Licensing's In ... Lawyer's Out

Licensing is too important to be left to lawyers. Or so goes the current thinking at Hewlett-Packard Development, L.P., where the only thing less popular than a long-lasting inkjet cartridge is an attorney brainstorming royalty deals. For years, Stephen Fox, the company's longtime chief intellectual property lawyer, had been the champion of a ramped-up licensing strategy: mining the company's intellectual property for revenue opportunities, pushing for a less ad hoc, more systematic approach to licensing, delivering what he often publicly called a “more entrepreneurial view” of the company's IP portfolio. But entrepreneurship, HP ultimately decided, was best left to entrepreneurs. In January, when the company announced a new licensing organization designed to increase royalty revenue, it gave the green light to Fox's ideas ' and put the brakes on Fox himself. The new licensing group would be run by a veteran HP manager.

Some lawyers might call that a raw deal. Fox, who has spent 36 years at HP (18 as its chief IP lawyer), calls it “optimum effectiveness.” That may sound like team play by a guy with nearly four decades on the team, but Fox is adamant that a separate organization, run by someone else, who will do the strategizing he used to do is exactly what he had in mind. Licensing, Fox says, “works well when placed in a business activity that is accountable for profit and loss, rather than in the legal department, which is an expense center.”

Yet the new regime is a drastic change for HP, whose licensing program had always been considered successful. Even companies that have aggressively licensed their intellectual property have not cut the attorneys out of the loop so dramatically. Gerald Rosenthal, who heads International Business Machines Corporation's billion-dollar-a-year licensing program, may be an engineer turned manager, but he has a J.D., too. That's pretty much the only thing that Joe Beyers, HP's vice president of intellectual property licensing, doesn't have. Beyers is a 29-year company veteran who has done everything from designing chips to managing HP's Internet business unit to spearhead planning and business development of its computer systems business. In his new role, Beyers will be approving, if not creating, every licensing deal at the company.

Drastic change or not, HP's approach to licensing isn't entirely surprising. Faced with cutthroat competition and a more turbulent economy, technology companies may find that business acumen can trump legal knowledge when it comes to leveraging patents into profits. “Once you begin to look at IP as an asset, it's usually a businessperson who is going to be responsible for it,” says David Klein, head of the technology transactions practice at New York's Shearman & Sterling. “Maximize profit from an IP portfolio? That's not really a lawyer's expertise,” he says.

In the past, when Fox tried putting on his business hat, his pleas for a separate, centralized licensing organization fell on deaf ears. (Fox even published on the subject in a book chapter in the 1990s.) It wasn't until board members from Compaq broached the same idea after Compaq's merger with HP in 2002 that the licensing idea gained currency. Fox blames the delay on “a changing environment that included an economic downturn, the HP/Agilent split, and the HP/Compaq merger.” Still, once the board members spoke, the wheels turned quickly. “Compaq had already moved some of its IP into a separate licensing entity before the merger,” Beyers says. “The concept wasn't new for them, and we expanded on that. We looked at the IBM model and saw that we were leaving a lot on the table.”

The 50-person team Beyers now leads is comprised of full-time staff, outside consultants who help analyze HP's patent portfolio, and members of various HP business units who work with the group.

For legal help, Beyers draws on attorneys in Fox's IP department.

Beyers's mandate also includes Fox's old responsibility: He mines HP's IP, looking for technologies and patents that are ripe for licensing. So far, however, there's been little need for any elaborate digs. HP product groups are actively encouraged to bring patent ideas to Beyers – cash awards are given to inventors who disclose their inventions and more money is awarded if the invention is patented. Inventors can earn about $2000 per invention. Beyers's had plenty to keep his team busy, vetting some 1000 deals in 2003 alone. (While the licensing group was officially announced this January, it had been quietly operating for the previous year.) “Some of these are on technology no longer being pursued in HP,” says Beyers, and “some go to a technology that we want to make broadly available, so we can create a standard.” Licenses for the latter are particularly crucial, as they get an emerging technology out to a greater market, increasing its chances for success. Beyers's group has already set up a program to license DVD+RW, the company's format for writeable DVDs ' one of several competing formats now on the market. It's licensing LightScribe, a technology that lets users burn labels onto CDs or DVDs directly from an enabled disc drive. LightScribe licensees include Toshiba America, Inc., Sonic Solutions, and MicroVision Development Inc. Another licensing program involves HP's Ultrium, a format for next-generation linear data storage tapes. Licensees for this technology include Fujitsu Ltd., Matsushita, NEC Corp., Phillips Semiconductor, and TDK Corp.

Still other licensing ideas have involved technologies that have uses beyond HP's own product lines. “The same patents that enable us to mix fluids to create microdrops in inkjet printers can be used to mix fluids in adhesives,” says Beyers. “So that's a way we can license IP we have in other areas.”

Beyers says that so far the licensing program has been a success. He claims that licensing revenue was up 50 percent in 2003, but he declined to give a number, and HP does not break out the figure on its public filings.

Of course, licensing is about more than finding new users for a technology. It's also about finding current users of that technology ' and getting them to cough up cash for it. To that end, HP's new group has started what Beyers calls a proactive scanning process, identifying companies that may be using HP's IP ' and getting them to take a license. Hunting down potential infringers sounds like a litigation strategy. Beyers downplays that angle. “There's definitely an assertive element to it,” Beyers says. “We realized that now was the time to take steps to better protect our IP. We're not interested in litigation. The goal is licensing.”

Licensing was Fox's goal, too, back when he and his lawyers mined patents to generate new deals and revenue. But the ad hoc system they used meant that lawyers saw deals on only an occasional basis. By vetting every deal companywide, Beyers says he gets an unprecedented view as to how every technology at HP is used. Ultimately, this will enable his team to create more deals, with more licensing partners, than any lawyer could. “You don't get expertise doing one-off deals here and there,” Beyers says.

The centralized approach also helps HP leverage a patent portfolio that has bulked up faster than Renee Zellweger for Bridget Jones's Diary. In 2003 alone, HP added 1759 patents to its portfolio ' placing it fifth on the annual ranking of companies obtaining U.S. patents (IBM was first, with 3415 patents), and marking a 27% increase from 2002. Worldwide, HP's patents jumped by 4000 last year, to 21,000. “With all those new patents,” Fox says, “we needed a more systematic approach to licensing.”

Licensing isn't the only work leaving HP's legal department. Fox has spearheaded a marked increase in outsourced patent prosecutions, delegating the work to such firms as Thomas, Kayden, Horstemeyer & Risley; Fulbright & Jaworski; and Wagner Murabito & Hao. Even as HP's patent portfolio has expanded over the past three years, the law department's IP section has had near zero growth, remaining at about 100 attorneys and patent agents. “Part of that is because of the economy, but part of it is because it's more cost-effective to outsource the work,” says Fox. Similarly, Fox says the new licensing organization is a more cost-effective way to leverage HP's patent portfolio. “We're producing the patents, and the new group is finding ways to turn them into dollars,” says Fox. “It takes a coordinated effort.”

But some experts worry that a centralized, aggressive stance on licensing may have the odd ' and perhaps unintended ' effect of actually hindering patent applications, meaning, in the long run, fewer patents and dollars. “If you've got someone on the business end watching closely, they may ask people on the R&D side to make a better business case before deciding to file,” says Shearman & Sterling's Klein. Fox says that's not going to be a worry, that while the Beyers group will take charge of licensing, “patent procurement will remain the work of the IP section of the law department, as always.”

Or maybe not. While Beyers plans to leave the nitty-gritty of patent filings to Fox, that doesn't mean he won't have a say in what gets patented ' and when. “We don't do patent prosecution, but we do give input on prosecution priorities based upon what we are seeing in our licensing activities,” says Beyers. In the end, the business people may be calling the shots ' leaving the lawyers to fill in the blanks.

Licensing is too important to be left to lawyers. Or so goes the current thinking at Hewlett-Packard Development, L.P., where the only thing less popular than a long-lasting inkjet cartridge is an attorney brainstorming royalty deals. For years, Stephen Fox, the company's longtime chief intellectual property lawyer, had been the champion of a ramped-up licensing strategy: mining the company's intellectual property for revenue opportunities, pushing for a less ad hoc, more systematic approach to licensing, delivering what he often publicly called a “more entrepreneurial view” of the company's IP portfolio. But entrepreneurship, HP ultimately decided, was best left to entrepreneurs. In January, when the company announced a new licensing organization designed to increase royalty revenue, it gave the green light to Fox's ideas ' and put the brakes on Fox himself. The new licensing group would be run by a veteran HP manager.

Some lawyers might call that a raw deal. Fox, who has spent 36 years at HP (18 as its chief IP lawyer), calls it “optimum effectiveness.” That may sound like team play by a guy with nearly four decades on the team, but Fox is adamant that a separate organization, run by someone else, who will do the strategizing he used to do is exactly what he had in mind. Licensing, Fox says, “works well when placed in a business activity that is accountable for profit and loss, rather than in the legal department, which is an expense center.”

Yet the new regime is a drastic change for HP, whose licensing program had always been considered successful. Even companies that have aggressively licensed their intellectual property have not cut the attorneys out of the loop so dramatically. Gerald Rosenthal, who heads International Business Machines Corporation's billion-dollar-a-year licensing program, may be an engineer turned manager, but he has a J.D., too. That's pretty much the only thing that Joe Beyers, HP's vice president of intellectual property licensing, doesn't have. Beyers is a 29-year company veteran who has done everything from designing chips to managing HP's Internet business unit to spearhead planning and business development of its computer systems business. In his new role, Beyers will be approving, if not creating, every licensing deal at the company.

Drastic change or not, HP's approach to licensing isn't entirely surprising. Faced with cutthroat competition and a more turbulent economy, technology companies may find that business acumen can trump legal knowledge when it comes to leveraging patents into profits. “Once you begin to look at IP as an asset, it's usually a businessperson who is going to be responsible for it,” says David Klein, head of the technology transactions practice at New York's Shearman & Sterling. “Maximize profit from an IP portfolio? That's not really a lawyer's expertise,” he says.

In the past, when Fox tried putting on his business hat, his pleas for a separate, centralized licensing organization fell on deaf ears. (Fox even published on the subject in a book chapter in the 1990s.) It wasn't until board members from Compaq broached the same idea after Compaq's merger with HP in 2002 that the licensing idea gained currency. Fox blames the delay on “a changing environment that included an economic downturn, the HP/Agilent split, and the HP/Compaq merger.” Still, once the board members spoke, the wheels turned quickly. “Compaq had already moved some of its IP into a separate licensing entity before the merger,” Beyers says. “The concept wasn't new for them, and we expanded on that. We looked at the IBM model and saw that we were leaving a lot on the table.”

The 50-person team Beyers now leads is comprised of full-time staff, outside consultants who help analyze HP's patent portfolio, and members of various HP business units who work with the group.

For legal help, Beyers draws on attorneys in Fox's IP department.

Beyers's mandate also includes Fox's old responsibility: He mines HP's IP, looking for technologies and patents that are ripe for licensing. So far, however, there's been little need for any elaborate digs. HP product groups are actively encouraged to bring patent ideas to Beyers – cash awards are given to inventors who disclose their inventions and more money is awarded if the invention is patented. Inventors can earn about $2000 per invention. Beyers's had plenty to keep his team busy, vetting some 1000 deals in 2003 alone. (While the licensing group was officially announced this January, it had been quietly operating for the previous year.) “Some of these are on technology no longer being pursued in HP,” says Beyers, and “some go to a technology that we want to make broadly available, so we can create a standard.” Licenses for the latter are particularly crucial, as they get an emerging technology out to a greater market, increasing its chances for success. Beyers's group has already set up a program to license DVD+RW, the company's format for writeable DVDs ' one of several competing formats now on the market. It's licensing LightScribe, a technology that lets users burn labels onto CDs or DVDs directly from an enabled disc drive. LightScribe licensees include Toshiba America, Inc., Sonic Solutions, and MicroVision Development Inc. Another licensing program involves HP's Ultrium, a format for next-generation linear data storage tapes. Licensees for this technology include Fujitsu Ltd., Matsushita, NEC Corp., Phillips Semiconductor, and TDK Corp.

Still other licensing ideas have involved technologies that have uses beyond HP's own product lines. “The same patents that enable us to mix fluids to create microdrops in inkjet printers can be used to mix fluids in adhesives,” says Beyers. “So that's a way we can license IP we have in other areas.”

Beyers says that so far the licensing program has been a success. He claims that licensing revenue was up 50 percent in 2003, but he declined to give a number, and HP does not break out the figure on its public filings.

Of course, licensing is about more than finding new users for a technology. It's also about finding current users of that technology ' and getting them to cough up cash for it. To that end, HP's new group has started what Beyers calls a proactive scanning process, identifying companies that may be using HP's IP ' and getting them to take a license. Hunting down potential infringers sounds like a litigation strategy. Beyers downplays that angle. “There's definitely an assertive element to it,” Beyers says. “We realized that now was the time to take steps to better protect our IP. We're not interested in litigation. The goal is licensing.”

Licensing was Fox's goal, too, back when he and his lawyers mined patents to generate new deals and revenue. But the ad hoc system they used meant that lawyers saw deals on only an occasional basis. By vetting every deal companywide, Beyers says he gets an unprecedented view as to how every technology at HP is used. Ultimately, this will enable his team to create more deals, with more licensing partners, than any lawyer could. “You don't get expertise doing one-off deals here and there,” Beyers says.

The centralized approach also helps HP leverage a patent portfolio that has bulked up faster than Renee Zellweger for Bridget Jones's Diary. In 2003 alone, HP added 1759 patents to its portfolio ' placing it fifth on the annual ranking of companies obtaining U.S. patents (IBM was first, with 3415 patents), and marking a 27% increase from 2002. Worldwide, HP's patents jumped by 4000 last year, to 21,000. “With all those new patents,” Fox says, “we needed a more systematic approach to licensing.”

Licensing isn't the only work leaving HP's legal department. Fox has spearheaded a marked increase in outsourced patent prosecutions, delegating the work to such firms as Thomas, Kayden, Horstemeyer & Risley; Fulbright & Jaworski; and Wagner Murabito & Hao. Even as HP's patent portfolio has expanded over the past three years, the law department's IP section has had near zero growth, remaining at about 100 attorneys and patent agents. “Part of that is because of the economy, but part of it is because it's more cost-effective to outsource the work,” says Fox. Similarly, Fox says the new licensing organization is a more cost-effective way to leverage HP's patent portfolio. “We're producing the patents, and the new group is finding ways to turn them into dollars,” says Fox. “It takes a coordinated effort.”

But some experts worry that a centralized, aggressive stance on licensing may have the odd ' and perhaps unintended ' effect of actually hindering patent applications, meaning, in the long run, fewer patents and dollars. “If you've got someone on the business end watching closely, they may ask people on the R&D side to make a better business case before deciding to file,” says Shearman & Sterling's Klein. Fox says that's not going to be a worry, that while the Beyers group will take charge of licensing, “patent procurement will remain the work of the IP section of the law department, as always.”

Or maybe not. While Beyers plans to leave the nitty-gritty of patent filings to Fox, that doesn't mean he won't have a say in what gets patented ' and when. “We don't do patent prosecution, but we do give input on prosecution priorities based upon what we are seeing in our licensing activities,” says Beyers. In the end, the business people may be calling the shots ' leaving the lawyers to fill in the blanks.