If you have been following the financial reports, you know that many global companies have reported sharp declines in fourth-quarter revenues and weak forecasts for first-half 2009 sales. Company after company has laid off workers, restructured and taken action to streamline operations and reduce costs.
But one area that seems to resonate with even the hardest-hit companies as “off limits” is R&D spending and with it, the hopeful new IP that researchers endeavor to create. Companies continue to spend money developing new products and applying for patents to protect these inventions.
Patent application filings were up 2.4% in 2008. It would probably come as no surprise that in 2008, the top 50 PCT (Patent Cooperation Treaty) applicants looked like a who’s who of the electronics industry and included many blue chip names like Panasonic (no. 2), Philips (no. 3), Nokia (no. 7), Microsoft (no. 14), IBM (no. 17), Intel (no. 31) and Apple (no. 45).
Perhaps surprising though was the firm that took the top spot in 2008: Huawei Technologies, a Chinese-owned networking and telecommunications equipment supplier, with 1737 patent applications. Huawei (pronounced wah-way) employs over 85,000 workers, mainly in China, and 43% are dedicated to R&D.
Protecting R&D programs and continuing to develop IP during tough economic times is nothing new. Looking at recent history, US patent filing and IP litigation markets have experienced significant growth during and immediately following recessionary periods over the past 40 years. In the three years following the 2001 recession, for instance, IP litigation was up 30% and patent filings up 10%, according to University of Houston Patent and USPTO Filing Statistics.
You don’t have to look far to notice some increase in IP litigation trends in the electronics industry. Some better known recent examples include Broadcom v. Qualcomm, in which Broadcom managed to stop cell phones from entering the US if they contained infringing Qualcomm chips. Last year, Isola brought suit against Taiwan laminate companies TUC and Iteq. Iteq agreed to stop manufacturing the products in question; the Isola-TUC case is ongoing.
Patent litigation is costly. Depending on the specific strategy of the plaintiff, the potential outcome of a suit could include licensing that would generate a revenue stream for the patent holder. Resolution through licensing is often a negotiated, out-of-court settlement that costs less to conclude. If, however, market share protection is key, the pursuit of damages often ends up in the courts in protracted and costly battles that provide patent holders with judicial remedies to protect the value of their inventions.
Enter patent reform. Last year, Congress tried again, and failed, to bring forward proposed patent reform that included changes in the way that damages are calculated in infringement lawsuits. The suggested reform would attempt to apportion the value that the patented invention brings to a product, reducing the amount of damages that can be claimed. A number of reports have attempted to quantify the negative impact of such changes.
One, prepared for the Manufacturing Alliance on Patent Policy by Case Western economics professor Scott Shane in January, concluded that the proposed apportionment-centric system of damages would reduce the value of US patents to between $34.4 billion and $85.3 billion (from an estimated value of between $171.8 billion and $218.7 billion), cut the value of the companies that hold them to between $38.4 billion and $225.4 billion (based on market capitalization of the Wilshire 5000 of $9.8 trillion), reduce R&D spending by $33.9 billion to $66 billion annually and put between 51,000 and 298,000 US manufacturing jobs at risk.
With proposed patent reform coming up again this year, many have asked what will become of innovation and R&D in the US. The previous proposal disproportionally benefited a few big companies and more complex technologies, such as electronics products. It puts more discrete inventions, like chemical formulations, at a disadvantage in terms of protecting their value. Overall, the reforms seem to favor infringers over inventors. The business of patent development and IP protection is an integral part of the innovation process. Innovation has been heralded as the foundation for economic recovery. Now is certainly not the time for the US to put its patent system at risk. We will be looking for the spoils of patent valuation to stimulate technology advancements and the economy in the months ahead.
