Don't get caught with your patents down

With ever more patent disputes going to court, it has never been more important for companies to build up strong evidence to back up their patent claims. Reverse engineering is one of the most effective ways of achieving this, writes Chipworks patent advisor Andrea Girones.

Reverse engineering of competitor products has always played a large and important role in any successful assertive patent licensing programme. However, new developments in the patent licensing arena are making reverse engineering much more vital and often necessary for any company seeking to capitalise on their intellectual property assets.

This article explores the traditional role of electronics reverse engineering in patent licensing campaigns, as well as some of the current trends that are driving up the demand for such services.

History of stick licensing
Stick licensing is intended to force companies to enter into patent licensing agreements by threatening a patent lawsuit as leverage – essentially pay voluntarily or we will take you to court and make you pay.

One factor that contributed to the rise of patent enforcement campaigns was the establishment of the US Court of Appeals for the Federal Circuit in 1982 with its bench specialising in patent matters. Various early judgements in favour of patent holders led to a strengthening of patent rights in that jurisdiction.

Texas Instruments (TI) opened the eyes of many CEOs when it began earning significant royalty revenues from its assertive licensing campaigns in the semiconductor arena. Annual reports from the early 1990s indicate TI was drawing in royalty revenues of up to US$2-5 million a year. While TI no longer reports its royalty income separately, the annual amount is now estimated by industry experts to be over US$1 billion.

Many other companies followed suit. STMicroelectronics, for example, entered into the licensing field almost by accident when it acquired a small semiconductor company called Mostek (an early DRAM company). In addition to buying the business, STMicro also acquired what turned out to be a fundamental RAS/CAS DRAM patent that was to form the basis of a multi-million-dollar licensing campaign in subsequent years.

IBM, on the other hand, despite being the number one holder of patents in the US, in 1990 disclosed annual royalty income from its patents of a mere US$30 million. In 1993, newly appointed CEO Lou Gerstner saw the incredible opportunities that existed within IBMs tremendous patent portfolio, and launched an aggressive patent licensing programme. Thanks to this initiative, IBM now boasts an annual royalty revenue stream in excess of US$1 billion.

In the semiconductor arena, the strengthening of patent holder rights led to the creation of an entirely new form of business, namely the semiconductor intellectual property (IP) companies. These companies earned revenues solely based on the various licensing deals that they negotiated for their patented technologies and designs. Since the intellectual property created in these companies was the mainstay of the business, they have been important drivers of the increased amount of patent litigation, particularly in the US.

The need to prove infringement
Patent licensing has grown in popularity as a means for companies to protect their IP and to generate revenues. Many companies now see the value of in-house patent licensing programmes and have formed internal IP teams specifically to perform this function. Reverse engineering has increased dramatically as a result.

It is generally agreed that at some point in the negotiation process, the offensive party (the party that initiates the licensing negotiations) will be required to present evidence of “use of invention”. The greater and more compelling the evidence, the greater the chances of success. Negotiations can move faster and be more fruitful with more convincing evidence. This evidence currently comes in many forms, including data sheets, standards, technical articles and reverse engineering. Here, we take a look at these in more detail.

Datasheets – datasheets are product brochures and are readily available. The problem with datasheets is that they are often outdated and are usually not detailed enough to be of much value. Datasheets are easy to defend against as the negotiator can dismiss them as being irrelevant.

Standards – standards are set by a group of participating companies in a particular area of technology. They are written to describe how systems or services should operate once implemented. As with datasheets, standards are often freely available at little or no cost. So if an infringement case can be made based solely on a standard then the cost of producing this evidence is low. Unfortunately, standards typically do not provide enough information to produce definitive evidence. Although the standard describes how a system should operate in general, it does not contain sufficient detail to show how the system is actually implemented. Therefore, it may be difficult to document all elements of the claim against the standard.

If you are able to clearly document a patent claim against a standard, one significant benefit is that once you have done this every company that claims to meet this standard with their product is now a good candidate for a patent licensing programme.
Technical articles – technical articles provide a very detailed account of how a device works, but are difficult to find. The challenge with using technical articles is to show “use of invention”. Unfortunately, these articles may not reflect design changes and may not have the detail required for licensing negotiations. As such, they are easy to defend against.
Reverse engineering – the best option for providing evidence of “use of invention” remains reverse engineering. While it can be costly, clients are provided with definite evidence of use. If in negotiation, should a claim chart showing evidence of use be presented, it is very difficult to defend against. Furthermore, with reverse engineering already complete before the negotiation, you are well positioned to proceed instantly to litigation should the need arise.

Weeding out
the patent trolls
The dramatic rise in the number of companies interested in stick licensing campaigns has lead to a significant increase in the amount of patent assertions that appear on the desks of corporate IP counsel. Estimates by industry professionals are that the number is three to four times higher than five years ago. Many more assertions are also coming from pure licensing companies, that is, companies that do not actually create IP, or manufacture or sell products. These companies are not asserting patents so as to protect their own market space and research and development – they are merely looking for revenue. These kinds of companies were famously referred to by Intels IP counsel as “patent trolls”, a name that has become popular among professionals in the field. Generally, only the patent assertions with the most compelling forms of evidence are even looked at by large corporations. Furthermore, many companies may not even respond to a patent assertion until such time as a lawsuit is filed. Large market share targets such as Intel, IBM and STMicroelectronics make a conscious decision not to even respond to patent assertions until litigation is close to commencing. These companies like to create the impression that they play hardball in patent negotiations, and would rather take their chances in a lawsuit than settle prematurely.

The increasing number of patent lawsuits that are filed annually in the US supports the fact that fewer settlements are being reached out of court. Companies preparing to assert patents must be prepared with the strong evidence required to make it through the litigation process. While a datasheet analysis may have worked in patent negotiations in the past, there are few lawyers who will base a patent lawsuit on datasheets alone. Quality reverse engineering evidence remains the mainstay of most successful patent law suits

Rise of the Asian
IP powerhouse
Another important trend driving increased demand for reverse engineering services is the growing awareness of the importance of IP rights in Asian countries such as Japan, Korea, Taiwan and China.

Japanese companies were hard hit a decade ago by the American licensing aggressors and are preparing to defend themselves more strongly as several important patent licenses near their expiry period. These Japanese companies have been ramping up their portfolios for some time in order to strengthen their negotiating positions in both offensive and defensive licensing initiatives. According to the US Patent and Trademark Office, 11 out of the top 20 patent winners in 2004 were Japanese or Korean electronics companies (table 1).

As these companies ramp up their portfolios, they are also engaging in reverse engineering services, both to defend themselves as well as to actively go out and start licensing others.

Conclusion
Patent Licensing has historically generated enormous earnings for companies who were proactive in enforcing their patent rights. However, the evolution of the patent troll company and contingency licensing firms has meant that it is much more difficult to get onto the radar screen of the IP counsels of the big licensing targets.

More patent licensing negotiations are ending up in litigation than ever before. This is driving the need for a higher standard of evidence in order to successfully litigate and eventually settle patent licensing agreements.

Top 20 patent winners for 2004

* Includes 17 patents issued to Hewlett-Packard Co. and 2 patents issued to Compaq Computer Co.

** Includes 9 patents issued as unassigned but which have C/O Sony Corp. in inventor address

***Counts exclude design and plant patents