essential role in determining patentability.
Leo Pharmaceutical Products filed a patent claiming a "storage stable and non-aqueous" invention to treat skin conditions. Before this solution was developed, an existing and well known treatment was the combination of Vitamin-D and a corticosteroid, except no one had been able to manufacture its storage stable form due to sensitive pH requirements. Initially the Board deemed the patent invalid due to obviousness in prior art. On appeal, the Federal Circuit reversed its verdict.
The PTO decision was tricky and the case became a relatively important obviousness case in the patent world. Basically, the Board found the patent claims obvious due to three prior art references- someone skilled in this "art" in the pharmaceutical industry would have taken the existing combination of Vitamin D and corticosteroids and added a solvent to it to achieve storage stability.
But why did the Federal Circuit reversed the Board's decision? While there is reasonable obviousness in design, the Board failed to accredit the patentee (Leo) for identifying the problem in the first place- that a stable form should be designed. The prior art did not recognize the problem and therefore never attempted to create a solution that solved the storage stability problems.
The blog post then goes into more detail about Judge Rader's interpretation of old prior art's relation to obviousness in this case. But our key takeaway in this intriguing case is that its seems the patent was ultimately validated on the grounds of nonobviousness in functionality.
I would be interested in exploring whether discovering new functions for existing designs is a patentable area. I had brought this up previously in comments about the Myriad case whereby a genetics lab's patent claim was rejected- while they found a new way to diagnose breast cancer by isolating breast cancer genes, which had never been done before, the courts could not award them a patent. There is a fine line here, where nonobviousness is a key factor, between patenting natural phenomena (the isolated genes) and new methodology, which is what I perceive in the Leo vs Rea case.
I was browsing through some previous cases where nonobviousness plays a critical role and found a compelling example written a couple days before my birthday last year by Dennis Crouch from the University of Missouri School of Law. This case highlights some very interesting qualities about nonobviousness but most of all stresses its prevalent and essential role in determining patentability.
Leo Pharmaceutical Products filed a patent claiming a "storage stable and non-aqueous" invention to treat skin conditions. Before this solution was developed, an existing and well known treatment was the combination of Vitamin-D and a corticosteroid, except no one had been able to manufacture its storage stable form due to sensitive pH requirements. Initially the Board deemed the patent invalid due to obviousness in prior art. On appeal, the Federal Circuit reversed its verdict.
The PTO decision was tricky and the case became a relatively important obviousness case in the patent world. Basically, the Board found the patent claims obvious due to three prior art references- someone skilled in this "art" in the pharmaceutical industry would have taken the existing combination of Vitamin D and corticosteroids and added a solvent to it to achieve storage stability.
But why did the Federal Circuit reversed the Board's decision? While there is reasonable obviousness in design, the Board failed to accredit the patentee (Leo) for identifying the problem in the first place- that a stable form should be designed. The prior art did not recognize the problem and therefore never attempted to create a solution that solved the storage stability problems.
The blog post then goes into more detail about Judge Rader's interpretation of old prior art's relation to obviousness in this case. But our key takeaway in this intriguing case is that its seems the patent was ultimately validated on the grounds of nonobviousness in functionality.
I would be interested in exploring whether discovering new functions for existing designs is a patentable area. I had brought this up previously in comments about the Myriad case whereby a genetics lab's patent claim was rejected- while they found a new way to diagnose breast cancer by isolating breast cancer genes, which had never been done before, the courts could not award them a patent. There is a fine line here, where nonobviousness is a key factor, between patenting natural phenomena (the isolated genes) and new methodology, which is what I perceive in the Leo vs Rea case.
Want a patent? Not if it's obvious.
Just like any application, inventions must meet requirements- five, in fact- to be patentable.
Ask yourself:
1. Patentable Subject Matter: Is the invention patentable subject matter (a whole different story)?
2. Utility: Does it provide any utility? (think the not so useful Perpetual Motion Machine)
3. Novelty: Can the features of the invention be anticipated based on a previous product?
4. Can it be described with the particular language so that skilled professionals in the field can understand, create, and own the invention?
And a drumroll for...
5. Obviousness: is it obvious?
Let's understand what this means. Even outside of the realm of the United States Code, it is difficult to objectively assess obviousness, which is critical to patentability. After reading a couple blogs online, I decided there are three ways I can phrase this, since they are often overly wordy.
1. If the differences between the invention seeking patenting and prior art are such that the invention would have been obvious at the time it was made to a person having ordinary skill in this art, the said invention is deemed obvious, which means...
2. An obvious invention is when several references knowledgeable about the field would look at your invention and consider it already known. A combination of their predictable and non-unique references and skills would create this invention. Let's look at an example...
3. Let's say you invented X+Y. Both X and Y are known in prior art. So if people skilled in X and Y looks at X+Y, they would consider the invention already known, therefore it is considered obvious.
Check out some examples in my next post.
Ask yourself:
1. Patentable Subject Matter: Is the invention patentable subject matter (a whole different story)?
2. Utility: Does it provide any utility? (think the not so useful Perpetual Motion Machine)
3. Novelty: Can the features of the invention be anticipated based on a previous product?
4. Can it be described with the particular language so that skilled professionals in the field can understand, create, and own the invention?
And a drumroll for...
5. Obviousness: is it obvious?
Let's understand what this means. Even outside of the realm of the United States Code, it is difficult to objectively assess obviousness, which is critical to patentability. After reading a couple blogs online, I decided there are three ways I can phrase this, since they are often overly wordy.
1. If the differences between the invention seeking patenting and prior art are such that the invention would have been obvious at the time it was made to a person having ordinary skill in this art, the said invention is deemed obvious, which means...
2. An obvious invention is when several references knowledgeable about the field would look at your invention and consider it already known. A combination of their predictable and non-unique references and skills would create this invention. Let's look at an example...
3. Let's say you invented X+Y. Both X and Y are known in prior art. So if people skilled in X and Y looks at X+Y, they would consider the invention already known, therefore it is considered obvious.
Check out some examples in my next post.
Friday, March 7, 2014
Big Fish, Small fish: Improving Patent Reform
As my previous blog mentioned, a focus on the smallest companies may not create representative perspectives of the patent reform debate but it is worth focusing on small companies because they represent the majority of our PAE friends.
There are three ways we as a group had brainstormed and defended to reduce the harm of patent assertion in the patent market.
1) Small companies should decrease vulnerability as PAE targets by forming collective, industry association groups to set policies for the group in standard patent troll situations. By spreading information, risks and transaction costs, the return on trolling can be reduced.
2) Small companies tend to be targeted because they are USERS of technology, eg. wifi, digital scanners, innocently using widely available technology. Of course, since it appears that those innocently using technology are still targeted, Congress should adopt some limit on the liability of users under the "innocent user defense"
3) Small companies legitimize PAE patents by agreeing to royalty-based settlements.
Overall, we see a series of unique characteristics, i.e. popular PAE target, that characterize both big companies and small. I hope to learn more about examples anybody has in mind.
There are three ways we as a group had brainstormed and defended to reduce the harm of patent assertion in the patent market.
1) Small companies should decrease vulnerability as PAE targets by forming collective, industry association groups to set policies for the group in standard patent troll situations. By spreading information, risks and transaction costs, the return on trolling can be reduced.
2) Small companies tend to be targeted because they are USERS of technology, eg. wifi, digital scanners, innocently using widely available technology. Of course, since it appears that those innocently using technology are still targeted, Congress should adopt some limit on the liability of users under the "innocent user defense"
3) Small companies legitimize PAE patents by agreeing to royalty-based settlements.
Overall, we see a series of unique characteristics, i.e. popular PAE target, that characterize both big companies and small. I hope to learn more about examples anybody has in mind.
Big Fish, Small Fish: How Patent Demands Impact the Economy
In reading Colleen Chien's "Startups and Patent Trolls", I found some very interesting information about:
Chien studied over 200 tech startups, 40% of which received a patent demand. She found that small companies, especially startups, are more vulnerable to failure than large, well-established companies. By small, I notice that more than half of the defendants in Chien's study make under $10M a year.
Firstly, the problem lies in the fact that as a small company, it is harder to absorb a PAE demand because it causes significant operational impact, business strategy, and losses in valuation relative to the startup's size.
Secondly, because small companies are focused on growing and building the business, they lack the time and resource to monetize their intellectual property. Unfortunately, patent sales are motivated in times of distress instead, like a "firesale" with the proceeds returned to creditors and investors instead of the company itself.
In addressing the issue, reforms that focus on startups and small companies have not been most successful to reduce the harm of patent assertion. Find out how in Part II.
Take a peak at the original paper.
- how patent demands impact startups- the small fish in the sea
- the breakdown between large and small patent assertion entities (PAEs, or trolls), which pursue the suit against the defendant, i.e. corporation versus startup
- these patent demands' overall effect on the economy and looking ahead
Chien studied over 200 tech startups, 40% of which received a patent demand. She found that small companies, especially startups, are more vulnerable to failure than large, well-established companies. By small, I notice that more than half of the defendants in Chien's study make under $10M a year.
Firstly, the problem lies in the fact that as a small company, it is harder to absorb a PAE demand because it causes significant operational impact, business strategy, and losses in valuation relative to the startup's size.
Secondly, because small companies are focused on growing and building the business, they lack the time and resource to monetize their intellectual property. Unfortunately, patent sales are motivated in times of distress instead, like a "firesale" with the proceeds returned to creditors and investors instead of the company itself.
In addressing the issue, reforms that focus on startups and small companies have not been most successful to reduce the harm of patent assertion. Find out how in Part II.
Take a peak at the original paper.
Friday, February 14, 2014
Video Summary: Why did Google Buy and Sell Motorola?
You're invited to read my two part blog posts below- remember to check out the pie chart (not included in video!).
Part II. Why did Google buy and sell Motorola?
In Part I, I introduced what happened in Google's acquisition and sale of Motorola Mobility and gave the basic reasons behind these two transactions.
Through simple subtraction, it appears that Google had taken a $9.5 billion hit from the price difference. However, breaking down the parts of the initial acquisition and changes that happened in the past two years leading up the sale tell a different story about how much Google had actually lost or, in fact, strategically gained.
Breaking down Google's acquisition cost of $12.5 billion, we see the actual cost of acquisition boils down to $1.5 billion assuming the following figures for Google's gains through the transaction, as illustrated in Figure 1, my back-of-the-envelop pie chart, below:
$3 billion from Motorola's cash on hand
$1 billion from Motorola's tax credits
$2.4 billion from the sale of Arris, Motorola's set-top business
$2.9 billion from the sale of Motorola Mobility this year
$1.7 billion as a minimum valuation of Motorola's patents in hindsight, although Google initially valued them at well over $5 billion in 2012
... which totals to $11 billion. Therefore, the cost of acquisition was essentially $12.5 - $11 = $1.5 billion. Whether this is a good deal could be too early to tell, but it's certainly a totally different number from $12.5 billion.
Figure 1.
If I assumed Google's optimistic $5.5 billion valuation of Motorola's patents, Google would actually be making a gain on the buy and sell.
Of course, I recognize that my numbers are prone to error, and that this summary of items through addition may not be the most accurate way to dissect the change in worth for Google and Motorola, but it provides fundamental insight into alternate sources of revenue that compensate for the high price Google paid two years ago.
Not to mention, Google reaps strategic benefits from the deal because it has locked up vital patents to defend its Android ecosystem.
To cap it off, Google took advantage of significant tax benefits, up to $1 billion immediately and $700 million tax deductions a year through savings from tax deductions for future profits and Motorola's net operating losses both domestically and abroad. I did not take this into account in the pie chart but I would comment that it has been a smart way to save on taxes.
I am curious to see Lenovo and Motorola's progress, especially given optimistic views grounded in Lenovo's successful past upon acquiring ThinkPad.
Through simple subtraction, it appears that Google had taken a $9.5 billion hit from the price difference. However, breaking down the parts of the initial acquisition and changes that happened in the past two years leading up the sale tell a different story about how much Google had actually lost or, in fact, strategically gained.
Breaking down Google's acquisition cost of $12.5 billion, we see the actual cost of acquisition boils down to $1.5 billion assuming the following figures for Google's gains through the transaction, as illustrated in Figure 1, my back-of-the-envelop pie chart, below:
$3 billion from Motorola's cash on hand
$1 billion from Motorola's tax credits
$2.4 billion from the sale of Arris, Motorola's set-top business
$2.9 billion from the sale of Motorola Mobility this year
$1.7 billion as a minimum valuation of Motorola's patents in hindsight, although Google initially valued them at well over $5 billion in 2012
... which totals to $11 billion. Therefore, the cost of acquisition was essentially $12.5 - $11 = $1.5 billion. Whether this is a good deal could be too early to tell, but it's certainly a totally different number from $12.5 billion.
Figure 1.
If I assumed Google's optimistic $5.5 billion valuation of Motorola's patents, Google would actually be making a gain on the buy and sell.
Of course, I recognize that my numbers are prone to error, and that this summary of items through addition may not be the most accurate way to dissect the change in worth for Google and Motorola, but it provides fundamental insight into alternate sources of revenue that compensate for the high price Google paid two years ago.
Not to mention, Google reaps strategic benefits from the deal because it has locked up vital patents to defend its Android ecosystem.
To cap it off, Google took advantage of significant tax benefits, up to $1 billion immediately and $700 million tax deductions a year through savings from tax deductions for future profits and Motorola's net operating losses both domestically and abroad. I did not take this into account in the pie chart but I would comment that it has been a smart way to save on taxes.
I am curious to see Lenovo and Motorola's progress, especially given optimistic views grounded in Lenovo's successful past upon acquiring ThinkPad.
Part I. Why did Google buy and sell Motorola?
In Part I, I'm going to outline what happened and the basic whys. In Part II, I will delve into more analysis on the strategic thought and financial reasoning for these transactions.
What
Google acquired Motorola Mobility for $12.5 billion in August 2012 and sold it to Lenovo for $2.91 billion in January 2014.
Why buy
From Google's fact page, the two main benefits were:
1. Faster innovation through the marriage between Google's software expertise and Motorola's device advantage to develop better phones at lower prices.
2. Possession of Motorola's patent portfolio to manage competition in the Android ecosystem.
Larry Page, Google's co-founder, called the move "supercharging the Android ecosystem" through the two means described above.
Why sell
Larry Page breaks it down like this: the smartphone market is super competitive. You gotta be all-in to be the leader in making mobile devices. Google is seeking new opportunities in the emerging wearable and home markets. So distinct are these market dynamics from the smartphone business that Google felt Motorola would be better served by Lenovo, the largest PC manufacturer in the world, in order to better serve smartphone users and to concentrate Google's efforts in their new focus on smart Android devices.
In hindsight, there are far more reasons at play...
By simply doing the math, Google appear to have lost $12.5 - $2.91 = a $9.5 billion loss. However, we need to look deeper to determine what value had been gained or lost beyond the dollars.
Check out my back-of-the-envelop bar chart and accompanying analysis in Part II (video included!) to see what Google had really lost and strategic benefits reaped from this recent transaction.
What
Google acquired Motorola Mobility for $12.5 billion in August 2012 and sold it to Lenovo for $2.91 billion in January 2014.
Why buy
From Google's fact page, the two main benefits were:
1. Faster innovation through the marriage between Google's software expertise and Motorola's device advantage to develop better phones at lower prices.
2. Possession of Motorola's patent portfolio to manage competition in the Android ecosystem.
Larry Page, Google's co-founder, called the move "supercharging the Android ecosystem" through the two means described above.
Why sell
Larry Page breaks it down like this: the smartphone market is super competitive. You gotta be all-in to be the leader in making mobile devices. Google is seeking new opportunities in the emerging wearable and home markets. So distinct are these market dynamics from the smartphone business that Google felt Motorola would be better served by Lenovo, the largest PC manufacturer in the world, in order to better serve smartphone users and to concentrate Google's efforts in their new focus on smart Android devices.
In hindsight, there are far more reasons at play...
By simply doing the math, Google appear to have lost $12.5 - $2.91 = a $9.5 billion loss. However, we need to look deeper to determine what value had been gained or lost beyond the dollars.
Check out my back-of-the-envelop bar chart and accompanying analysis in Part II (video included!) to see what Google had really lost and strategic benefits reaped from this recent transaction.
Monday, February 10, 2014
Friday, February 7, 2014
Cross-Licensing Explained
Earlier today, I typed "patent war" into Google Search News and I hereby present you the most recent news: HTC settles patent dispute with Nokia, signs cross-licensing agreement
As far as I gather, these two smartphone companies have agreed on some form of settlement called cross-licensing. In other words, giving HTC and Nokia's layers a rare vacation from the slew of patent law suits between them. The deal is as close to collaboration as it gets when two companies head-butt over intellectual property.
What is a cross-licensing agreement?
This legal agreement grants company A's the right to use company B's patents and vice versa. Essentially both companies win because they can perform R&D and sell new products without worrying about infringing each other's patents. This can a multi-lateral agreement between multiple companies.
Implications
This leads to a couple of implications. Company can forgo royalties mandated by standard patent licenses BUT gives up its right to collect royalties on its own patents too. So, companies now weigh the cost of a lawsuit in the absence of cross-licensing to the cost of giving up its royalty income. Usually cross-licensing is most valuable for large corporations because a smaller firm will not have enough products to license to the other firm as incentive.
What I found most interesting was how regulators view cross-licensing agreements to be a form of antitrust- think of it as several people teaming up to monopolize the markets and one up their rivals. When tech giants in the industry sign cross-licensing agreements, they agree not to sue each other but can continue to sue new competitors.
HTC, Apple, and Nokia
HTC has not only shaken hands with Nokia about its LTE patents as of today (February 7), but also made a similar cross-license with Apple to settle litigation between them. The details are pretty confidential to the average college observer like myself, but it would fascinating to study how cross-licensing as a strategy changes the inflows and outflows of cash within these participating smartphone giants.
As far as I gather, these two smartphone companies have agreed on some form of settlement called cross-licensing. In other words, giving HTC and Nokia's layers a rare vacation from the slew of patent law suits between them. The deal is as close to collaboration as it gets when two companies head-butt over intellectual property.
What is a cross-licensing agreement?
This legal agreement grants company A's the right to use company B's patents and vice versa. Essentially both companies win because they can perform R&D and sell new products without worrying about infringing each other's patents. This can a multi-lateral agreement between multiple companies.
Implications
This leads to a couple of implications. Company can forgo royalties mandated by standard patent licenses BUT gives up its right to collect royalties on its own patents too. So, companies now weigh the cost of a lawsuit in the absence of cross-licensing to the cost of giving up its royalty income. Usually cross-licensing is most valuable for large corporations because a smaller firm will not have enough products to license to the other firm as incentive.
What I found most interesting was how regulators view cross-licensing agreements to be a form of antitrust- think of it as several people teaming up to monopolize the markets and one up their rivals. When tech giants in the industry sign cross-licensing agreements, they agree not to sue each other but can continue to sue new competitors.
HTC, Apple, and Nokia
HTC has not only shaken hands with Nokia about its LTE patents as of today (February 7), but also made a similar cross-license with Apple to settle litigation between them. The details are pretty confidential to the average college observer like myself, but it would fascinating to study how cross-licensing as a strategy changes the inflows and outflows of cash within these participating smartphone giants.
Smartphones: Let the Law Suits Begin
Food for thought: Smartphone Patent Wars 2012. Looks like Apple is an active participant.
Source: PC Mag
Apple is the king when it comes to its patent portfolio in consumer electronics. Based on statistics in 2010, Apple was granted 566 U.S. patents, roughly five times less than the number granted to Hitachi, Canon, and Sony respectively. However, it is ranked number 1 according to the Institute of Electrical and Electronics Engineers' Patent Power scorecard. (Source: IEEE)
Brief History of Key Law Suits: (Source: cnet.com)
2008: EMG Technology vs Apple
2009: Nokia vs Apple
2010: Eastman Kodak vs Apple, Elan Microelectronics vs Apple, HTC vs Apple, Motorola vs Apple
2011-present: Samsung vs Apple
My question for you is: why are its patents so powerful and what does this imply in today's smartphone patent war? In other words, why does Apple so aggressively engage in litigation? Perhaps one reason is its high rate of acquisition of other companies, hence their patents included. But the patent race does not depend on acquisitions though. Patents incentivize innovation. Comment on what factors you think drive the smartphone patent races!
Apple is the king when it comes to its patent portfolio in consumer electronics. Based on statistics in 2010, Apple was granted 566 U.S. patents, roughly five times less than the number granted to Hitachi, Canon, and Sony respectively. However, it is ranked number 1 according to the Institute of Electrical and Electronics Engineers' Patent Power scorecard. (Source: IEEE)
Brief History of Key Law Suits: (Source: cnet.com)
2008: EMG Technology vs Apple
2009: Nokia vs Apple
2010: Eastman Kodak vs Apple, Elan Microelectronics vs Apple, HTC vs Apple, Motorola vs Apple
2011-present: Samsung vs Apple
My question for you is: why are its patents so powerful and what does this imply in today's smartphone patent war? In other words, why does Apple so aggressively engage in litigation? Perhaps one reason is its high rate of acquisition of other companies, hence their patents included. But the patent race does not depend on acquisitions though. Patents incentivize innovation. Comment on what factors you think drive the smartphone patent races!
IEOR 190G: Why this class?
With an academic background in business, applied economics and policy, I am indeed interested in the costs and benefits aspect of intellectual property. From my basic understanding of technology trends especially in China, innovation is a substantial barrier to developing economies' growth.
Last summer, I read tech company biographer Richard Brandt's book "One Click: Jeff Bezos and the Rise of Amazon." Besides learning about the e-commerce giant's amazing rise from the ground up, I was particularly fascinated by the patent battles the firm had fought against various competitors to maintain its competitive edge, for example, its "one click" button.
While the concept of a "one click" purchase is pretty "duh" obvious, no one's thought of it AND implemented it before! So Bezos, Amazon's CEO, laid claim to it as intellectual property and forced rival Barnes and Noble to settle when it sued B&N for copying them with the "two click" purchase option.
What constitutes a patent? Just how much money is at stake? And how do entrepreneurs and business developers spot the value of these patents before the transactions even occur in the future? These are the questions I hope to think about critically and - through class discussion, Prof Lavian's guidance, and this fun blog - eventually answer, though I am doubtful that a black and white answer will exist.
Anyway, I'm super looking forward to building my knowledge on the technical side of these technologies too and getting a better picture of the patent world through case studies. I'm sure my experience in 190G will be helpful for my future career in business.
About Me
Hi there! I'm Melissa Zhang and I'm a junior double majoring in Business Administration and Environmental Economics & Policy. I've always been interested in a wild variety of things and Berkeley didn't make it any easier to pick my major(s)!
I was born in the Mid-West in China and went to school in Hong Kong before coming to the Bay Area two years ago. I love the sunshine here and endless list of things to do in the outdoors! Let's talk if you're into bouldering, biking, skiing, mahjong, guitar, TechCrunch, or Sherlock. I also love planning for my next trip and meeting new people, and aim to visit 22 countries before I turn 22.
Currently, I'm part of the student organization that manages the Credit Union for Berkeley Students on campus. I'm also excited to be part of a campus marketing team for HTC, so definitely looking forward to starting our discussions on smartphone patent wars! In the future, I want to pursue a dynamic career in finance or business operations where no two days are the same.
I was born in the Mid-West in China and went to school in Hong Kong before coming to the Bay Area two years ago. I love the sunshine here and endless list of things to do in the outdoors! Let's talk if you're into bouldering, biking, skiing, mahjong, guitar, TechCrunch, or Sherlock. I also love planning for my next trip and meeting new people, and aim to visit 22 countries before I turn 22.
Currently, I'm part of the student organization that manages the Credit Union for Berkeley Students on campus. I'm also excited to be part of a campus marketing team for HTC, so definitely looking forward to starting our discussions on smartphone patent wars! In the future, I want to pursue a dynamic career in finance or business operations where no two days are the same.
Subscribe to:
Comments (Atom)