Electronic Design

Patents: Cuffing Innovation?

Patent claims are threatening what have been accepted as royalty-free standards.

Whose technology is it anyway? A growing number of patent disputes and cross-licensing agreements has muddied the waters. But few designers question the value of protecting their intellectual property (IP).

Ask IBM, which collected an estimated $1 billion last year in licensing revenue. Or Texas Instruments, whose royalties averaged around $100 million a quarter in 2004. One 10-year cross-licensing deal inked in 1999 between TI and Hyundai Electronics Industries is expected to generate more than $1 billion in royalty payments.

"Patents reward innovation," says Derek Meyer, vice president of marketing at ARC International, a specialist in low-power, high-performance, 32-bit configurable CPU/DSP processor cores and application subsystems. "You can give it away, but if you don't have a patent in the first place, you wouldn't have anything to give away. There's still a business objective here."

"From a Silicon Valley point of view, entrepreneurs are going to innovate irrespective of what's going on in the patent world," says Kent Richardson, vice president of IP at Rambus Inc., a designer of high-speed computer memory chips. Rambus recently lost a five-year patent-infringement case against chip maker Infineon Technologies, but it plans to appeal.

"The patent process and its impact on innovation is a yin and yang thing," according to Navi Radjou, a consultant with Forrester Research and a specialist in corporate innovation. "Patents are an important incentive for creative entrepreneurs to come up with new product ideas that they can 'own' and profit from."

But Radjou believes patents also can inhibit the process if they restrict other people's creativity. "The key challenge today is defining what is patentable. In other words, what invention is worth a patent, or deserves a patent?"

"In boom times, there's much less litigation because people are busy actually doing their jobs," says Ralph Albrecht, an IP patent attorney with Venable LLP, a firm based in Washington, D.C. Albrecht is a specialist in computer and communication technologies who worked in IBM's patent department for 12 years before becoming a lawyer.

"In bust times, people who didn't succeed may own patents, and maybe that's all they have to show for the $10 million in venture capital they invested in some business. Now they're sitting with a property right," says Albrecht. The only way they can monetize that, he notes, is to license it to someone, which means they must make a credible argument that someone is infringing on their patent.

"If they refuse to take a license, you have to sue them for infringement," he says. "That's why many investors like to get patents. It's a hedge position against the business not executing, or maybe the market is soft, or the economy is down."

U.S. companies are by far the most litigious when it comes to protecting their IP. European companies typically are slower to sue in IP cases. And, technology companies in the Far East have tended to be even less litigious. But according to Albrecht, Japan is now beginning to feel threatened by companies in South Korea and China. "It's starting to assert itself in IP matters," he says.

Cambridge Display Technology, based in the U.K., recently won new patents in the U.S., Europe, and Canada, expanding its already extensive IP portfolio in the field of organic light-emitting diodes (OLEDs). Stephen Chandler, CDT's legal and IP vice president, says patents are critical to his company, even though the process is slow and expensive, particularly in the U.K. and U.S.

"This doesn't deter CDT, but if the process were cheaper, there would be more to spend on innovation," he says. "It is just a huge burden on emerging businesses."

Is the high cost of filing and protecting patents worth it? Most industry executives believe so. But a survey sponsored by the Lemelson-MIT Program found that most filed patents have little commercial value. (The Lemelson-MIT Program, which began in 1994, was established to raise the stature of inventors and to inspire invention and innovation among young people.)

For instance, patents filed by European researchers have increased 10% per year since the late 1990s. Yet less than 10% of those patents have commercial importance, and less than 1% have seminal importance.

"You can understand why the recently passed European Union laws on software patents is generating mixed responses and polarizing opinions in the electronics industry," says Forrester's Radjou.

IP POOLING
Radjou says one of today's major trends is that firms like IBM and Dell redefine IP—from intellectual property to intellectual partnering—by sourcing more IP from external partners and by licensing, or even giving away, more of their IP to third parties. IBM calls this "collaborative innovation."

IBM recently announced that it would offer free access to 500 of its software patents to anyone working on open-source projects. IBM will hold the rights to its patents, but it will encourage other companies to follow its lead by placing no restrictions on anyone using the technology from the now-available patents.

The company isn't planning to curtail its patent activities. IBM was granted 3248 U.S. patents in 2004, which is 1314 more patents than second-place Matsushita Electric Industrial of Japan (see "IBM Tops U.S. Patent List—Again," p. 52).

Forrester refers to this collaborative or partnering approach to sharing as innovation networking. "Most companies face an innovation double whammy," Radjou said in a study published last year. While demand for technology-enabled innovation is exploding, he says, companies' ability to meet the demand is declining.

And the traditional mechanisms for innovation sourcing and commercialization, which were put in place to solve this imbalance, have actually created the problem. To meet the pressures from customers, competition, and regulations, Radjou says leading companies are replacing their rigid and restrictive approach to innovation by "adopting a fluid market ecosystem that matches global demand for innovation with worldwide supply."

ROLE OF STANDARDS
There are several ways to do this, and they usually involve development of new products around a technical standard. But the role standards play in the patent process may be changing.

"Most litigation comes after the standard is filed," says Venable's Albrecht. The reason for this, he says, is that the company whose technology wasn't adopted suddenly has no business. And following a standard doesn't mean you're not infringing on someone's patent.

"Lots of people are trying to build proprietary technology and get it approved as the industry standard," he says. "We're seeing several examples of this in wireless. You want your technology in the standard so that everyone will have to license your technology."

Qualcomm has taken this approach with great success in a number of areas. The most recent example is the company's air interface specification of its Forward Link Only (FLO) technology, designed specifically for mobile multimedia applications. While the industry continues to debate how best to beam TV to cell phones and other portable devices, Qualcomm recently made its FLO technology available to the industry.

"Our goal is for FLO to be a globally adopted standard, and we are taking the necessary steps to make that happen," says Rich Sulpizio, president of Qualcomm MediaFLO.

SAP AG and Intel took another tack, agreeing to jointly make radio-frequency identification (RFID) technology easier to use. SAG and Intel plan to give customers the choice of integrating their RFID hardware directly into back-end systems or using device management partners to manage their hardware environment.

The approach aims to help companies implementing RFID technology to cut costs and get around such hurdles as complex integration of proprietary and non-proprietary technologies and emerging standards. As part of the joint effort, Intel will give customers access to its RFID Lab in Munich.

Emerging wireless technologies like WiMAX, RFID, and Wi-Fi—thought to be on a fairly solid standards footing—are being subjected to IP disputes. It has reached the point where some of the most vocal industry leaders are calling for royalty-free standards.

Nowadays, companies developing products in these and other emerging markets realize the looming threat of a patent lawsuit. As a result, two business models have rapidly ascended into industry trends: patent pooling and investing in innovation through patents.

Via Licensing Corp., a subsidiary of Dolby Laboratories, is now administering licensing programs through joint patent licensing programs. Such programs "pool" the patents of several companies that have decided to offer a joint license for their patents. The process is designed to reduce lawsuits between competing holders of similar patents, such as the IEEE 802.11-related suits filed by Agere Systems, Intersil, Proxim, and Symbol Technologies. Via has formed similar groups, or "pools," for MPEG 2, MPEG 4, and near-field communications standards.

Although pooling seems to be gaining interest, particularly among smaller companies, "the jury is still out on patent pooling, and you have to pick your spots," says Kent Richardson of Rambus.

Another trend is "patent trolling," and it's practiced by firms like Intellectual Ventures, led by Nathan Myhrvold, the former chief technical officer of Microsoft, and Acacia Technologies. While most venture capitalists invest in the business of technology, including startups that design and manufacture products, the trolls buy up patent portfolios and license them.

"Trolls may collect patents from, say, 20 companies that are in peace and harmony with their overlapping, cross-licensed patents," says Albrecht, the IP attorney. "Then, all of a sudden, the trolls can sue any of them because they're an outsider. They can take a stake out of each of their products." According to Albrecht, this has become a burgeoning business. Not to be left out, venture capital firms also are amassing significant patent portfolios in particular technologies, such as RFID.

THE PATENT PROCESS
What about the patent process itself? How does it play into innovation and invention? Is it keeping up with new and emerging developments? Richardson says it usually takes Rambus four years to receive a patent from the time it's filed. (In the medical devices field, the average is 12 to 18 months, mainly because that industry is more aggressive and tends to file for patents earlier than companies in the electronics industry.)

"When we look at the market, we have to look out eight, sometimes 10 years," Richardson says, though some projects are shorter.

For the past few years, Rambus, along with Sony and Toshiba, have been developing a processor bus interface for the Cell processor created jointly by Sony, Toshiba, and IBM.

Part of the problem is the underfunded and understaffed U.S. Patent and Trademark Office (USPTO). "Things could be improved and made a lot simpler," adds Richardson.

Since 1997, the number of patent applications has risen by 50%. But the backlog of patents, those waiting to be reviewed by a patent examiner, has quadrupled. Most IP lawyers also believe that patent examiners are underpaid and overworked. On top of that, they complain that Congress won't allow the USPTO to use all of the revenue it brings in from applications fees, moving much of it into the general treasury for other uses.

The Bush Administration's Fiscal Year 2006 budget request for the USPTO is $1.7 billion, equaling anticipated FY 2006 fee collections from patent and trademark filings. This is a $149 million increase over FY 2005, reflecting an anticipated rise in patent and trademark fee collections in FY 2006. The USPTO also expects to hire 900 patent examiners and 75 trademark examining attorneys in FY 2006, which would bring the number of USPTO patent examiners to more than 4500 and 350 trademark examiners by the end of FY 2006.

But there's a ramping-up period for new examiners. And, only a fraction of them are dedicated to work related to the electronics industry.

Rambus has experienced some success by priming the process through building more quality control into its filings and helping patent examiners better understand its references. Rambus also conducts searches for the examiners and provides the results of those searches. According to Richardson, this kind of assistance is "atypical of the industry," even among fabless design houses like Rambus, whose primary product is IP.

"What we're doing doesn't necessarily speed up the process, but it gives us better patents," Richardson says. And that usually means fewer challenges.

A U.S. PERSPECTIVE
With the dramatic rise in offshoring being blamed for a huge drop in U.S.-based engineering jobs, it's not surprising that industry trade groups are concerned about how this might impact innovation in the country.

"Our concerns extend beyond job loss and depressed incomes to threats to our nation's innovation infrastructure," says IEEE-USA President Gerard Alphonse. "Because innovation tends to follow jobs, key drivers of our economic prosperity could be lost."

Indeed, recruiting local or internal talent no longer works, especially if you're outsourcing design and manufacturing. The U.S. granted only 61,000 bachelor's degrees in engineering in 1999, compared with 103,999 in Japan, 134,000 in Europe, and nearly 200,000 in China.

Worse, since the mid-1990s, engineering PhDs in the U.S. have declined by 15%. It shouldn't be surprising, then, that data developed by Semico Research suggests the percentage of IP reuse has grown from 5% of system-on-a-chip (SoC) designs in 1998 to 25% in 2004.

"That means that 25% of a chip design is now outsourced," says ARC's Meyer.

The Electronic Industries Alliance (EIA) was concerned enough to publish a "policy playbook" last year. Throughout its 64 pages, the playbook stresses that the rest of the world is catching up to the U.S. in "its most prized intellectual asset—innovation." The EIA also called on Congress to support more aggressive enforcement of IP protection by U.S. trading partners.

Given Congress' track record on technology issues, the industry isn't holding its breath.

NEED MORE INFORMATION?
Acacia Technologies Group
www.acaciatechnologies.com

Agere Systems
www.agere.com

ARC International
www.arc.com

Cambridge Display Technology
www.cdtltd.co.uk

Dell
www.dell.com

Electronic Industries Alliance
www.eia.org

Forrester Research
www.forrester.com

IBM
www.ibm.com

IEEE-USA
www.ieeusa.org

Intellectual Ventures
www.intellectualventures.com

Intersil
www.intersil.com

Matsushita Electric Industries
www.matsushita.co.jp

Proxim
www.proxim.com

Qualcomm
www.qualcomm.com

Rambus
www.rambus.com

SAP AG
www.sap.com

Semico Research
www.semico.com

Sony
www.sony.com

Symbol Technologies
www.symbol.com

Texas Instruments
www.ti.com

Toshiba
www.toshiba.com

U.S. Patent and Trademark Office
www.uspto.gov

Via Licensing
www.vialicensing.com

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