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3 Strategic use of IPRs for creating commercial value
3.1 IPRs and economics
The purpose of industrial property rights is, amongst other things, to enable patent proprietors not only to disclose their ideas to the public through the patent specification but also to obtain temporary monopoly profits through protection against imitation. This creates incentives for inventions and technical progress which increase the growth and prosperity of an economy (Schumpeter 1934). From the economic perspective industrial property rights are therefore said to benefit innovation (Landes and Posner 2003). An OECD study finds, however, that the effect of patents on corporate potential for innovation and economic efficiency is not clear-cut and is therefore to be regarded as differentiated (OECD 2004).
Studies show that especially in the biotechnology, pharmaceuticals and chemicals sectors innovation is encouraged because patent protection has a considerable impact when it comes to securing comparative competitive advantages. This also applies to a certain extent to the computer industry and the mechanical engineering industry. Enterprises in other sectors often primarily pursue other protection mechanisms such as secrecy, market leadership, technical complexity and monitoring complementary advantages (Levin et al. 1987; Cohen et al. 2000). Protection strategies can, however, also be based on credibility - common in the case of consumer electronics - or on the establishment of considerable customer loyalty by controlling the distribution channel as, for example, direct selling in the case of Hilti.
On the other hand, patent protection can also hinder innovativeness by making access to important knowledge difficult. This is especially the case with emerging technologies if there are basic patents on which further developments are dependent and if the patent proprietors refuse to grant licences of use on reasonable terms and conditions. Such a situation exists to some extent in genetic engineering (Bar-Shalom and Cook-Deegan 2002; Nuffield Council on Bioethics 2002; OECD 2003) and in the area of software (Bessen and Maskin 2000; Bessen and Hunt 2003; Jaffe and Lerner 2004).
Patents do, however, have a positive effect on competition and business start-ups by also enabling small and new enterprises to use their own patents to enter existing markets, to hold their own against larger enterprises and to get financial investors on side (Gans, Hsu and Stern 2002). Gore-TexTM is so successful because the breathable textile was protected under patent and trade mark law prior to marketing. The patent portfolio is traditionally one of Gore's strongest competitive factors. In the biotechnology sector, patents represent the major secured component of the going concern value for most start-ups.
Patents can be identified as having a positive effect on knowledge diffusion, on the one hand because intensive use is made of patent documents to gain access to technical information.
Of the published technical knowledge globally available, 80% is published only in patent specifications (Ehrat 1997). By far the greatest proportion of this knowledge is no longer documented by means of patent protection, since the patents have already been abandoned or have expired. On the other hand, a commonly cited reason for enterprises refusing to file a patent application is the later publication associated with it (Sheehan, Guellec and Martinez 2003).
Table 3 summarises the advantages and disadvantages of the patent system in relation to innovativeness, competition and the exploitation of knowledge.
Table 3. Economic advantages and disadvantages of patent systems
Incentive to R&D activities through reward
Increase in transaction costs for subsequent innovations
Lowering of market entry barriers, especially for small and new enterprises
Temporary monopolies, in networks frequently with a considerable longterm effect
Risk of cartel formation
Disclosure of technical information
Uncertainty as to whether and which disclosed knowledge is available on reasonable terms and conditions
3.2 Creating commercial value
Enterprises pursue different aims and objectives with property rights and especially patents.
A distinction can be made here between the following three major motives (Fig. 6):
- Securing own freedom of action
- Blocking competitors to defend own products and services business or as a means of gaining access to third-party technologies
- Generating revenue from licensing agreements
Fig. 6. Motivation for the use of intellectual property rights (especially patents)
The patent strategy pursued by most leading international technology companies is aimed at securing their own freedom of action, eg Siemens. Another factor is preventing imitation of the company's own products. Some companies successfully defend their own products and services business with patents, eg Bayer versus Barr Laboratories, Ruby and Hoechst Marion Roussel. Only a few companies focus their patent strategy on revenue from licensing agreements, eg IBM.
The marketing effect already explained alongside these three main motives plays a part in some sectors ("patented product"). In view of the cost of a patent there are, however, more attractive ways of advertising.
Main motive 1: freedom of action
Here the patent strategy focuses on securing the company's own freedom of action relative to third parties. European enterprises generally value this very highly and try to develop products and technologies that do not conflict with third-party property rights. A company's freedom of action can, for example, be underpinned by just the sheer quantity of its own patents and patent applications. This is one way of deterring competitors and also of potentially protecting products from possible attackers.
Freedom of action as an objective can thus be achieved by preventative, prophylactic measures when a company is developing its own products and technologies.
Defensive measures have to be initiated if one enterprise is attacked by another alleging patent infringement. In practice the enterprise attacked tries, amongst other things, to use mainly its own property rights against the attacking enterprise's products and business activities.
Offensive measures used to acquire or retain freedom of action can also be carried out on an enterprise's own initiative. Such measures include, in particular, the proactive inlicensing or cross-licensing of patents of interest as well as the defeat of interfering patents, for example by means of opposition or revocation proceedings.
Swiss lift manufacturer Schindler strives to achieve the use of the best possible technology for its products and services without infringement and also endeavours to successfully defeat interfering, third-party patents, for example by means of opposition proceedings before the patent offices.
Generation of products free of third-party rights: This ought to be the general aim pursued by enterprises. In practice, this means that third-party property rights activities have to be observed and analysed and, where appropriate, specific solutions have to be developed to circumvent those rights.
This process, which is referred to as product clearing or patent clearing, is frequently very time-consuming and expensive and often involves ongoing staff training. In the USA, contempt or negligence in patent infringement proceedings may be punishable by triple damages.
Defence against infringement attacks: In an OECD study (2002) on Business Patenting and Licensing, 70% of the firms surveyed reported growing involvement in patent infringement suits. Those affected consider attack to be the best form of defence. The basic strategy for defence against third-party attacks has four pillars:
- Counter-attack against the legal validity of the patents in suit, eg by means of actions for revocation
- Counter-establishment of the existence of an actual property right infringement, eg by means of a claim for a negative declaratory judgment
- Counter-attack against the attacker's range of products, technology and services with one's own property rights
- Further technical, legal and, where appropriate, even political steps to influence the infringement proceedings to one's own advantage
Nevertheless, the high costs that can generally arise in the course of property rights enforcement should be borne in mind. In the USA, for example, the cost of patent litigation averages as much as US$ 500 000 where the amount involved in the particular case is less than US$ 1m, and these costs usually have to be borne by the enterprises themselves (AIPLA 2001). Innovative SMEs also have to consider, in particular, the consequential charges and commitment of resources involved in any court case; this applies especially in the USA. To this extent, legal protection strategies always have to involve not only legal considerations but also financial and political ones.
The cultural climate has also changed. While pharmaceutical companies such as Schering or Aventis generally used to be able to settle disputes with third parties out of court, legal disputes have increased, not least as a result of the influence of American firms.
Design access: anyone wishing to escape the ever-present risk involved in knowingly infringing third-party patents has to proactively endeavour to obtain access to these rights or at least try to defeat them.
In-licensing. In numerous cases it is not possible to develop solutions that completely circumvent property rights, or this is too expensive or is undesirable for other reasons, for example in the case of technical standards. Then the licensing or acquisition of the property rights is one way of solving the problem of the use of the rights.
Numerous companies such as IBM already operate an open licensing strategy and offer licences to third parties on fair, reasonable and non-discriminatory terms. As a rule, however, a company has no general obligation to offer licences to third parties.
In the case of large enterprises in particular, licences are often also awarded to third parties against security, for example in return for licence grant-backs. The idea is that the inlicensing enterprise is prevented from being able to attack the licensing enterprise later on the ground of patent infringement. The licensing enterprise could then possibly have very little defence, since the relevant patents would already be licensed and could no longer be used for a counter-attack.