VideoWhen one of Mobility Electronics Inc.'s major customers decided to switch to a competitor's product five years ago, the potential defection galvanized top management. Not only would it mean up to $10 million in lost revenue annually, says executive vice president and CFO Joan Brubacher, but Mobility held the patent on the product in question — a universal power adapter.
That fact didn't sway competitor Comarco Inc., which Mobility immediately confronted. But it convinced the Scottsdale, Arizona-based company to launch a multi-million-dollar lawsuit. That ended in a settlement allowing both firms to use each other's technology without licenses. It also convinced Brubacher to institute a formal process for managing patents — even though the managerial time commitment equates to a monthly expense of more than $60,000.
Until the Comarco suit, "there was no real process for determining which developments to patent and in which jurisdictions," says Brubacher. "That litigation made us aware of how important intellectual-property diligence, not just the pursuit of patents, is to our business."
As the Mobility example illustrates, keeping tabs on what patents a company holds, what they are worth, and whether anyone is encroaching on them may sound straightforward. But with millions of patents active worldwide, monitoring patent portfolios is a complex task — one to which many companies give short shrift. Part of the problem is that patent valuation is not currently required in any regulatory report. In addition, many companies — especially those with small but growing patent portfolios — have a false sense of security regarding these assets.
But several trends are converging to change those attitudes. For example, recent patent cases involving Ebay and Research in Motion have highlighted the practices of so-called patent trolls, companies that use patents solely as bargaining chips. At the same time, the risk that a patent dispute could cause a precipitous decline in a company's value is increasingly. In April, for example, Momenta Pharmaceuticals's stock slid 15 percent after an appeals court sent a patent dispute back to the U.S. District Court.
Global commerce means that patent infringement can occur anywhere, putting U.S. companies at the mercy of foreign courts. In some countries, says Ron Foster, CFO of FormFactor Inc., a Livermore, California-based maker of probe cards used in inspecting semiconductors, there is a "clear home-court advantage." American companies, he adds, "better be able to protect themselves." Foster knows of what he speaks: FormFactor sued Phicom, a Korean company that also sells probe cards, for patent infringement last year. Initially the Korean patent office backed the U.S. company, only to have an appeals court overturn three of the decisions. The Korean Supreme Court will now review the case.
Cease and Desist
Obviously, some companies are adept at managing patents. IBM, for example, has a global staff of 200 supplemented by a customized Lotus Notes database that tracks its intellectual property (IP) — assets that bring in more than a billion dollars a year in licensing fees. But for many companies, the process has taken a backseat to growing the business. In fact, only 31 percent of private companies in a new survey by PricewaterhouseCoopers have formal processes to manage their patents.
As basic as it sounds, effectively managing patents begins by centralizing the process. In many firms, there has been no one person or department assigned to track patents, says Robert Reilly, a valuation specialist at Willamette Management Associates. "That responsibility has been disseminated to individuals in plants, in the IR office, in engineering, and in the new-product-development office," he says.
In early 2004, Mobility formed an IP committee, which includes the CFO, the CEO, general counsel, and the director of product management. The committee meets quarterly to review existing patents and new proposals, as well as potential infringements, says Brubacher, adding that any suspect products are analyzed by a team of engineers. Then, if a potential infringement is validated, the IP committee decides on a course of action — simple monitoring, an initial letter de-manding that the infringer cease and desist, or immediate legal proceedings.
At Cephalon Inc., a Frazer, Pennsylvania-based biopharmaceuticals firm, a patent committee with representatives from research and development, business development, sales, and commercial meets bimonthly to decide whether to maintain individual patents and, if so, in what countries, says vice president of IP Bob Hreubiec. Since maintaining patents is expensive, Cephalon also regularly prunes its portfolio for deadwood, adds CFO Kevin Buchi. He estimates it costs from $200,000 to $400,000 to protect a patent within the first three years, including filing, translation, and legal fees. "We constantly review and analyze to make sure we are getting the most value for our dollars," he says.
Such analyses also allow a company to decide which patents it should let lapse and which it should acquire. At many companies, this effort is supplemented by outside patent-watch services that keep an electronic eye on filings and flag potential infringements. Other companies rely on outside counsel to keep them vigilant. At Ropes & Gray LLP in Boston, for example, clients have access to a spreadsheet tool that not only tracks costs associated with obtaining a patent but can also be customized to provide "a fine level of granularity" on the associated fees, says partner Edward Kelly. Those additional costs include maintenance fees required in the United States every four years and annual property taxes in foreign countries.
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