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

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. 

Video Recap: Why Startups are Vulnerable to PAEs

Video Recap: Obviousness in Pharmaceutical Case

Video Recap: Deterrent Behavior in Patent Expiration

Video Recap: IP and Antitrust in Yamaha Case

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!

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.

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.

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.