Patent Profits

How lawyers and engineers milk the intellectual-property cash cow.

Lucent Technologies Inc. is a patent machine. More than 37,000 patents have been issued to Lucent and its predecessor companies, going back to the late 1800s. Today Lucent is obtaining patents at a rate of three per day. To protect and achieve maximum return from its patents, the company has devised another machine, a 266-employee intellectual-property business group, headed by attorney Michael R. Greene, Lucents vice president, intellectual property. "My function," he says, "is to manage a business whose objective is to make a profit from licensing patents to companies that come to us for a license or that we discover have in fact used our patents in their products and have not come to us for a license." Many companies attempt to make the licensing of their intellectual property into a profit center, but few have occasion to approach the problem on the scale that Lucent does. Lucent is an offspring of AT&T Corp.s 1996 trivestiture. The spinoff included Bell Laboratories, one of the worlds preeminent R&D centers. The company had more than $26 billion in sales for 1997. Under Lucent, Bell Labs innovations have ranged from communications software and hardware to the production of a high-resolution map of cosmic dark matter "showing for the first time," as the company announced, "how much dark matter is tied to galaxies and how much is smoothly distributed across galactic clusters." "We turn ideas into inventions, inventions into patents, and patents into profits," says Patricia F. Russo, executive vice president-corporate strategy and staff operations. "We spend more than 12% of our revenue on research and development. Thats a huge investment in the creation of intellectual property. Its important we get good return on that investment." Lucent negotiates between 40 and 60 licenses a year, according to Greene. Some expire as others are granted, so that at any time the number of active licenses could be between 200 and 400. Greene declined to give precise licensing revenue figures, but he says that from 1996 into 1998, the annual growth rate in revenue from licensing was "in the high double digits." Current annual licensing revenues are, he says, on the order of several hundred million dollars. Seven core processes The IP group at Lucent is unusual not only for its size, but also for its method of organization and its formalized modus operandi. In many large companies, intellectual property matters are a function of the in-house legal department. At Lucent thats only half the story. Greene reports to general counsel Richard J. Rawson, but he also reports to John Dickson, group president of both the microelectronics business unit and the intellectual-property business unit. The organizational structure reflects a high degree of integration between legal and technical functions. The IP units work follows what Lucent has identified as seven "core processes" that have helped the IP group achieve a positive business result by rationalizing an unwieldy process and focusing finite resources on what easily could be construed as an infinite task:

  • Patent creation -- "This is the fundamental process that produces the asset that ultimately we will use to license," Greene says. Attorneys from the IP group meet regularly with inventors to get a readout on their work and to determine if it is potentially patentable. If it is, the patenting process begins. Bell Labs remains the main engine of innovation at Lucent, but not the only one. "Marketing people especially are privy to what people are asking for," Greene says. "But anyone involved in a business can come up with a patentable idea. If you start with, Gee wouldnt it be great if I could just (fill in the blank), and if you come up with something that sounds like an answer, we say, Come see us. You may have hit on something that is patentable."
  • Patent management begins with organizing existing patents into related portfolios -- optical products or microprocessing products, for example. "Once you have done that, you are able to take those patent portfolios and apply them in some rational fashion to the market," Greene says. Here, the lawyers work closely with the engineers, under Roger E. Stricker, intellectual-property vice president. "We will sift through up to 30 patents in a few hours to see if any of them are relevant to current technology," Stricker explains. "In sales language, we are looking for a qualified lead." The object is to identify patents that companies on the cutting edge of technology are using or likely to have need to use. "We dont know whether or not it is going to be an actual infringement," Stricker says. Then, within that particular technology segment, the group will identify all the main players. "Probably most of them will already be licensed. But there may be some that arent," Stricker says, "and if it looks like they may be using our patents, then we enter into the assertion phase."
  • The assertion phase is long and labor-intensive. "As a practical matter," Greene says, "my business spends most of its time doing analyses of other companies products so that we can determine to our satisfaction they are, in fact, using our patents in their products." This phase involves managers and technicians directed by what Lucent calls its assertion attorneys, "a very small and dedicated group," Greene says. If this conjures up an image of technicians laying out the innards of some device on a bench, while conversing with lawyers standing behind them with clipboards, thats not far off. That step, though, is generally the end of a longer process. First, the engineers find out everything possible about the product, using spec sheets, Web sites, and other sources of information. "We take that information and, under the direction of the assertion attorney, [compare it with] our patent," Stricker says. "If it looks like it makes sense to do so, we buy the equipment, set it up in one of our laboratories, and tear it apart. If it contains our invention, the attorney documents it."
  • Patent licensing -- If the assertion phase, culminating in the reverse engineering, convinces the IP group there is a potential infringement, a meeting is set up with the other company, the case is made, and that begins what is typically a very long negotiation.
  • The collection process is basically contract enforcement, making sure payments are made on time and are correctly calculated.
  • A fallback to patent licensing -- "If," Greene says, "we are unable to convince the other side we are correct, we do from time to time have to sue a company to prove to it and the court that our patents have been used and we are due a royalty. Litigation is something you have to do, but we dont want to do it any more than we have to, because it is much better to reach a business relationship than to sue someone." For the infringer, losing the case could entail triple damages and legal fees, a far worse consequence than paying royalties. "Thats the whole point," Greene acknowledges.
  • The licensing of technology that is proprietary, but not patented -- Frequently, for a variety of reasons, a company with an innovation will eschew the patent process, which entails disclosure. Instead it will opt to maintain the innovation as a trade secret. If any Lucent business unit wants to enter a deal that transfers proprietary technology outside the company, the IP group is available for support. Frequently, Greene notes, there are complex restrictions. Sales of the ensuing product, for example, might be allowed only to certain customers. "The permutations on technology licensing are as varied as the imagination of a company," he says.
The entire IP business is run on a profit-and-loss basis, but the performance of each core process is measured separately. This allows Greene to spot problems and address them early. Patents evolution "Years ago," says Herbert C. Wansley, executive director of Intellectual Property Owners Assn., a Washington trade group, "the large companies tended to get patents just for defensive purposes or to protect their own manufacturing, without too much thought of trying to get licensing revenues." Now, he says, more companies are trying to make money from the patent portfolio itself. Lucent and IBM Corp. are two companies that have been particularly aggressive in seeking to license out their large patent portfolios. The patent itself, in this scenario, becomes the product. Wansley says that licensing strategies appear to be developing along industry lines. "My impression is, there is not so much licensing among the large chemical companies," he says. With the exception of the biotech industry, he notes, smaller companies in general have steered away from it, too. Smaller companies have to be cautious, according to Wansley, just as an inventor with a start-up company would have to be. "If they want to manufacture it themselves and try to build a new market, they are not going to be anxious to license a lot of competitors," he says. "But it is a judgment call in every case."
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