Over the past fifteen years, the United States has experienced dramatic changes in patent licensing. Understanding this history helps provide context for the present, as well as a view of the future that can help inform patent portfolio strategies today.
The rise of aggressive patent licensing: why and how it all began in the technology industry
As the information and technology revolution picked up steam in the 1990’s, standardizing components became an important part of the industry. Although international Standard Setting Organizations (SSOs) and Standards Developing Organizations (SDOs) were already established at least three to four decades before 1990’s, their importance became very prominent for corporations in the technology industry because of the revolution. Technology corporations needed to work together from the start to frame standards to ensure their products would be compatible with the overall ecosystem. Most of the big technology corporations were part of major international SSOs and SDOs, so that they can be part of developing and setting of different technology standards across the globe.
While corporations realized it was mutually beneficial to contribute technology to frame these standards, they also needed to protect their patents and negotiate fair licensing deals. By negotiating licensing deals to ensure they would be fair, reasonable and non-discriminatory (or FRAND) with SSOs, technology corporations became more active in licensing and familiar with negotiation practices than corporations in other industries.
Along with the information and technology revolution, the 1990’s and the start of the millennium saw another tectonic shift. The old guard (read established technology corporations) started to lose their market position as new corporations began to penetrate. As obtaining a patent in the technology industry is anyways generally less expensive than in other industries like pharmaceuticals, there was an abundance of patents that these established technology corporations had collected in the 1990’s. Faced with cost pressure and loss of market share, they began selling off patents to make more money. This resulted in a flood of technology patents available for acquisition or for out-licensing, as compared to patents in other industries.
With established and new technology corporations jousting for position, along with the flood of new patents and a high-stakes licensing game, the stage was set for a patent war.
Mayhem: NPEs and the patent licensing “big bang”
Although Non-Practicing Entities (also known as NPEs) began to be established at the start of the millennium, their real affect was felt around or after 2008. Around 2008, NPEs burst onto the scene with significant funding and patent acquisition muscle. They acquired vast numbers of patents and began to enforce these patents against corporations from every side. The NPEs’ strategy was simple: to assert their large number of patent portfolios against corporations to make them pay. Faced with the expense and difficulty of proving non-infringement or taking other tactical measures against the entire asserted patent portfolio, many corporations caved in and licensed the asserted portfolios from the NPEs.
During this “mayhem” period in patent licensing, many corporations went into defensive mode, running for cover by paying large sums or royalty rates to NPEs to avoid the costs and uncertainty of litigation. The corporations even went to the extent of buying available patents themselves, just to ensure those patents did not land in the hands of NPEs. Case in point – in 2011, Nortel’s patent portfolio was sold for a whopping $4.5 billion and was acquired by technology corporations themselves. Admittedly, these corporations would have acquired the patent portfolio for Nortel’s technology as well, but the value of the deal shows the lingering shadow of the threat that NPEs posed at that time.
The cooling period: the Alice decision deflates the NPEs
Timeframe: 2013- to present
Beginning in 2013, the “wild west” of patent licensing and the threats posed by NPEs began to wane due to several important factors. U.S. court rulings, law changes, and the increased costs of litigation cooled the NPE industry’s fervor.
The most significant blow to NPEs came in 2014, with the U.S. Supreme Court’s decision in Alice Corp. v. CLS Bank International, 573 U.S. 208. The Supreme Court’s ruling put NPEs on the backfoot. The ruling gave corporations more protection against software patent threats. In addition, Alice brought uncertainty to the value of software patents, making it difficult for NPEs to obtain funding to acquire these patents.
The America Invents Act (AIA) also gave corporations another weapon in the fight against NPEs with the creation of post grant opposition proceedings. This provided a more cost-effective path to invalidate patents held by NPEs. As a result, corporations began to oppose any patents in their infancy that could become a threat to them in the future.
With these changes in law causing headwinds to their efforts, NPEs began to experience the high costs of litigation. They also found that patent infringement cases could take many years to settle. In addition, new joinder rules under the AIA increased the litigation costs for NPEs. Apportionment in patent damages was another blow to NPE businesses. Reduced patent damages meant a lower return on investment for NPE patent litigation suits. As a result, NPE’s litigious activities cooled considerably after 2014.
Although the cooling period was a relief for the corporations, the “Mayhem” period of 2008-2013 forced them to realize the critical value of patent portfolios for monetization. Many corporations after 2013 started to look at their IP department as not a cost center, but a department that could generate revenue for them. A few corporations started to create separate IP business units (with their own P&L) with the objective of monetizing their patents and making their IP department profitable.
Still, corporations were figuring out the best practices for this new landscape, but they now understood the imperative of having both an offensive and defensive strategy for their patent portfolios and licensing.
To find out the status of patent licensing in the present, as well as our predictions for future, stay tuned for Part 2 of this blog series.