Cross-Licensing

Technology AgreementsSpring 2005

Pete Perlegospperlegos@scu.edu

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Outline

Introduction Motivations Offense, Defense Negotiations Dangers Types of Licenses Benefits over Unilateral Licensing Limitation of Cross-Licensing Benefits

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Introduction

What is cross licensing? Businesses share patent rights

through licensing agreements so that they can use each others’ inventions

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Introduction

How does such a relationship begin?

I think this Patent is relevant Do not want to initially precipitate a

lawsuit If the other Party says no:

The only remedy is to file a lawsuit Intel v. Via: Before Intel filed the lawsuit,

Via did not come to the negotiating table

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Motivations to Cross License Litigation is Expensive

David v. Goliath Can a small company afford to litigate? Normal case cost $2-5Mn from start to end

of trial. Large case can cost $10Mn/quarter Dangers of Litigation

Patent might be held invalid (attacker) This can cripple your business

Judgment might be huge (target) Can put you out of business

Access to complementary patents

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Offense How strong is the patent?

Previously Litigated How easy is it to design around? Fundamental v. Improvement

A fundamental patent can be Blocking and is worth more money

Process Patents Cut across entire product lines

More valuable in negotiation Injunction – can put target out of

business

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Offense Everyone is licensing

“…interest in licensing our…patent is an important validation of the value this patent holds within the industry and of the technology we create…”

US courts (CAFC) more favorable to patent holders

Treble damages and attorneys’ fees for willful infringement

Do not want to risk injunction An injunction can shut down your business

Patents have become much more important to business (major assets)

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Defenses

Design Around If you can design around the patent you can

still make the product Value of the patent is only the cost of

designing around and implementing the design around

Legal Defenses Previous Art: if not disclosed at the time of

the patent, patent can be invalidated Pay less: the payment should be proportional

to chances of the patent not being invalidated and found to be infringing

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Negotiations

Look at accused products How many are sold? What is the prevailing party going to

get in damages if they win? Settle

Not prohibitively expensive As long as you are not out of market Margins might be thin

Can I still pay the fee and make money?

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Same Patent -> Different Result

Wang v. Msft Microsoft bought $84Mn of Wang

stock

Kodak v. Sun Kodak won on Patents bought from

Wang Sun paid Eastman Kodak $90Mn

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Dangers

Agere v. Atmel Agere sued Atmel on manufacturing

process patents (Bell Labs) Agere sued Atmel for $100Mn Agere had licensed these patents to

other companies Result?

Three patents were found invalid because previous work was not disclosed

Fourth patent was found non-infringing

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Types of Licenses

Fixed Cost – Straight Fee “paid up fee”, “fully paid fee”

Per Item Running Royalty per item: flat fee, % Volume discount Declining prices over time

Straight Cross License Very common in the 1980s-90s Broad cross license

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Benefits over Unilateral Licensing

Cross-license to reduce fee Might not be able to fully utilize

patent Monopoly deadweight loss

Use patent to barter with Cross-license results in future

collaborative relationship Complementary inventions

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Benefits over Unilateral Licensing

Added knowledge flow between cross-licensing parties for post-licensing innovations Cross-licensing is a forward-looking alliance,

not merely a barter of patents Duopoly profit attained through cross-

licensing can be greater than expected monopoly profit (both technologies) Firms prefer cross-licensing if they can

assure higher profit Allows for design freedom by leveraging

access to other firms’ technologies

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Benefits over Unilateral Licensing

Large companies want to avoid litigation when launching new products (Sony & Samsung) companies don't want to be surprised by

litigation for patent infringement of non-ground-breaking products

there may be too many patents to look at practically

to not pay any money, they have to be roughly equal in the harm they could do to each other

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Benefits over Unilateral Licensing

Technologies such as semiconductors are distributed among many firms A single merger or license is not likely to fulfill

all technological requirements for the industry participants

Firms need to have access to other firms’ technological assets through contract

Semiconductor patents are highly complementary

Cumulative Innovation Accelerated innovation Higher Appropriability Exchange of future innovation possibilities

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Intel v. Via

Intel sued Via over patents used in chipsets for Intel/AMD processors

Via countersued on patents used in P4

Settlement: Cross-license of Intel, Via patents Via pays royalties to Intel on some

products

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Benefits over Unilateral Licensing

Cross-licensing transforms the transaction into “mutual reliance relation”

Unilateral Licensing – Appropriability Problem Follow-up innovations and patents are captured

by the licensee against the intention of the original patent holder

Cross-Licensing Can mitigate hazards of appropriability problem A’s license to B is tied with B’s license to A Safeguarding mechanism for transfer of

knowledge

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Limitation of Cross-Licensing Benefit

Core patent has broad innovation potential Produces many follow-up innovations

Core technology has greater hazards Continuing innovation is a key asset for

the licensor and blocking innovation jeopardizes the competence

Companies are reluctant to license core technologies

Selective cross-licensing of non-core patents

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Conclusions

Cross license can bolster both companies’ patent portfolio Decrease risk of litigation Cumulative innovation

Complementary inventions Mitigate appropriability problem

Be reasonable Gambling to win big is a huge risk Everyone makes money => Everyone

wins

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Questions/Comments