April 13, 2021
We live in a world enriched by amazing technologies, many of which were the stuff of fiction only a few decades ago. Our modern economy is increasingly built on the intersections of industries. Whether it’s the integration of cameras with phones, or connecting a car to the internet, much of the world’s innovation for the foreseeable future will be about creating something new by bringing together different technologies from multiple sources.
In many industries, such sharing has been enabled through the licensing of patents. This is very apparent in the personal computing revolution and the connectivity that smartphones have brought us, for example. Hearing some of the commentary, though, you’d be forgiven for thinking that this licensing is a nefarious activity. In reality, sharing technology through patent licensing (as it is properly understood and practised) is not only good for business, but also for consumers and ultimately for the societies in which we live.
Without the ability to share patented technology through licensing, we would probably see one of two unsatisfactory outcomes: infringement without compensation, which undermines incentives to invest in future innovation; or aggressive enforcement of the exclusionary right conferred by patents, which could have a chilling effect on further advances in technology or more widespread adoption of the patented inventions. (A third possibility is that a small group of competing firms use their patents defensively to create an implied détente with one another and as a barrier to entry for new firms, thus creating an oligopoly – likewise detrimental to consumers and society.)
Why, then, have the business and profession of patent licensing garnered such a bad reputation in some quarters? I suspect that, at least in part, it has emerged from cases of “innocent infringement”. A company introduces a successful new product or service based on its own development efforts, only to be approached later by a party claiming that the product or service infringes their patent and requires a licence. While this may come as an unwelcome surprise, is it not better to have an opportunity to negotiate a licence for a reasonable licensing fee, than to be faced with a lawsuit and the risk of an injunction?
To be sure, opinions on what is reasonable often vary widely. Recognise, though, that many price negotiations begin with a wide gap, as each party attempts to frame the process in a manner most favourable to its own interests. Recognise, too, that no sensible patent owner would deliberately set the price so high that the licensed product or service will no longer succeed in the marketplace. After all, a large percentage of zero is still zero.
It is also fair to say that not all infringement is truly innocent. For example, anyone managing the supply chain of an automobile or smartphone company these days should be aware that these products use hundreds of technologies protected by many thousands of patents. Similarly, any sophisticated investor in an early-stage wireless communications company should know to confirm that the company’s business plan addresses the need to secure rights to use cellular and/or Wi-Fi patents. In some cases, overblown criticism of patent licensing is merely part of a cost-reduction effort.
By the same token, there are examples of bad behaviour by patent owners, which have contributed to a negative perception of patent licensing. When rights holders or their representatives seek to license patents of dubious validity, or in circumstances where infringement is questionable at best, and then abuse the court system to extract settlements for amounts less than the costs of defence, one can understand them being labelled as trolls. Their behaviour should not really be described as licensing, but rather as abusive litigation. Thankfully, the vast majority of licensing deals are not the outcome of this sort of approach.
Perhaps the most common frustration with patent licensing these days is simply how long it takes to conclude an agreement. When negotiations outlast product design cycles, the drain on resources and management distractions are hard to justify. While there are many possible reasons for this in any given case, let me focus on one in particular: uncertainty.
Those schooled in the art of negotiation know that a deal is more likely to be struck when the parties share a common understanding of the predictable consequences of failing to reach agreement. In the world of patent licensing, that consequence (apart from the patent owner simply going away, the prospects of which the potential licensee will surely take into account) is one or more patent infringement suits, perhaps coupled with a parallel validity challenge. The more uncertain the outcome of such legal proceedings – and these days, the outcomes are often highly uncertain, especially when multiple jurisdictions are involved – the more each party may feel inclined to take its chances with the relevant courts and agencies.
The legal framework – including patent law, contract law, and dispute resolution processes – that serves as the backdrop to any patent licensing negotiation is created by a global network of judges, legislators and regulators. Undoubtedly, these policymakers take many competing interests into account. Ideally, they would share the view that one important objective is to facilitate licensing instead of hindering it. To this end, they should strive to construct a framework that is balanced, stable and generally consistent from one jurisdiction to the next.
While policymakers play an important role, however, business leaders must do their part to improve the perception and reality of patent licensing. After all, innovation is not solely the purview of engineers and scientists. When traditional ways of reaching agreement do not work, new ways should be explored.
I’ve devoted the bulk of my career to helping companies do deals designed to accelerate the development and commercialisation of new technologies, most often through licensing. There is little I haven’t encountered and yet I still learn something new on a regular basis. In my experience, effective and efficient patent licensing is best achieved through freedom of contract and free market forces.
With a balanced, consistent and stable set of commonly understood principles, creative and motivated business leaders (and their advisers) can almost always find ways to make deals happen.
This article was originally published by IAM.