Understanding the IP Wars

Today, technology companies like Facebook, Google and Twitter are getting a scary wake-up call on the importance of IP issues.

My personal wake-up call happened in November 2008. The financial crisis was exploding, the hot start-up computer company I worked for, OQO, was in the process of shutting down, and my 19-month-old son had just been diagnosed with Type 1 diabetes. Unlike when someone is laid off and can receive ongoing benefits, when a company shutters and jobs are disappearing everywhere, there is no Cobra coverage.

At the time, I was responsible for building and growing OQO’s patent portfolio. It was staffed with some of the smartest and most talented people I have ever met. OQO pioneered innovations in computer miniaturization, antenna design and power management. Unfortunately, due to delays in getting patents processed, OQO had 13 patents granted but over 90 pending, and without further collateral, the company was out of time and options.

Instead of helping the company though a critical time, the complexity and inefficiencies in the patent system contributed to the entire 100+ employee company being lost.

Since that time, I have worked to make sure things like this don’t happen again. As a former U.S. patent examiner and advisor to the Obama-Biden transition team, I was appointed by the Obama Administration to help fundamentally reform the quality and speed with which patents are issued. Today, there is a fast track for small businesses to build large patent portfolios quickly, and expanded work-sharing programs with patent offices all over the world. Last year, the Small Business Administration Office of Capital Access supported over $30 billion in financing and is now working with the USPTO to better ensure that lenders can feel more confident that patents are able to be used much like equipment, machinery, or real estate to secure financing.

Since leaving the Administration, I’ve joined MDB Capital, an investment bank which looks to capitalize early stage companies with disruptive technology. MDB has invested millions in building internal tools which we use to more deeply understand patent portfolios and better assess companies with potentially disruptive innovation.

Late last year, a number of Yahoo investors approached me to better understand the value of Yahoo’s patent portfolio. One of those investors was Eric Jackson, who published a portion of my analysis under the seemingly prophetic headline “The Owner of Yahoo!’s Patents Could Cripple Facebook’s IPO Aspirations.”

When major companies like Yahoo and Facebook go to war over patents, the company with the strongest assets is going to win.

Patents are technical and legal documents, each one costing about the price of a new Fiat 500 to draft. There is a very small community of IP professionals who write, prosecute and sell these assets. Of the over 1,000,000 attorneys in the United States, only 30,000 or so have passed the Patent Bar. So few, in fact, that the USPTO allows scientists and engineers to take the exam, adding about 10,000 more “Patent Agents” admitted to practice patent law before the USPTO.

This means that at any given time, depending on the technology area, there are only a few thousand people who really have any idea what a given patent likely covers, or what it’s potentially worth.

And that is at the core of all these IP wars.

The entire reason the patent system exists is that the Government wants to buy something from inventors: Disclosure. Society benefits when inventors disclose their ideas so that later innovators can learn from, reproduce and build upon or around those ideas. What the Government gives the inventor is exclusivity — it grants the right to exclude others from making, using or selling those new innovations.

But remember — in certain industries, almost no one really knows what a patent covers. And nowhere is this issue worse than in IT and Software.

So many companies in these industries launch products without even bothering to check whether or not a new feature or function would be covered by granted patents or pending applications. What many of them do instead is enter into broad cross-licensing agreements with their customers, competitors and suppliers, ensuring a relatively stable, peaceful existence with respect to IP. When they overlap a small patent portfolio of a company or inventor unable to commercialize, they typically litigate or purchase the assets, however with far lower stakes.

Going public with roughly 60 granted patents, Facebook clearly did not see the portfolios or players in its space as presenting an IP risk. Yahoo owns over 1,200 patents from over 2,700 different inventors. Its top 10 patents alone have been cited over 2,200 times by later inventions.

More broadly, the top patent holders in the world are all hardware or software companies, all have over 20,000 granted U.S. patents, and together average a three year compound annual growth rate of over 10 percent — Facebook ally Microsoft among them.

These IP dynamics are not going away. The large players have spent billions over decades to use IP and strategically position themselves within their markets. Google learned this the hard way in the mobile space, watching large established players prevent it from buying the Nortel patents, extracting royalties from its customers, and eventually compelling the purchase of Motorola Mobility and its thousands of patents for over $12 billion. Today, the OQO patent portfolio is owned by Google.

Facebook is having the same growing pains with Yahoo, but is following the same roadmap in rapidly acquiring assets applicable to its ecosystem, and ultimately, given its applicability to Google, Apple, and Amazon among others, it is still possible that Yahoo could be Facebook’s Motorola Mobility.

Twitter seems to be in the worst position of all. Having secured little IP for itself, despite developing a significant and important communications platform, Twitter recently decided to needlessly encumber any future patent portfolio it may develop with its recently announced Intellectual Property Agreement, making that portfolio nearly impossible to value or transact. If Facebook is acquiring arms, and Yahoo is building them, then Twitter is playing Russian roulette.

I only wish I could communicate the feeling of watching the business tide rapidly turn, and having everything riding on a valuation of your IP.

Erin-Michael Gill is Managing Director and Chief Intellectual Property Officer of MDB Capital. He is a registered patent agent and licensed securities broker. He has no individual holdings in any of the companies discussed above. The opinions presented are his alone and are not intended to be nor should they be construed as legal or investment advice.


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