Patent portfolio strategy revisited

Writing in Innovation Science, Brent Edwards ("Trolls Attack Innovation: Panic in Corporate Parks!"), left, reviews an article in the June 2008 issue of the Harvard Business Review by management professors Joachim Henkel and Markus Reitzig ("Patent Sharks: Legal strategies aren’t enough to deal with these predators of the IP world. You need to rethink your approach to R&D"). Edwards addresses the authors'recommendations which he criticises as being unrealistic in that they idealise the willingness of competing companies to cooperate with each other and to forgo competitiveness in technology development in order to protect themselves against the trolls.

The first of the professors' recommendations is "High-technology firms should move away from building huge patent portfolios for the purpose of cross-licensing with competitors". On this, Edwards comments:

"The authors correctly point out that one reason companies generate patents is to trade them for patents needed from other companies. Such trading is done because the patents behind key components in complex technical products are usually distributed across all of the major companies in an industry—no one company owns all of the patents necessary to produce a product. Because no company can produce a product solely on technology from their own patent portfolio, companies trade their patent licenses for licenses to the other companies’ patents. The cellphone industry is a typical example of this, e.g., Nokia trading patent licenses with Motorola and Samsung. The authors suggest that this strategy of building a strong portfolio and trading licenses is no longer valuable to companies and should be stopped because it doesn’t protect them from trolls. Indeed, it doesn’t—it protects them from their competitors, who are ultimately more threatening than patent trolls. Just because a patent strategy does not affect patent trolls does not mean that it isn’t worth doing. If I were Nokia, however, I would certainly try to convince Motorola to follow this advice to stop building up Motorola’s patent portfolio".

It seems to be by no means clear that one's competitors are ultimately more threatening than patent trolls. By virtue of the fact that they are in the same market -- particularly where that market is technologically complex and patent-rich -- competing players becomes increasingly reliant on one another in terms of standards-setting and cross-licensing, so each has a long-term incentive to cooperate with one another. A troll, however, is an outsider; he is not interested in cooperation or developing any relationship outside that of rentier. The more rent he receives, the better able he is to defend his patents if their validity should be challenged, and the less he does apart from collect his rent and keep it, the more focused he is on his continued role as rentier.