2014 IP Investments & Markets town hall meeting was held on June 17-18 in Chicago, Illinois. The conference was hosted by the non-profit Center for Applied Innovation, with Ocean Tomo LLC as the presenting sponsor. TechNexus, a venture collaborative located on the 12^th floor of the Opera House Building, was the venue provider.

With attendance restricted to about 100 delegates, the conference was divided into three sections: Early Stage/Venture Investment; a “Town Hall” Meeting on IP markets; and IP investments and debt.

The organizers invited speakers from across the IP industry value chain. The diagram created below groups the corporate logos of the keynote speakers and panel participants in the meeting under five value-chain headings:

During the townhall meeting, the keynote session speakers and panels participants – primarily executives and CEOs from different segments of the IP industry – often described the current state of the IP industry as “heavily litigious,” “inefficient,” “opaque,” “in turmoil,” and “undermanaged.” In contrast to these negative adjectives, the positive words used were “untapped” and “opportunities.”

After participating in the two-day town hall meeting, it was very clear that the IP industry is at a crossroads. Due to the challenges faced with valuing patents, difficulties are experienced by stakeholders across the IP value chain. Patent monetization, more often than not, goes through the courts, costing millions of dollars and taking several years. Companies that own high-quality patents are faced with the underutilization of their IP assets since it is hard to leverage their patents to optimize their financing costs.

In a keynote speech, Marshall Phelps, CEO of Article One Partners and former head of IP at IBM and Microsoft, advocated four solutions to the issues facing the industry:

• Focus relentlessly on patent quality
• Fix the US Congress’ recapture of fees that are coming from the USPTO
• Fix our “industrial age” accounting systems to better capture IP assets
• We ourselves have to change – stop demeaning the efforts of the other companies in the industry. Patents and IP have to again ally with words such as “invention” and “innovation” instead of “litigation.”

Implementing any of these four recommendations would certainly help industry take a big stride in the right direction. At the same time, improvements of this magnitude will certainly require extensive amounts of time, money and collaboration by stakeholders across the industry.

Since joining the IP industry almost eight years ago, I have been blessed with working with many talented individuals with exceptional abilities. Let’s hope the talents in the industry will all work together so that I can update everybody on all the positive progress the industry has made after next year’s town hall meeting.

George Mason Law Professor Adam Mossoff published an article in the university’s Center for the Protection of Intellectual Property blog last week titled “Tesla’s New Patent Policy: Long Live the Patent System!” Mossoff’s piece is in response to a blog post by Tesla CEO Elon Musk, revealing that the electric car company would not sue companies who use its patents in “good faith.”

Mossoff writes that the announcement is not quite what it seems at first blush:

The reality is that Tesla is not disclaiming its patent rights, despite Musk’s title to his announcement or his invocation in his announcement of the tread-worn cliché today that patents impede innovation. In fact, Tesla’s new policy is an example of Musk exercising patent rights, not abandoning them.

Mossoff explains that Tesla’s “good faith” language is the key to understanding its strategy. In fact, Tesla is talking about a cross-license, which is a common practice in all industries:

In plain English, here’s the deal that Tesla is offering to manufacturers and users of its electrical car technology: in exchange for using Tesla’s patents, the users of Tesla’s patents cannot file patent infringement lawsuits against Tesla if Tesla uses their other patents. In other words, this is a classic deal made between businesses all of the time — you can use my property and I can use your property, and we cannot sue each other. It’s a similar deal to that made between two neighbors who agree to permit each other to cross each other’s backyard… Thus, each party has licensed the other to make, use and sell their respective patented technologies; in patent law parlance, it’s a “cross license.”

Tesla’s strategy is a sound business approach, argues Mossoff, and one likely to bring commercial and brand value to the company:

Tesla’s decision to cross license its old patents makes sense. Tesla Motors has already extracted much of the value from these old patents… Now that everyone associates radical, cutting-edge innovation with Tesla, Musk can shift in his strategic use of his company’s assets, including his intellectual property rights, such as relying more heavily on the goodwill associated with the Tesla trademark.

Let us know what you think. Is Tesla abandoning its patent rights or, in fact, exercising them to the full extent of the law and opening the door to a more fulsome view of patent licensing models?

In my last blog post, I wrote that with patent reform efforts in Congress stalled, we expected reform efforts to continue elsewhere – specifically citing the growing movement within the patent licensing industry itself to develop a voluntary code of conduct or standards of ethical behavior, just like responsible members of other industries do.

Sometimes we call it right. Last week, Dominion Harbor Group (DHG). a licensing services company formed in 2013 by eight former-IPNav employees, published a list of six best-practice principles. DHG is clearly attempting to improve standards and encourage greater self-regulation in the patent community. Of course, the principles also distinguish DHG – and indeed, all companies who advocate for principled patent licensing – from bad actors in the market.

The six principles that DHG proposes adhering to in tandem with its clients are:

• Pre-filing letters – DHG will not work with any clients that send serial demand letters in the hopes of extracting “cost of defense” settlements.
• Patent pleading – DHG will only work with clients that agree to provide clear, concise and detailed disclosure regarding their claims early in the process.
• Litigation efficiencies – DHG believes that litigation is inherently inefficient and that parties to litigation should do everything possible to expedite the litigation process and thus reach resolution of the material issues at minimal litigation cost.
• Revenue threshold for licensing – DHG believes that small companies should not be the target of patent litigation where their use of a particular invention may be incidental and small. Accordingly, DHG will not represent any client in a case where the alleged-infringing company has less than $25 million in annual revenue.
• Rational pricing – DHG recognizes that not all patents are granted on $100 million inventions and that litigation costs should not be used to prop up the value of patents with low damages. DHG invites potential licensees to engage in an early disclosure of revenue information so that both parties can arrive at a rational price for licensing IP.
• Fee shifting – DHG is in favour of fee shifting that punishes any party engaging in litigation abuse. This should not just apply to a patent plaintiff but rather should apply uniformly to any party that takes unreasonable positions in patent litigation.

What’s particularly notable – and novel – is that DHG is not only committing itself to certain standards, it’s casting a wider ethical net by including clients. Thus, DHG won’t work with clients that send serial demand letters in the hopes of extracting cost-of-defense settlements (the very definition of troll-like behavior). DHG is advocating for transparency by insisting that its clients “provide clear, concise and detailed disclosure regarding their claims early in the process.” DHG also won’t work with any client that goes after start-ups and small businesses, and gives a precise dollar figure – any allegedly infringing company with less than $25 million in annual revenue.   These are important public commitments that Conversant applauds and supports.

Since Conversant’s announcement last November of its 10-point set of guidelines for principled patent licensing, two other companies have come forward. Finjan Inc., a developer and licensor of patented cyber security software, last week committed itself to a series of licensing best practices aimed at ensuring “candid, transparent, and consistent business practices” in the licensing field. With DHG’s announcement, that makes three of us.

Is this the beginning of a trend? For the sake of the patent licensing industry, and the integrity of the U.S. patent system, we should all hope so.

Patent reform legislation efforts stalled after Senate Judiciary Committee Chairman Patrick Leahy announced that he was taking his patent reform bill off the committee’s calendar. But this does not mean an end to the necessary fight against patent trolls. Rather, for the time being it just shifts the ongoing battle to more incremental and potentially more effective approaches to reining in abusive litigants.

On May 21, just one day before the Judiciary Committee was scheduled to mark up the patent reform bill, Senator Leahy dropped the measure. He cited the lack of broad bipartisan support and serious concerns that many of the bill’s provisions would, as he put it, overly burden “companies and universities who rely on the patent system every day” and impose “severe unintended consequences on legitimate patent holders who employ thousands of Americans.”

We appreciate Senator Leahy’s concerns about pending proposals being burdensome and potentially causing unintended consequences, and we agree that dropping the current measure was the right move.  Earlier we wrote to Representative Bob Goodlatte, who sponsored the House’s patent reform bill, to express our concern that overreaching legislation could not only encroach on an independent judiciary and lead to unjust results in many cases, but it could unduly burden all patent owners, by making patent litigation more protracted, expensive, and burdensome regardless of the patentee’s identity and business model.

With litigation reform legislation on the back burner, there are still several avenues being taken on abusive patent litigation.  One targeted approach is being taken by a growing number of state legislatures and state attorneys general who have begun using consumer protection laws to clamp down on patent trolls who use demand letters to extort small businesses for nuisance “settlements.” A series of White House executive orders issued in February also promise to curb patent litigation abuse, boost patent quality, and strengthen the patent system without risking the harm to the innovation system that could arise from overly-aggressive changes to patent law itself. And an important part of improving patent quality in the US is fully funding the US Patent and Trademark Office, an initiative that we fully support.

The federal courts also addressed key patent litigation issues.  Related to the controversial fee-shifting legislative proposals, the district courts will begin applying the recent Octane and Highmark Supreme Court decisions, which granted greater leeway to judges in making abusive patent litigants pay attorneys’ fees.  Time will tell if the new fee-award judicial regime will lessen the pressure to implement legislation.  The Eastern District of Texas, the most popular venue for patent litigation in the US, has added a new Track B docket, which specifically addresses a number of proposals considered by Congress, including early disclosure of certain information, such as licensing information, as well as very early disclosure of both the damages sought and the method of calculating those damage.  All of these steps are being taken against the backdrop of the imminent FTC study, which aims to collect reliable empirical data about patent licensing that we expect will provide a truer picture of what’s really going on in our business.

Another positive development recently is the growing movement within the patent licensing industry itself to develop a voluntary code of conduct or standards of ethical behavior, just like responsible members of other industries do.  That’s why Conversant has committed itself publicly to a set of ethical guidelines for patent licensing. As I wrote in an op-ed in Washington’s The Hill newspaper May 14, “industries grow faster and create more jobs when they police themselves rather than wait for the often-heavy hands of legislation and regulation to deal with the bad actors that lurk in every field of economic activity.”

In my previous blog post, I mentioned the Linley Group’s 2014 Mobile Conference. In past years, the focus has been on the mobile processors (and other chips) found in smartphones, but this year another type of mobile product gained significant attention: wearables, such as the Fitbit Flex wristband and Google Glass. There was wide agreement that wearables will become an important product category, but virtually no consensus on the kind of product we’ll see over the next ten years.

Wearables are today where the smartphone market was in 2003; lots of exciting stuff is going on, but the category-defining product had not yet been introduced.  For example, some wearables today are designed as peripherals to a smartphone, simplifying both their communication needs and the kind of mobile processor required, while others have sophisticated processors, sensors, and displays.  No one really knows which design direction will dominate in the future.

Pankaj Kedia of Qualcomm observed that wearables are really a subset of the Internet of Things (IoT).  At their simplest, wearables consist of one or more sensors connected to “just enough” signal processing silicon and a method of communicating that processed data, such as Bluetooth or Wi-Fi.  I agree, and expect that on a volume basis, this kind of very simple, very low cost product will predominate.  In ten years, every shoe could easily contain a built-in pedometer.  Why not, if it adds less than 1% to the cost of the shoe, and everyone’s smartphone is running a health monitoring app which can accept this data?

But as we look at complex wearables, such as a smartwatch, the future is harder to predict.  At one level, it’s not clear if a smartwatch is meant to replace a smartphone, or simply be a peripheral for it.  The answer will determine the kind of computing and connectivity semiconductors that will be required.   And a vendor’s ability to correctly predict which kind of product to build will determine its marketplace success.  But at this stage, conference panelists admitted, it’s not really clear if a smartwatch is intended to replace a regular watch. (Personally, I wear a watch given to me by my father; the Samsung Galaxy Gear smartwatch is pretty slick, but it’s not going to push it off my wrist any time soon.) Figuring out how consumer electronics are going to intersect with the fashion world, as well as the public’s general concerns about these products from a privacy perspective, is much harder than comparing technical specs to predict which System on Chip (SoC) device is going to sell the best.

Chris Anderson, Wired’s Editor in Chief, called wearables “the peace dividend of the smartphone wars”.  The incredible competition to produce ever better handsets at ever lower prices has brought the price of many components (particularly sensors) down to commodity price points – so why not include them? For example, the price of a three-axis accelerometer has dropped from $4.50 to 20 cents.  Kurt Shuler of Arteris outlined some very compelling use cases for wearables in the medical and safety fields, such as glucose monitors for diabetics and temperature sensing clothing for fire fighters.  But there was general agreement with his observation that in the broader consumer market the “killer app” has yet to emerge.

It’s always interesting to hear tech savants speculate about the future. We all know that somewhere out there, some startup will combine these components in an unexpected way, create a product no one’s yet conceived, but which we’ll all clamour to own.  And this will be possible because the inventors had the value of their R&D protected by a strong patent system.  Furthermore, there’s a good chance that they’ll make use of licensed IP blocks, such as ARM processor cores or DSP cores.  And should this startup stumble and fail, their venture backers know that their investment is at least partially protected by their ability to sell or license any patents filed by the company.  A robust environment for protecting intellectual property is essential at every stage in the process of innovation.

As we noted last October, the United States Federal Trade Commission (FTC) asked for public comments on its proposed study of patent assertion entities.  The proposed study will “examine how PAEs do business and develop a better understanding of how they impact innovation and competition”.   The Commission now has come back with a revised proposal and is asking for additional comments. We expect that this revised proposal substantially will be the basis of the study.  The FTC will begin the study after it has had time to consider the additional comments, most likely in the next couple of months.

The revised proposal has several significant differences from the original proposal.

First, the revised proposal makes clear that “the study will consist of two parts. The primary focus of the study consists of a descriptive examination of the PAE business model. The second part is a narrowly focused comparative case study of PAE activity in the wireless communications sector. Consequently, the FTC separated the questions addressed to PAEs from the questions addressed to [the wireless communications] manufacturers and NPEs”.  For the most part the questions asked in each part are the same, with some additional categories of questions for the PAEs related to their acquired patent holdings.

Second, to reduce the burden on the respondents, the FTC narrowed its questions from asking for “all documents” in a category to “focus on agreements and on strategic documents provided to officers and directors or shared with persons outside the firm”.

Third, with respect to patents potentially subject to licensing commitment such as standards-setting declarations, the Commission has shifted from asking respondents to identify all such patents to asking respondents to describe their commitments.

Fourth, the FTC is working with the USPTO to directly collect publicly available patent information instead of asking respondents for that same information.

Finally, the start of the relevant period for the study has been moved up a year to the beginning of 2009.  This might reflect the fact that the study actually will begin almost a year since it was first announced.

Conversant welcomes the Commission’s study of the patent licensing business.  Much of the “information” that gets media attention is anecdotal, perhaps apocryphal, and from biased sources.  But there isn’t a lot of reliable empirical data about patent licensing.  Conversant expects the FTC study will provide a truer picture of what’s really going on in our business.

The Linley Group’s 2014 Mobile Conference in Santa Clara, California, is an annual event focused on mobile processors, one of the critical components in a wide range of consumer electronics and automotive products – think notebooks, smartphones and BMWs.

The speakers and panelists agreed that the world desperately needs innovative solutions to reduce power consumption in all types of mobile devices if industry is going to keep providing the ever-more sophisticated features and applications that users expect. The mantra is reducing power to prolong battery life: People are already frustrated with smartphones and tablets that need daily (at least) recharging, and this issue will be more pronounced as smartwatches and other wearables enter the market.

But the biggest culprit is heat: mobile processors work so hard (for example, to render a video game) that their increased power consumption leads unavoidably to massive heat production. If a mobile processor were allowed to run full tilt for more than a few seconds, it would overheat and destroy itself. Thus, while advancements in battery technology are always welcome, the power management problem is in fact the more important technical challenge.

Engineers throughout the industry are approaching this problem from several directions. ARM’s big.LITTLE architecture combines slower, low-power processor cores with more powerful and power-hungry ones. Most of the time, the lower power core is used, with the big core brought online for brief sprints of intense processing. System-on-Chip (SOC) designers are experimenting with various combinations (four big, four little; two big, four little, one big, one little, etc.) optimized for particular applications.

More recently, this approach is expanding into so-called heterogeneous multiprocessor architectures, where besides large and small general purpose processor cores, the SoC can include graphics processing (GPU) cores and digital signal processing (DSP) cores as well. These cores have a fundamentally different architecture, each better suited to certain types of processing tasks. It’s nothing that a regular core couldn’t do, but the GPU and DSP cores can do it with greater power efficiency.

On a different front, moving to a smaller “process geometry” (that is, how tightly packed the transistors are in the integrated circuit) is another way chip designers are reducing power consumption. Smaller geometries mean more circuits per square millimeter, which means faster speeds and greater power efficiency. This relentless improvement of manufacturing process underpins the famous Moore’s Law, and companies such as Intel, IBM, and TSMC are continuously innovating to be the first to advance the state of the art.

Meanwhile, the DRAM market is increasingly being dominated by mobile (i.e., lower power) DRAM. At the conference, Rambus presented on the advantages of their R+LPDDR3 architecture compared to regular LPDDR3.

All these companies are succeeding through innovation, rather than a grim “race to the bottom” of cost reduction. Their innovation is protected by patents, giving them the ability to license their designs to other companies, or manufacture their own products, as they see fit. In the end, everyone benefits, including everyone with a cellphone in his pocket.

Each year the federal judges of the US Northern District of California have a conference to discuss matters related to the improvement of administration of justice in the district.  This year’s conference, held April 11-13, had programs on topics as diverse as NSA surveillance issues, whether all civil cases should proceed to trial in a year, and a review of the “hot” cases before the US Supreme Court.  We were honored to be invited to participate in a panel on patent litigation (even though our panel was scheduled for 8:30 on Sunday morning).  Magistrate Judge Paul S. Grewal led a lively discussion among me, Cynthia Bright, VP and AGC, IP Litigation & Public Policy at Hewlett-Packard, Barney Cassidy, General Counsel at Juno Therapeutics, and Catherine Lacavera, Director of IP and Litigation at Google.  We discussed and debated specific issues related to so-called “non-practicing entities”, fee-shifting and other “patent reform” proposals now before Congress, the state of damages theories, and the impact of the AIA.  As we have said in prior posts, our bottom line is that while there is a “patent troll” problem, any reforms should be measured and balanced, and – particularly as it relates to the conference audience – should preserve the discretion of the judges to administer justice in each patent case on its merits, regardless of the identities of the litigants.

Just as the Senate is considering the government’s latest patent reform measure, the “Patent Transparency and Improvements Act” (S-1720), IPWatchdog has published an excellent four-part series titled “Myths of the Patent Wars.”

Authors David Kline and Bernard Cassidy seek to clarify a broad range of facts and arguments about the patent licensing business.  In particular, the authors argue that global product companies are “hijacking” the legitimate work of lawmakers in curbing bad actors by expending huge resources on lobbying and media relations to propagate false claims about the patent system.  What are the misleading claims that underlie Big Tech’s legislative agenda?

1. An ” explosion of patent litigation” greater than any in history is imposing an unwarranted burden on industry and diverting resources better spent on innovation.
2. “Non-practicing entities” (NPEs) (i.e., entities which do not make or sell products) are a new breed of parasitic patent litigant that hinders economic growth and contributes nothing to society.
3. These NPEs have “stampeded” the International Trade Commission (ITC) with spurious infringement claims, “holding up” products that consumers want and need in order to extort settlements from deep-pocketed tech importers like Apple and Google.
4. Undeserving patent holders are winning “excessive damages” from gullible juries for the infringement of even the most minor patents.
5. Software patents are stifling innovation in the industry, and should not be allowed because software innovation is far more incremental and iterative than in other industries.

These deceptive claims are meant to justify and buttress a legislative agenda aimed at immunizing this small coterie of technology giants from the costs of their patent infringing behavior, says retired Chief Judge Paul Michel of the U.S. Court of Appeals for the Federal Circuit.

We wholeheartedly agree.  And, as we make clear in our Patent Licensing Principles, we think that there is an obligation for responsible behavior from the parties on both sides of the patent licensing table.  While the current focus of the rhetoric is strictly on licensors, the behavior of infringers cannot and should not be ignored.. The US patent system works if both sides act fairly and responsibly.

A licensee’s obligations include:

• To investigate the licensor’s claims fairly and honestly, and if it determines that the licensor is likely to have valid and enforceable claims, conduct good faith discussions with a willingness to take a license on fair and reasonable terms.
• To engage in good faith discussions with the licensor and make reasonable, good-faith efforts to timely meet with and respond to the licensor.  Individuals acting on behalf of the licensee must have the authority to negotiate with, and if appropriate, reach an agreement with the licensor.
• To be willing to take a fair and reasonable license where appropriate.  This means that the licensee must fairly acknowledge that if its activities use, or are likely to use, the invention claimed in a licensor’s patent, then the licensee owes the licensor reasonable compensation for the use of that patented technology.   A licensee should not take a free ride off another’s patented innovation.

This Washington Post article sheds further light on the growing influence of Big Tech.  Google made its very first foray into lobbying in 2003, and by 2012 the company was the second largest corporate spender on lobbying in the US.  This summer Google will move to a new Capitol Hill office, doubling tis Washington space to 55,000 square feet – roughly the size of the White House.

As Google’s lobbying efforts have matured, it has pioneered new and unexpected ways to influence decision-makers.  For example, it has befriended key lawmakers in both parties by offering free training sessions to Capitol Hill staffers and campaign operatives on how to use Google products that can help target voters.

Would you go so far as to agree with Judge Michel that global tech giants are engaged in the process of “regulatory capture” — the term of art used in economics to describe the means by which groups with a high-stakes interest in the outcome of policy or regulatory decisions gain the policy outcomes they prefer?

Share your comments with us.

Efforts to promote transparency and other responsible practices within the patent licensing industry continue to gain strength following Conversant’s announcement last November of its 10-point set of guidelines for principled patent licensing.

Finjan Inc., a developer and licensor of patented cyber security software, last week committed itself to a series of licensing best practices aimed at ensuring “candid, transparent, and consistent business practices” in the licensing field.  According to Finjan president Phil Hartstein, the company’s licensing best practices are aimed at combatting the abusive practices of “patent trolls” who threaten America’s patent system and unnecessarily raise costs for innovators, especially small businesses. Hartstein, who has had a long career in the patent industry, emphasized that Finjan also hopes to foster more dialog within the industry about ethical business practices.

Conversant agrees completely with the need for more discussion and debate within the patent industry over best practices.  As I argued in a national law journal article last week, “it’s time for patent licensors to take the lead in reform. It is simply bad strategy for industry leaders to remain silent about the patent troll issue for fear that some will try to tar responsible licensors with the same brush.”