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Intellectual Quandary
By Ed Sperling -- Electronic News, 1/14/2005
Electronic News sat down to discuss the future of licensing intellectual property with John Weekley, director of business development for Synopsys’ solutions group; Andrew Basile, partner at the law firm of Cooley Godward; Mark Zetter, president of Venture Outsource Group; and Ira Blumberg, VP of Licensing at Rambus. What follows are excerpts of that conversation.
Electronic News: What’s different about licensing IP versus other types of licensing?
Blumberg: One of the most interesting things that I’ve seen developing in the last two years is a company called Intellectual Ventures. What has been going on in Silicon Valley -- this buying and selling of patents -- has suddenly taken on new importance because Intellectual Ventures is shaking things up. For years, big companies in the semiconductor and computer industries have been nervous about patents because of the Lemuelson effect. But when a company goes out of business, they have a couple of choices. One is that they can sell their patents to a big company that wants to bolster its portfolio. The other increasingly popular idea is to take the patents and show them to people and say they need to pay money for them, and because there are no products cash is the only thing they want. What Intellectual Ventures has done is set up a fund to finance the buying up of patents so investors can get non-exclusive licenses. For $50 million, you get not only your patent purchasing power but also the other investments. In effect, it takes loose nukes off the market. But once Intellectual Ventures buys up a significant portfolio, there are only a handful of investors. What happens to the rest of the people who don’t have immunity?
Electronic News: But not all those patents are enforced equally around the world.
Zetter: Software patents aren’t enforced. A lot of countries look at mathematics as public domain. That affects the algorithms. And in Europe, the party that can prove they’ve developed the IP doesn’t necessarily get the IP. It’s actually the first company that registers it, whereas in the U.S. it belongs to whoever develops it.
Electronic News: That sounds similar to gold mine claims.
Zetter: It is. Stake a claim and it’s yours. And in China, it’s estimated that close to 90 percent to 95 percent of the software on PCs is pirated because China doesn’t recognize IP protection for the software. It goes back to algorithms being public domain.
Basile: There are two issues there. The primary protection for software continues to be copyright, and that’s where China has been lacking. More significantly, there is a belief that if you want to be successful at enforcing any kind of intellectual property in China you need to be doing a lot of business there and helping the economy, or your chances of getting a sympathetic jury or judge are pretty slim.
Zetter: Sometimes companies buy the competitor, so at least they’re entitled to half the royalties. But the Chinese courts are not based on case law, and there’s not much transparency into the Chinese courts so decisions aren’t made public.
Weekley: From the IP side, we as a company haven’t gone out and enforced patents on people. But our licensing is more about licensing technology and know-how that our customers use in design. We see the productivity enhancement of people trading IP fairly as the key to the growth of the semiconductor industry in the future. The closing of the so-called productivity gap will depend on that. For us, looking at the China market, we’re struggling with a way to trade our IP fairly in that market.
Electronic News: Where are the hot spots in the intellectual property world?
Basile: The more things change, the more they change the same. From my perspective as a lawyer who represents buyers of electronics and semiconductor products and services, the most interesting long-term trend is the slow drum beat to reform the patent system. I can’t predict how for or whether it will go at all.
Electronic News: A lot of IP is headed into the embedded space. Is it becoming harder to figure out who developed what?
Basile: The problem was daunting 15 years ago and it still is.
Blumberg: I think the answer is yes and no. There are many more breakthroughs in areas that people don’t think about. Packaging, for example, doesn’t take any expertise to open because it’s right there in front of you, but the amount of development in the packaging area has skyrocketed. You have to get more pins and more heat dissipation and more packaging efficiency onto a device every day as the stuff inside gets more complicated. At Intel there was a patent on the ball grid array, which was a great patent because, among other things, it had on the first page of the patent a picture. You could take someone’s chip, look at the bottom of it, compare it to the picture and show it to a jury. In that case, it was trivial. And even with printed circuit boards, while they may be more complicated, it may take no more than a hacksaw to determine the design.
Electronic News: As we get down into 90 nanometers and beyond, you won’t be able to cut that open with a saw.
Blumberg: To the extent that you want to look at the individual transistors or the layout of the transistors, it’s getting harder because the things are getting smaller. But some of the reverse-engineering houses try to keep pace and they make a good living by doing that reverse engineering. These companies do reverse engineering on specs and just sell the reports to anyone who wants them.
Zetter: There’s a handset firm that does that. They do a tear-down analysis and a chip count and board layer count.
Blumberg: It’s not that different. If they’re telling you what’s inside, from a technical perspective, then all you need is a patent attorney and a heap of patents.
Weekley: I think it’s clearly a problem for the industry. At 65 nanometers you can have hundreds of millions of gates. Even for someone that’s legitimate and who’s trying to keep track of where all this IP came from, it’s a challenge. Companies that are aggregating IP from lots of sources need to have a mechanism to keep track of where they got that IP.
Zetter: We have trouble with manufacturers that overbuild intentionally. That extra volume goes for tear-down analysis. It’s not for educational purposes. It’s for counterfeiting purposes. How do you manage that?
Electronic News: How much of a problem is this?
Zetter: It’s definitely a problem with some Indian companies we’ve worked with. And I’ve heard it to be a problem with Chinese companies. A lot of times that occurs just because there aren’t standard procurement protocols. Employees transfer from one division to the next and from one company to the next and they take that knowledge with them.
Basile: This issue of controlling the outsource partners in India and China always looms large. One of the problems is overproduction. But there are some basic common-sense rules of business. Know who you’re doing business with, and trust but verify. The other issue that emerges with the provision of confidential information is the impracticability of protecting your rights in that. An easy solution is to limit the amount of information you give to any one partner. If you can divide the information among multiple partners or maintain key pieces of that, it’s always advisable. But depending on what you’re doing, that also may not be practical.
Zetter: We also come across, particularly in China, companies buying outside the approved vendors list that’s provided by the OEM. The Chinese manufacturer will go to their market, often beneath the radar, and buy counterfeit components and build it into the OEM’s unit. The Chinese manufacturer doing that will improve his margins without passing on the savings. Meanwhile, the buyer gets an inferior product. We’ve seen products shipped into our manufacturers where a well-recognized label-say the 45-degree ‘E’ on Dell-is not angled properly. From the logo is evident it’s not the real product. We’ve also seeing cases where the striping on the resistors is wrong. You can look that up on the Internet. There’s a striping code.
Electronic News: What happens with a system on a chip, where the intellectual property is coming from a variety of vendors and being built by subcontractors of subcontractors?
Zetter: We have two-way NDAs. We’ll engage with the OEM, and if we have bring other parties onto the project we can give an NDA to that other partner that will then be obligated not to let that information out. On the supply chain they do that, as well.
Electronic News: This has been a supply chain issue, but what’s changing is that the supply chain is now overlapping with the intellectual property world.
Basile: It’s an immense challenge to do it correctly, and I’m always amazed there are not more problems than we see. Given the business processes of some of the smaller players in the supply chain, those things are not being properly attended to. The licensing and sublicensing and then more sublicensing of a piece of intellectual property and then making sure it’s being deployed according to the original licensor’s grant is very difficult. It gets even worse if one of the links in that chain goes bankrupt. What is the implication of the end OEM’s right to use that intellectual property? That can be a particularly difficult question when it’s multi-jurisdictional. People spend a reasonable amount of money on lawyers, but I don’t think it’s ever possible to track down every loose end. You simply get to the point where you reduce the risk down to an acceptable single-digit percentage.
Electronic News: Can you keep track of a patent across the extended supply chain?
Basile: No law firm would like to admit defeat. But in some respects, it’s not possible. You’re really relying on the layer you’re touching. You have to have some faith the individuals you’re dealing with are trying to manage it.
Electronic News: Is there a way to write contracts to minimize these problems?
Blumberg: You can write anything into a contract, but you always have to think about, ‘What if there’s a breach? What can you do about it?’ First, you can write a strong indemnity that says, ‘If you do something inappropriate, you’re on the hook for whatever it costs to fix this problem.’ But if you’re talking about some little supplier with $100 in a bank account, that indemnity isn’t worth a whole lot. It really comes down to the notion of: the more expensive the problem is going to be for you the more lucrative the business is for you. And the more you’d better be investigating your partners and standing next to them and watching what they’re doing. At the same time, if you sell IP cores to people that are going to make millions of units, you’ll probably worry less about leakage to small or moderate size players because the enforcement costs aren’t worth it. Your recovery will be less than your legal fees. The big problems get solved because people pay attention to them, the small problems get away because nobody wants to spend the money to deal with them.
Zetter: It’s also a matter of deciding up front which portions of the contract you write with wide interpretation and which portions you write with narrow interpretation.
