Mining Patent Gold: What Every CEO Should Know

In the weeks since Google acquired Motorola Mobility and its 17,000 patents for $12.5 billion, the media has engaged in an orgy of hand-wringing over a supposedly “broken” patent system that diverts resources away from innovation and towards litigation instead.

Ignore the histrionics. What the Google-Motorola deal actually proves is that innovation — and its embodiment in intellectual property — is more valuable and necessary than ever for market success. What’s more, patents are no longer simply akin to mining claims that give one the exclusive right to pan for gold. In many cases, patents are the gold itself.

But first, let’s debunk some myths about our supposedly-“broken” patent system. The truth is that the number of patent infringement suits each year has held steady for seven years, at just under 3,000. Ninety percent of these suits are abandoned or settled, and of the 300 that remain, two thirds never go to trial but are adjudicated on pre-trial motion.

What we are left with, then, are about 100 patent infringement trials per year, the same number that went to trial a decade ago. This is pretty modest for a nation with two million active patents and hundreds of thousands of companies competing with each other on a daily basis.

“It’s not excessive at all,” concurs Paul Michel, retired Chief Judge of the U.S. Court of Appeals for the Federal Circuit, which handles patent appeals. “Not in a technology economy.”

To be sure, we are plagued by a new type of patent litigant these days —so-called “patent trolls” — who buy up questionable patents in hopes of extracting payments from deep-pocketed firms eager to avoid the expense of a trial. But remember that any free and open legal system like ours is inevitably going to be subject to a certain number of abusive “holdup” suits — and not just by “patent trolls,” either, but by “product liability trolls,” “medical malpractice trolls,” and “shareholder fraud trolls” as well. Just watch the ads on late-night TV and you’ll see that the lure of making a quick buck by suing someone — anyone! — is, unfortunately, as American as apple pie. That’s the price we pay for allowing everyone unfettered access to the courts.
But the bigger problem with the “litigation defense” explanation for why Google bought Motorola is that a large percentage of Motorola’s patents — perhaps even a preponderance — are enmeshed in a worldwide web of licenses, cross-licenses, patent pools, and standards activities that tend to undermine any offensive or defensive value they offer in litigation.

The truth is that Google bought a great deal more than patents when it acquired Motorola, though there are doubtless some real gems in the Motorola portfolio. As a relative newcomer to the wireless arena, the search giant in one bold move got its hands on the unmatched innovation experience of the longest-lived mobile phone company on earth. The technical acumen and product experience of those thousands of mobile software and hardware engineers will prove hugely valuable to Google as it seeks to dominate the $250 billion global market in smartphones, especially if it decides to become a handset maker as Motorola had been.

From this viewpoint, then, the Google-Motorola offers important lessons for CEOs.

First, make sure your intellectual property strategy serves your business strategy. You’d be surprised how many once-great companies simply churn out patents on automatic, without regard for where the business needs to innovate and grow.

But even where companies do try to align their intellectual property strategy with their business strategy, market conditions can change very quickly. If you doubt that, just remember how yesterday’s leader in cell phones, Nokia, became today’s laggard in smartphones — and how in only two years netbooks went from the Next Big Thing to “who cares?”

Two, once you know where your business needs to grow, build or buy the innovation and the supporting intellectual property that you’ll need to succeed. By securing patents in emerging new markets before your competitors get there — we call this “forward invention” — the patents serve as placeholders for the products and brands you will create. Start with the end goal in mind and set up rigorous patent processes that can ensure a place for your company in the most vital innovation arenas of tomorrow.

In Google’s case, the company could have spent years developing the internal capabilities needed to dominate tomorrow’s smartphone field — years that Apple was unlikely to give them. Instead, in one fell swoop, Google has gained many thousands of man-years of experience and put itself on a more equal footing with Apple.

Third, mine the gold within. There are hundreds of mature companies who have built strong portfolios of thousands of patents. Some of these firms license parts of these portfolios to other, usually non-competing, firms in exchange for millions of dollars in annual revenue. But a great many of them are sitting on a treasure trove of unused patents just gathering dust in their legal department’s filing cabinets, like long-forgotten Rembrandts in grandma’s attic.

In some cases, the patents may even be worth more than the operating company itself. Kodak is one example; there are certainly others. In other cases, though, a patent portfolio could provide the financial or strategic life raft that enables an old-line company to survive and transition into new and more successful lines of business.

Trust us, we know. Twenty years ago, when IBM faced bankruptcy, we turned Big Blue’s patent portfolio into a $2 billion a year revenue stream that helped the venerable firm survive and eventually prosper again, creating the patent processes used in many industries today.

[Marshall Phelps built and led the intellectual property operations at IBM and Microsoft. John Cronin was formerly IBM’s top inventor and ran its Patent Factory, and is today chairman and managing director of the ipCapital Group, an intellectual property consulting and licensing firm.]