Lesson 4: Does Having an IP Strategy Guarantee Success?
Merely having IP and an IP strategy does not guarantee business success. However, not having an IP strategy could mean that the business is more likely to struggle or may be less likely to be able to scale its business.
This point is illustrated by a consideration of the fate of Nortel Networks Corporation (Nortel) and its vast patent portfolio.
Nortel was once an industry leader in optical networking technology. It was also once Canada’s technology darling before it became insolvent and filed for protection from its creditor in 2009. Not only did Nortel offer leading-edge technology solutions, it had a vast IP portfolio that included trademarks and patents. Its patent portfolio, consisting of thousands of patents filed or obtained, was its most important IP asset.
In an interview published in Corporate Legal Times in June 1999, Nortel’s general counsel, Richard Brait, explained the company’s IP strategy:1
While we’re growing our patent portfolio at a much greater rate than we did even a few years ago, we’re not collecting more patents for the sake of having large numbers of patents. Instead, we want to identify those technologies that serve as the marquees of high-impact areas, areas that will gain us a commercial advantage. That advantage might be our ability to exclude competition, generate high levels of royalty payments or cross-license with competitors that also have strong portfolios.
When asked how Nortel identified potential licensing situations, Brait answered:
The key is a deep knowledge of your own portfolio and of what’s being done by others in the industry. We have started our patent licensing program formation group, which is becoming familiar with and classifying our patents as a first step to figuring out their applicability.
The group analyzes competitors and markets of interest. It looks at the patents and figures out who the patents apply to and what patents might be valuable. The group then offers feedback to those planning the portfolio to identify areas in the market where we should build our portfolio. Our goal is to get patents coveting large markets, not small ones.
Nortel clearly had a deliberate and well-articulated patent strategy. However, it does not appear to have meaningfully executed on this strategy, which might have contributed to its declining fortunes. Nortel generated modest licensing revenues of roughly CDN$30 million per year. While its strong patent portfolio may have provided some advantages, such as deterring companies from suing it, Nortel did not use its patents offensively as it had articulated in its strategy. In fact, there are only a few examples where Nortel sued a company on its patents.
Contrast this example with a company such as Ericsson, which had historically competed with Nortel. Ericsson has more than 30,000 issued patents and has at least that number pending. It generates more than US$1 billion in licensing revenues annually. And importantly, it is not shy about vigorously asserting its patent portfolio. While it will generally start by asking a company to enter into a licence for its patents, it is not reluctant to sue companies for patent infringement. For example, in the past few years, Ericsson has sued the two most popular smartphone manufacturers (Samsung and Apple).
In addition to having such a strong and lucrative patent portfolio itself, Ericsson was part of a consortium that acquired the bankrupt Nortel’s patent portfolio for US$4.5 billion. This raises an important question.
Given that Ericsson already has such a robust patent portfolio as evidenced by its significant licensing revenues, what could have motivated it to acquire Nortel’s portfolio and why would it ascribe such a high value to it?
- For possible revenue generation:
Nortel hadn’t granted many licences to the patents and hence a lot of new revenue could be extracted from its patent portfolio.
- For defensive purposes:
If Ericsson didn’t acquire the patents and someone else did, Ericsson would be exposed to lawsuits and damages or royalties on patents that were relevant to its field of technology.