Intellectual Property Rights and Strategy - Cases

Orbital
Engine Corporation
Summary:
Australian-based Orbital Engine Corporation (OEC) was founded in 1970 by a 32-year old engineer,
who dreamed of creating a better internal combustion engine. According to the company, a 2-
stroke engine using the Orbital Combustion Process was not only lighter and more fuel efficient
than the best 4-stroke engines on the market, but was also more environmentally friendly,
cheaper to manufacture, and longer lasting.
Orbital Engine Corporation extensively patented its technology and brought it to the point where
it could license the rights on a non-exclusive basis to both automakers and other engine
manufacturers. The company charged extremely high royalties for its licenses (automakers had to
pay $30-40 per engine, as opposed to the industry rate of about $1), both to ensure that the
automobile manufacturers took the technology seriously, but also, not least, to enhance its
earnings
Thus Orbital Engine Corporation, established in 1970, had by 1992 concluded seventeen
agreements (license options, licenses, and joint ventures) based on its fuel injection technology,
and earned over A$110 million (cumulatively) from the sale of its intellectual property. OEC
generated so much income from royalties on its test engines and provisional licenses that it had
become the largest company in Western Australia in terms of market capitalization by 1990, and
was hailed as the best performer on the Australian stock market. Subsequently, OEC found new
outlets for its fuel injection process in engines for motorcycles, motorboats, and lawnmowers.
Nevertheless, as of this writing, none of the companys license deals has led to the
commercialization of the fuel injection process in its main target market: Automobile engines.
OECs policy of non-exclusive licensing, combined with maintaining tight control over its property
rights, ensured that the basic idea would not be appropriated. But it may also have guaranteed
that the technology would never be commercially adopted by any one manufacturer, let alone the
automobile industry as a whole.
OECs engineers, pursuing their visionary strategy, continued to refine and perfect a technology
that automobile manufacturers ultimately did not incorporate into their vehicles, even as they
continued to pay license fees for the rights to do so.
A new inventions commercial development often depends on its compatibility with the demands
of existing markets. No matter how good the invention is, it will only be valuable to potential
buyers if it can be integrated into this larger system. OECs fuel injection technology, while
technically and environmentally superior to existing technologies, would involve revamping
existing engine technology. Car dealers and insurance agents would have to learn about the new
engine. Mechanics would have to be trained in its repair. Automobile manufacturers might not be
completely certain about the safety and reliability of a technology developed by an IP provider.
This could put them at risk for consumer lawsuits. These were the drawbacks from OECs non-
exclusive licensing strategy which caused it to never commercialize fully in the automobile
industry.
What other solutions might have worked for OEC? Not many, it turns out. The companys core
competencies were in idea generation, not manufacture. Even if it had wished, it could not easily
have become a manufacturer of automobiles, or even of engines. Mass production of the engine
would have required substantial re-tooling of existing engine manufacturing plants, which would
have required huge capital expenditures, big market risks, and a complete re-orientation of the
giant and conservative automobile industry. OEC realizes that his invention was only a part of a
bigger product (the car). They had the choice between creating a new car to put his fuel injection
system into, or license the invention out to the big players of the automobile industry.

Should OEC originally have entered into an exclusive licensing arrangement with one automobile
manufacturer? This might have facilitated commercialization but it would also have required
OEC to relinquish control over the wider implementation of the technology. OEC might also have
feared that the licensee might not, in practice, ultimately have been committed to
commercializing the idea.

Introduction:
! OEC has made an engine, which is able to meet the most stringent emission standards in the world
as well as having superior fuel efficiency.
! The revolutionary orbital engine won a special award on the Australia Broadcasting Commissions
television program The inventors.
! Even though the engine was superior to existing engines in terms of fuel economy, emission levels,
size and weight, OEC faced a major problem: Mass production of the engine would have required
substantial re-tooling of existing engine manufacturing plants, which would have required huge
capital expenditures, big market risks, and a complete re-orientation of the giant and conservative
automobile industry.
! Therefore: They decided to go a different path, when they invented a highly efficient and yet low
cost fuel injection system, which enabled dramatically improved fuel combustion with the potential
for improved fuel efficiency and lower emission levels of unburnt gases.
! The Orbital Combustion Process (OCP) was born and became the main focus!
! The improved fuel efficiency came at a good time, as the US Government proposed more
demanding standards in terms of environmentally friendly cars. The OCP demonstrated the
capability to meet these demands.
! OEC decided to establish a A$300 million manufacturing plant for the OCP engine at Tecumseh,
about 50 km south-east of Detroit. This was due to an A$80 million incentive from the State of
Michigan. The Australian government hadnt been willing to provide such an incentive, so the
company move to the States.

Value adding activities
! Motorola had entered into a joint venture development agreement with OEC to develop a
production version of the electronic control unit for use on the OCP engine.
! OEC was also collaborating with Johnson-Matthey PLC, a major producer of catalysts to produce
robust and cost effective catalytic system for use on the OCP engine.

Protecting the intellectual property
! The value of the company depended on its ability to extract fees and royalties from the motor car
companies for the intellectual property.
! In addition to its core patents, the company also registered a range of related patents forming
several layers of shielding patents around the core technology.
! By June 30 1991, the company had 548 patents and patent applications registered in 23 countries
around the world.
! The annual cost to OEC of maintaining its patents and employing the necessary legal counsel
averaged about A$300,000 and peaked at A$1,000,000.
! However, the company expected that royalties would persists for a long time in the future.

Pricing policy
! Sarich calculated that the OCP engine would be about A$200 to A$300 cheaper to manufacture
than conventional engines.
! Redesign of the car because of a lighter and smaller engine could save a further A$200.
! He was prepared to license his technology for between A$20 to A$30 per engine built.
! This, however, was more than ten times as much as any royalty paid before in the industry and was
considered outrageous by the car makers.
! Sarich developed a range of license options to allow companies to evaluate the technology before
entering into final licensing.
! The license agreements were non-exclusive. Ford, General Motors and Fiat were among the
licensees.

Finance
! The pioneering work on the orbital engine leading to the successful firing of the second prototype
cost about A$60,000 which was financed by selling their house and work part-time on the side.
! In a later joint venture with BHP, BHP agreed to provide capital for the further development (up to
A$50 million). The agreement was subject to ongoing evaluation.
! OEC was aided by financial contributions from both Federal and State governments and a loan from
the West Australian Government of A$15 million.
! He pushed to Australian government to provide further financing, but eventually had to move to
the US, where OEC was listed on the New York Stock Exchange.

Further thoughts:
Electric engines and hybrid cars was at the time of writing considered possible paths of the industry in the
future, but the technology wasnt developed nearly enough at the time. Today, this is changing rapidly.

Sarich realize that his invention was only a part of a bigger product (the car). He had the choice between
creating a new car to put his fuel injection system into, or license his invention out to the big players of the
automobile industry. The latter was of course the better way, even though the car manufacturers prove to
be difficult to negotiated with. In the end, Sarich accomplices his goal and license his invention out to
General Motors and Ford just to mention a few.

What were OECs strengths and weaknesses?
Size: OEC managed to growth rapidly in size through loans from the Western Australia government as well
as funding and stocks. They needed the size to be taken seriously by the automobile industry and to be able
to supply the possible future demand.

Location: OEC decided to move to Michigan after the Australian Federal Government failed to give them
incentives to stay. This brought OEC closer to Chicago and Detroit where the largest two manufacturers of
American cars were located (Ford and General Motors). They benefitted from this closeness by being closer
to the action and the decisions. Its easier to cooperate with a company thats located near you, than on
the other side of the world in Australia.

How would you evaluate OECs strategic use of patents and licenses?
Think fx about:
- How important were patents to OEC for this invention, and why?

Patents were extremely important to OEC for this invention. They made their money through the royalties
extracted from licensing the invention out. No one in the resourceful automobile industry would care to
license an engine, if it wasnt protected. They would have the resources to develop a similar engine
themselves and save the licensing costs. So the patents were at the center of OECs success, and the
extensive patent portfolio of more than 500 patents proved to be a successful IPR strategy.

- What other appropriability strategies did OEC use (or could have used)?
- What would you have recommended?
CASE: BitTorrent

Howard Business Review

Abstract:
The case involves the copyright issues associated with Bram Cohen's revolutionary software
program BitTorrent, which makes it possible to transfer very large files, such as movies, at a high
speed over the Internet. The program, which is available for free over the Internet, is used for
peer-to-peer sharing of movies and music and for the legitimate distribution of licensed software,
including games.

The case also discusses the litigation against Napster and Grokster over peer-to-peer sharing, as
well as cases against Google in connection with its efforts to digitize entire libraries to facilitate
electronic searches.

Subjects Covered:
Business models
Copyright
Intellectual capital
Internet
Legal aspects of business
Litigation

Take outs

Introduction music and video distribution
Even though the music labels and movie studios had successfully sued MP3.com, Napster, and
Grokster for copyright infringement, many coders thought that the digital distribution of music
still held promise.
However, the purveyors of digital video still faced two technological hurdles: Bandwidth and data
hosting costs. One of the biggest obstacles to monetizing Web-distributed movies was the cost of
sending huge digital files in a steady stream to hundreds if not thousands of users who often
requested a copy at the same instant.

Bram Cohen had come up with the answer: A software program that identified every person
seeking a specific piece of digital content then teamed their hard drives and broadband
connections to transfer the file in simultaneous packets. It was called BitTorrent, and significantly
accelerated the transfer speeds of digital content, including software, console-based video games,
music, high-resolution photography, and digitized video.

Monetization of BitTorrent
Ashwin Navin, who was instrumental in helping realize the potential to fully monetize BitTorrent:
On a fundamental level, BitTorrent is a publication tool.

To encourage other programmers to use and refine the BitTorrent code, Cohen had created
BitTorrent in the spirit of the open source movement and granted a free license to anyone who
wanted to improve the program or even distribute it. The only payments Cohen initially received
were optional donations from its users and proceeds from the $20 blue-and-black T-shirts he sold
from his house in Bellevue.
As Cohen pointed out: It wasnt so much the fact that BitTorrent was open source that made it
potentially difficult to monetize. The fact that its software makes it difficult to monetize. When
youre in high-tech, theres a period where you have an opportunity to build a tremendous
business very fast, but a huge business can also disappear very quickly, so your chances of success
are inherently quite volatile.

Legal issues
Despite its potential, BitTorrent had a serious shortcoming: A large percentage of BitTorrents
early adopters used the software to rapidly trade illegal versions of copyrighted movies and
music. On December 15, 2004, the Motion Picture Association of America (MPAA) had brought
lawsuits against some of BitTorrents heaviest users who had contributed to the industrys
estimated $860 million in losses in that year alone.

Still, several film industry executives recognized how potentially valuable BitTorrent could be as a
distribution medium and responded positively to Navins overtures to meet to discuss plans for a
legitimate online marketplace for fast digital downloads. Therefore, Navin retained the
entertainment lawyer Fred Davis to broker introductions with the studios and major record labels
to try to secure licenses to sell albums and movies.

However, VCs were very afraid of being suedthey are in the business of taking tremendous
financial risk, but they are not in the business of taking tremendous legal risks. The legal issues
were a concern from the very beginning. Cohen explained, It would be ridiculous to be working in
a space that is notorious for having all kinds of legal problems all over the place and not worry
about that. As Navin recalled, this was a matter of necessity, rather than a cavalier approach.
BitTorrent Seeks Venture Capital

Chao from the VC firm, Doll Capital Management (DCM), viewed BitTorrent as having an
important competitive advantage. There are 40 million people using the software so they
naturally get a lot of traffic to begin with. The brand is very strong and has a lot of goodwill and
value in it.
Chaos first focus was the legal strategy. They agreed that it was very important to make it clear to
the content providers they had always wanted to be legitimate, which had also been the intent all
along. BitTorrent was also careful not to do anything that would make it difficult for content
providers to enforce their copyrights. Navin elaborated: We had a framework in mind to make
our tools even more copyright-friendly going forward. We let them know that our future direction
was consistent with our past in providing great technology that democratizes the publication and
distribution of content.

Still, the legal issues surrounding BitTorrent were no small affair. Chao was keen to avoid a similar
outcome as he had seen was the case for Napster.

This case (Napster (2), along with the case of Grokster (3), Google (4) and the general situation
regarding distribution of music (1) is elaborated below:
1) Digital Distribution of Music

The march of technology had been a mixed blessing for the music industry, as piracy had
simultaneously eroded the profit potential of the music media. Only 598.9 million music CDs
were sold in 2005, and by some estimates, music industry revenue would drop from $14
billion in 2001 to $11 billion in 2010.

Digital piracy:
MP3 files could be created in just minutes through a process called ripping. Once
computer owners converted the contents of a CD into the MP3 format, the new file then
resided on a computers hard drive and could be played, duplicated and, most importantly,
e-mailed as an attachment to anyone online. Over time, a range of new technologies
coalesced to accelerate the mass appeal and adoption of the MP3 format. These included
faster Internet connections; free, consumer-friendly MP3 software and CD burners.

The Music Industry Strikes Back:
In response to what it viewed as digital theft on an unprecedented scale, the music industry
pursued two strategies.

Digital security technology: One was to develop a backward-compatible standard for

encrypting audio files on future CD releases.
Litigation: The other was to sue the Internet companies that posed the largest
financial threats to the major labels

2) Napster
The wildly-successful peer-to-peer service Napster was sued for both contributory and
vicarious copyright infringement in the early 00s.

CEO, Eileen Richardson, response: We are about enabling amateur and unknown artists to
share their music on this new medium. Our job is not to stop pirating; that is your job

People who never would have considered shoplifting a CD from a store appeared to have
few qualms about downloading music files without paying for them. The prevailing
impression at the time among Napster users was that most musicians were already
millionaires and that file-sharing did not materially impact their incomes or careers.

Still, the music industry alleged that Napster had vicariously infringed on musicians
copyrights and had contributed to the direct infringements by its 70 million users. In
defense, Napster cited the Sony Betamax case and contended that its service was protected
by the fair use provision of the Copyright Act.
Hank Barry, an attorney by training with experience in a law firm, then replaced CEO
Richardson. Napster now appeared ready to make a deal with the music industry and morph
into a legitimate digital music distribution service.

However, after Napster failed to install a filtering system adequate to prevent the ongoing
transfer of infringing files, the District Court ordered Napster to disable its file transferring
service in March of 2001. That order was upheld by the Ninth Circuit in March of 2002. Less
than three months later, Napster filed for bankruptcy.

3) Grokster
Grokster allowed its users to search the hard drives of other users directly to find music files
without routing through a central file index. As a result, even if firms like Grokster closed
their doors and deactivated all computers within their control, users of their products could
continue sharing files with little or no interruption.
Unlike Napster, which did not have an opportunity to monetize its subscriber base before
being forced into bankruptcy, Grokster sold online advertising from the outset. Grokster
showed ads to its captive audience of users while they waited for requested songs to
download. The advertising generated a clear revenue stream.

Eventually, complains alleged that the company was in business to encourage, enable, and
profit from the copyright- infringing activities of people who used the products.

At trial, Groksters attorneys used the Sony case as the foundation of their clients defense.
They argued that Groksterlike the Sony Betamaxhad substantial non-infringing uses.
Moreover, because Grokster did not maintain a central server and did not track which files
were being swapped, they argued that Grokster was not responsible for the misuse of its
software.

Therefore, in 2003 the U.S. District Court for the Central District of California surprisingly
decided that Grokster was not liable for contributory or vicarious copyright infringement,
because Grokster had no central index and did not track the files being transferred by its
users. The Ninth Circuit concluded that it did not have this requisite knowledge to be found
liable. Grokster did not have the right and ability to supervise its users. Unlike Napster,
Grokster did not operate and design an integrated service that it monitored and
controlled. It had no ability to actually terminate access to file-sharing functions.

The Ninth Circuit explained the public policy considerations that informed its decision: The
introduction of new technology is always destructive to old markets, and particularly to
those copyright owners whose works are sold through well-established distribution
mechanisms. Yet, history has shown that time and market forces often provide equilibrium
in balancing interests. It also acknowledged that the more artistic protection is favored;
the more technological innovation may be discouraged.

However, when Grokster launched its system, it had inserted digital codes into its web site
so anyone doing keyword searches for Napster or free file sharing would be directed to
the Grokster site, where they could download its software. Grokster also sent its users a
newsletter promoting its ability to provide particular, popular copyrighted materials. Also,
Groksters name, the Court found, was an apparent derivative of Napster.

Ultimately, the Court concluded that Groksters efforts were designed to attract former
Napster users who had lost the mechanism for copying and distributing what were
overwhelmingly infringing files, indicating a principal, if not exclusive, intent . . . to bring
about infringement.

Groksters management admitted defeat, settled the outstanding infringement lawsuit for
$50 million, and shut down its service.

4) Google: Book Search and Image Search

Books:
In December of 2004, Google had announced its plan to digitize the entire holdings of five of
the western worlds major libraries to help fuel Google Book Search.
Although Google touted the plans benefit to the public, there were many who believed the
project constituted copyright infringement on a massive scale. Google had hoped it would
be able to create an iTunes for books, but that paradigm was risky for the book industry. In
its defense, Google claimed that the fair use exception allowed it to create and use its digital
card catalog.

Images:
Google launched its own image search function in 2004. In response to queries for various
keywords, Googles browser would display the results in a grid of thumbnail images.
Although users could enlarge the thumbnails, the files lost their clarity when enlarged. The
image shown within Googles own frame was delivered through an automated link to the
original web page on which the original image was found.
When these same images showed up on Googles images page, users who might have been
paying cellphone wallpaper customers could simply right-click and save the appropriately-
sized photographs to their computers for free. Google argued it had the same right to show
images in search results that media outlets have when it comes to displaying copyrighted
images in news stories.

Video:
In the spring of 2005, Google, Inc. launched Google Video, a service that enabled users to
post streaming video and, if they so chose, to offer it for sale. Google Video also let users
search for the content of television programs, the next step in the companys efforts to
make a broad range of information available from a growing number of sources, ranging
from text and still shots to television programs.

Exhibit 1: Summary of Copyright Law

The U.S. Copyright Act of 1976 gave copyright holders the exclusive right to control the reproduction,
modification, distribution, public performance, derivative use, and public display of their works.
Meritorious infringement claims could be brought based on three separate theories:

Direct copyright infringement occurred when a person directly violated any of the copyright holders
exclusive rights. For example, bootleg cassette and CD manufacturers that sold pirated cassettes
and compact discs containing copyrighted music without obtaining permission for such a sale directly
infringed the copyright holders right to reproduce his or her work.

Contributory copyright infringement occurred when a person knowingly contributed to the directly
infringing conduct. For example, an electronic bulletin board service was found liable for
contributory infringement when it encouraged subscribers to upload images from Playboy magazine
so other bulletin board subscribers could download them for free.

Vicarious copyright infringement occurred when a person had the right and ability to control the
direct infringers actions and reaped financial benefits from those actions. For example, courts had
held that swap-meet organizers met the threshold of vicariously infringement if they knowingly
created and administered a market in which bootleg music was bought and sold and had accepted a
flat fee for admission. The swap meet owner was liable even though it did not receive any of the
proceeds from the illegal sales.

Exhibit 2: Fair Use

Limitations on Exclusive Rights: Fair Use

The fair use of a copyrighted work, including such use by reproduction in copies or phonorecords or by any
other means specified by that section, for purposes such as criticism, comment, news reporting, teaching
(including multiple copies for classroom use), scholarship, or research, is not an infringement of copyright.
In determining whether the use made of a work in any particular case is a fair use the factors to be
considered shall include;

(1) the purpose and character of the use, including whether such use is of a commercial nature or is for
nonprofit educational purposes;
(2) the nature of the copyrighted work;
(3) the amount and substantiality of the portion used in relation to the copyrighted work as a whole;
and
(4) the effect of the use upon the potential market for or value of the copyrighted work. The fact that a
work is unpublished shall not itself bar a finding of fair use if such finding is made upon
consideration of all the above factors.

Case work

The case involves the copyright issues associated with Bram Cohen's revolutionary software
program BitTorrent, which makes it possible to transfer very large files, such as movies, at a high
speed over the Internet. The case also discusses the litigation against Napster and Grokster over
peer-to-peer sharing, as well as cases against Google in connection with its efforts to digitize
entire libraries to facilitate electronic searches.

The text covers the issues companys face when managing intellectual properties both when it
comes to formulating a strategy in the startup face, but also when it comes to holding on to an
advantageous position gained from an original business model. Digitization and global digitization
has made the market for ideas increasingly dynamic, constantly pushing boundaries of the
definition of what goes under the category of fair use and what can be copyrighted. Thus many
industries are facing new challenges when it comes appropriating from their innovations and to
enforce copyrights. As a result of digital disruption, many historically successful business models
are becoming less competitive.

Related articles in this respect are:
Copying and copyright by Varian, Hal R. (2005) In regard to: Technological progress vs. IP
management + fair use + solving the problem
The 3-D printing revolution by DAveni, R. (2015) in regard to: Technological progress vs. IP
management

The choice between formal and informal intellectual property by Hall, B., Helmers, C.,
Rogers, M., Sena, V. (2014) In regard to: BitTorrent and their first mover advantage
informal property
Protecting growth options in dynamic markets: The role of strategic disclosure in integrated
intellectual property strategies by Peters, T., Thiel, J. and Tucci, C.L. (2013) In regard to:
Dynamic markets
Profiting from technological innovation: Implications for integration, collaboration,
licensing and public policy by Teece, David J (1986) In regard to: Monetization of
BitTorrent

Strategic management of intellectual property: an integrated approach by Fisher, W.W.
and Oberholzer-Gee. (2013) In regard to: Focusing on IP management form the beginning

Reflections based on syllabus

In regard to: Technological progress vs. IP management + fair use + solving the problem
Copying and copyright by Varian, Hal R. (2005) session 4
In regard to: Technological progress vs. IP management
The 3-D printing revolution by DAveni, R. (2015) Session 1

Today most newly created textual, photographic, audio and video content is available in digital
form. At the same time, the world has become more networked, making it easy to transfer digital
content from one person to another. As Varian (2005) in the paper Copying and copyright points
out, the combination of technological progress in both digitization and computer networking has
been a challenge for traditional ways of managing intellectual property. Some observers have
even questioned whether current models for intellectual property can or should survive in a digital
world. For example, there is widespread concern about piracy of popular music and film. This issue
is being covered in the case of BitTorrent and the supplementary litigations against Napster,
Grokster and Google being discussed in the case.

A lot has happened since the present time in the case and especially the subscription-based
business models of companies such as Spotify and Netflix have shown potential to solve the
problem of creating enough value for costumers to not consider piracy. However, there is no
doubt, that piracy still is a great issue in the music and video business. And at the same time new
challenges are constantly evolving, again asking the question whether intellectual property can or
should survive in a digital world most recently, 3D Printing.

Richard DAveni touches this subject in his paper The 3D Printing Revolution, forecasting that 3D
printing will have enormous effect on patenting, design protection and branding. When the
valuable designs for printable products are purely digital and easily shared, it will be hard to hold
tight.

This is very much also the case of the litigations described in the case of BitTorrent in regard to the
distribution of music. People who never would have considered shoplifting a CD from a store
appeared to have few qualms about downloading music files without paying for them. The
prevailing impression at the time among Napster users was that most musicians were already
millionaires and that file-sharing did not materially impact their incomes or careers. These are
issues companies are very likely also to face as the 3D-printing technology will improve: What
happens to the concept of product generations, when things can be upgraded continually during
successive printings?

As with the litigations descried in the BitTorrent case, the term fair use was, and most likely
continually will be, a great matter of discussion. Fair use covers:

1. Purpose and character of the use (for example commercial or non profit educational
purposes)
2. Nature of the copyrighted work
3. Amount and substantiality of the portion used in relation to the copyrighted work as a
whole
4. Effect of the use upon the potential market for or value of the copyrighted work

Copyright is, specifically, a prohibition against copying a work. But what about loaning a work or
selling a used copy? What about home copying for personal use? What about quoting a work or
satirizing a work?
Loaning a work generally falls under the doctrine of first sale, which allows the purchaser of a
work subsequently to do with it what he desires. This doctrine gives a legal basis for libraries and
other forms of institutional sharing. Renting a work falls under the same doctrine. The last two
uses of a work run up against free speech issues and are normally counted as fair use.

Peoples perception about what they consider fair use will continue to change. Now that most
information is born digital and that digital information is typically very easy to copy and distribute,
it is conceivable that copyright laws may become almost impossible to enforce. How might sellers
support themselves in such an environment?

Varian (2005) presents a brief list in the paper Copying and copyright of business models that
might work in a world without effective copyright. Of these the following have shown potential in
solving the problem of the illegal distribution of music and video content: 1) Subscriptions, 2)
make the original cheaper than a copy, 3) advertise other things, 4) sell information
complements.

Exemplified by Spotify, the service has managed to make the original cheaper than the copy
through their subscription business model (1), as the service is much more convenient and
involves no risk, and therefore is cheaper than the copy in a value, none-monetary sense (2).
Also they run advertisements (3) and often attract people through a limited temporary license,
acting as an addictive complement to the full, limitless version (4). Recently the Spotify-service
has also become a part of many mobile deals.

So even though, the increased availability of content (due to the reduction in the cost of creating
and distributing it) will presumably increase competition and reduce the price consumers pay for
legitimate access to content, it is highly unlikely that free content alone will meet all of societys
needs for music content.
This point is also used in the BitTorrent case by the Ninth Circuit when explaining the public policy
considerations that informed its decision of not finding Grokster liable for contributory or vicarious
copyright infringement in 2003: The introduction of new technology is always destructive to old
markets, and particularly to those copyright owners whose works are sold through well-
established distribution mechanisms. Yet, history has shown that time and market forces often
provide equilibrium in balancing interests. It also acknowledged that the more artistic protection
is favored; the more technological innovation may be discouraged.

In regard to: BitTorrent and their first mover advantage informal property
The choice between formal and informal intellectual property by Hall, B., Helmers, C., Rogers, M., Sena, V.
(2014) (session 4)
In regard to: Monetization of BitTorrent
Profiting from technological innovation: Implications for integration, collaboration, licensing and public
policy by Teece, David J (1986) (session 6)
In regard to: Dynamic markets
Protecting growth options in dynamic markets: The role of strategic disclosure in integrated intellectual
property strategies by Peters, T., Thiel, J. and Tucci, C.L. (2013) (session 6)

The survey-based evidence in the paper The choice between formal and informal intellectual
property by Hall et.al (2014) indicates that companies report heavier reliance on alternative
mechanisms (than formal IPRs), such as lead time, first mover advantage and secrecy by which
they appropriate rewards to invention and innovation and the available empirical evidence
suggests that firms rely on these alternative mechanisms much more than on formal IP.

This point is exemplified in the BitTorrent case. BitTorrent had a first mover advantage and also
fast lead time, which caused the program to have its enormous amount of users. These were the
main reasons why the VC, Chao, showed great interest in specifically BitTorrent: There are 40
million people using the software so they naturally get a lot of traffic to begin with but when these
users want to upgrade theyll have to come to the BitTorrent site, which they can leverage. The
brand is very strong. If you go outside the U.S., yes, there are other BitTorrent clients available but
when we go into business development meetings with some of the major portals abroad, they
dont want to work with the small BitTorrents; they want to work with the original guys. So being
the real deal actually has a lot of goodwill and value in it.

However, there is little doubt that a first mover advantage alone and quick lead time is not a
guarantee for success. In fact, it is often found that innovating first-to-market firms often fail to
obtain significant economic returns from an innovation, while customers, imitators and other
industry participants benefit. This tendency is examined by David Teece in his paper Profiting
from technological innovation: Implications for integration, collaboration, licensing and public
policy.
As Cohen pointes out in the case: It wasnt so much the fact that BitTorrent was open source that
made it potentially difficult to monetize. The fact that its software makes it difficult to monetize.
When youre in high-tech, theres a period where you have an opportunity to build a tremendous
business very fast, but a huge business can also disappear very quickly, so your chances of success
are inherently quite volatile. Therefore, understanding how firms profit from innovation is
essential, when formulating their strategy.

According to Teece the profitability of your innovation depends on 1) the appropriability regime,
2) the dominant design paradigm and 3) complementary assets. Even though these key concepts
are still relevant for traditional industries, it is important to notice that the case of the companies
described in the BitTorrent case is a matter of digital disruption, which has caused many
historically successful business models to suddenly becoming less competitive. Teeces view on
what drives profitability from innovations and his key concepts therefore need to be adapted to
these new conditions in the market place.

As Peters el.al. (2013) point out in their paper Protecting growth options in dynamic markets: The
role of strategic disclosure in integrated intellectual property strategies, consumers have
increased access to the internet, while companies have access to more data from their customers
changing the way companies and consumers interact globally. This has caused a much more
dynamic market for ideas.

The influence of digitization and globalization has chanced the market conditions and the focus
and view on innovation tremendously. Traditionally innovation was a matter of products and
processes. However, service economy and business model innovation is becoming increasingly
important. Obvious examples are Netflix, Spotify, Uber, Airbnb. Using the key concept on Teece,
we find that:

1. Traditionally, success in tight appropriability regimes with high tacit knowledge and
extensive intellectual property protection is realized through an innovative product and/or
process and the complementary assets around it.
However, success is increasingly being realized through business model innovation, and the
digitization and globalization has brought more weak appropriability regimes and less tacit
knowledge. As result, advantageous appropriability regimes are not always characterized by
strong intellectual property protections, as legal instruments are not always applicable or
extremely hard and expensive to enforce.

2. In regard to the Dominant design regime, traditionally the main focus in the pre-
paradigmatic stage is on product innovation, whereas in the paradigmatic stage, focus is on
the process innovation.
Now, however, a clear dominant design has become harder to keep. The pre-paradigmatic
phase is characterized by very dynamic markets and evolving consumer needs, including
wants to change the dominant design often. In paradigmatic phase, tendency is, that success
emerges not always from prices but from the user base and the ecosystem around the
service which increase the switching costs for users, i.e. Apple and Google.

3. Traditionally, specialized complementary assets were within the firm and/or gained from
partnerships that helped to profit from innovation. Building the complementary asset
network required resources, and thus bigger companies had an advantage over smaller
companies.
Now, often complementary assets can be reached with less resources. Sharing economy
allows consumers to take part, emphasizing the importance of building your networks. As a
result, smaller companies can also profit. Also the importance of intangible assets that are
not easily copied e.g. brand name, value and user base has increased, has become
increasingly valuable compared to cost-advantages.

Due to the reduced costs as a result of the digitization and globalization it is easier for smaller
companies to build ecosystems and reach large amounts of consumers. Digitization has changed
the complementary assets companies posses e.g. marketing channels, distribution networks and
manufacturing. As pointed out by Chao, BitTorrents greatest advantage is their brand and
goodwill, which is a result of BitTorrent to being first to market. However, the technology is not
novel and imitation of it is relatively unproblematic. Therefore, focusing on complementary assets
and integrating their technology in some kind of ecosystem along with further improving brand
value are considered important aspects in BitTorrents attempt of catching rents drom their
innovation in a very dynamic and fast-paced market.

In regard to: Open Source
SMIT: Chapter 9: Protecting Innovation: Melissa A. Schilling
In regard to: Focusing on IP management form the beginning
Strategic management of intellectual property: an integrated approach by Fisher, W.W. and Oberholzer-
Gee. (2013) (session 1)

wanted to improve the program or even distribute it. Using the terms we learned from the SMIT-
course last semester, Cohen, in other words, chose to exploit the advantages of diffusion by
practicing an open source strategy. In some situations, diffusing a technology may be more
valuable than protecting it. Taken the fast-paced technological development and the fact that
BitTorrent works faster, the more people that use the program, this is possibly the reason why
Cohen chose to disclose the technology, as this often cause more rapid adoptions. However, once
control is relinquished it is typically difficult to reclaim. Fragmentation of the technology may
result, which is also the case of the peer-to-peer BitTorrent technology. This is important to take in
to account, when formulating BitTorrents strategy.

Another important issue is obviously the legal aspects of the technology. Therefore, the legal
strategy was also the very first thing Chao focused on when joining BitTorrent. This is in
accordance with the concluding points of Fisher and Oberbolzer-Gees (2010) paper. Here they
conclude, that if managers and lawyers engaged earlier with one another, products and services
could be designed in a way that reflects not just market demand, but also the legal opportunities
to exploit the resultant IP.

However, had Cohen not disclosed the innovation straight from the beginning but in stead sought
counselling from an attorney, there might had been more opportunities for strategy formulation.
(discuss these). On the other side, BitTorrents greatest advantage is their brand and its enormous
number of users as Chao points out. Could BitTorrent had secured licenses to sell albums and
movies, the potential would have been great. Eventually, this has proven not be case.

Instead they have informal intellectual property.

Questions for the case
1. When, if ever, would sharing copyrighted files constitute fair use?
2. If you were David Chao, would you invest in BitTorrent? Why?
3. If you had been the CEO of Google Inc., would you have authorized either the Google Book
Search or the Google Image Search projects?

1) When, if ever, would sharing copyrighted files constitute fair use?

Fair use
5. Purpose and character of the use (for example commercial or non profit educational
purposes)
6. Nature of the copyrighted work
7. Amount and substantiality of the portion used in relation to the copyrighted work as a
whole
8. Effect of the use upon the potential market for or value of the copyrighted work

2) If you were David Chao, would you invest in BitTorrent? Why?

wanted to improve the program or even distribute it. Using the terms we learned from the SMIT-
course last semester, Cohen, in other words, chose to exploit the advantages of diffusion by
practicing an open source strategy. In some situations, diffusing a technology may be more
valuable than protecting it. Taken the fast-paced technological development and the fact that
BitTorrent works faster, the more people that use the program, this is possibly the reason why
Cohen chose to disclose the technology, as this often cause more rapid adoptions. However, once
control is relinquished it is typically difficult to reclaim. Fragmentation of the technology may
result, which is also the case of the peer-to-peer BitTorrent technology. This is important to take in
to account, when evaluating the value of BitTorrent.

Another important issue is obviously the legal aspects of the technology. Had Cohen not disclosed
the innovation straight from the beginning but in stead sought counselling from an attorney, there
might had been more opportunities for strategy formulation, i.e. exercising market power, selling
or licensing. On the other side, BitTorrents greatest advantage is their brand and its enormous
number of users as Chao points out. Had Cohen not chosen to practice his open source strategy,
BitTorrent possibly would not have reached its valuable scale.

Could BitTorrent had secured licenses to sell albums and movies, the potential would be great, as
downloading files that big had been basically impossible until this point. Yet the technology also
has many more opportunities than just selling movies and music. As, Navin, who was instrumental
in helping realize the potential to fully monetize BitTorrent points out: On a fundamental level,
BitTorrent is a publication tool. Why Chao sees great potential in technology in the given time, is
therefore understandable, as the technology has substantial non-infringing uses.
However, the fact that the technology is relatively easy to imitate, is a big downside. On this issue
Chao points out: The brand is very strong. If you go outside the U.S., yes, there are other
BitTorrent clients available but when we go into business development meetings with some of the
major portals abroad, they dont want to work with the small BitTorrents; they want to work with
the original guys. So being the real deal actually has a lot of goodwill and value in it. Being a
well-educated and experienced business man, one must assume this argument is legit.

Therefore, if I was a VC managing a portfolio of projects with different levels of risk, I completely
understand why Chao chose to invest in the company, as the technology, given the time, had
extremely great potential.

3) If you had been the CEO of Google Inc., would you have authorized either the Google Book
Search or the Google Image Search projects?

Looking from a present perspective, the choice is obvious, as the projects have proven to be very
successful. This development illustrates the tendency described in the paper by Varian, as he
points out, that some observers have questioned whether current models for intellectual property
can or should survive in a digital world. The combination of technological progress in both
digitization and computer networking has been a challenge for traditional ways of managing
intellectual property, and it is pushing boundaries of IP every day.

However, taken the time in perspective, it easy to understand why the authors and the picture
owners felt infringed. In that respect it is interesting to refer to the points from the BitTorrent case
by the Ninth Circuit when it explained the public policy considerations that decided its decision of
not finding Grokster liable for contributory or vicarious copyright infringement in 2003: The
introduction of new technology is always destructive to old markets, and particularly to those
copyright owners whose works are sold through well-established distribution mechanisms. Yet,
history has shown that time and market forces often provide equilibrium in balancing interests. It
also acknowledged that the more artistic protection is favored; the more technological
innovation may be discouraged.

Given Googles extremely strong position and the pace of which the internet was, and still is,
developing, I believe this is the kind of reasoning, that ended up favoring Google in court. And
knowing this, I would have authorized the projects as well, if I was running Google.

CASE: Lego Group: Publish or Protect?

Abstract:

Senior managers at the LEGO Group are faced with a quandary concerning IP management of their
manufacturing processes:
1. Should they patent inventions coming out of their manufacturing process development
work?
2. Should they keep them as trade secrets?
3. Or should they publish them so that they would go into the public domain and nobody else
could patent them?
They wish to preserve their freedom to practice, but they are very concerned about competitors'
ability to benefit from LEGO Group's R&D investments or alternately interfere with its freedom to
operate (FTO).

The absolute worst case would be if we come up with an innovation and then our competitors use
it, or even worse, they prevented us from using it!

Take outs:
LEGOs engineers had come up with significant innovations that improved both the speed and
precision of their manufacturing processes, but the executives were uncertain on whether or how
to protect these new inventions.

The industry is extremely dynamic for something that was supposed to be as mature as plastic
injection molding, change seemed to be coming at a rapid pace. The pace of internal innovations
had picked up as well. Two broad technological thrusts in the industry presented distinctive
challenges.

1. Asian injection molded plastics producers had largely shifted to electric drive from
hydraulic drive machines. Independently, LEGO engineers had perfected some inventions
that afforded the possibility of dramatically better tool life and performance. The
inventions were independent of whether the company used hydraulic or electric drive,
though hydraulic drive stood to benefit more because of the difficulty of getting in the
control loop.

2. The circumstances in the field of additive manufacturing were quite different. Three-
dimensional manufacturing (3D) had attracted so much interest that it was shaping up to
become a patent minefield. The LEGO Group had selected a particular tool supplier
because it appeared to have the leading and most formidable patent position on the 3D
methods. Since toolmakers nominally indemnified their customers from patent risks,
Hvsgaard felt this choice held out the prospect for the greatest freedom to practice. Since
LEGO often pushed against the limits on tool design in the use of advanced tooling
systems, it also came up with numerous innovations during the course of its development
activities. So here the question was how much to share with its tool supplier.

Despite different circumstances around these two streams of technological change that the LEGO
Group was investing in, the need to protect these inventions was becoming urgent. We dont
want to teach our competitors to do what we do in places where we consistently drive down
costs. How should we drive our molding platform and protect it? There were several alternatives,
but the choice was far from obvious. They wish to preserve their freedom to practice, but they are
very concerned about competitors' ability to benefit from LEGO Group's R&D investments or
alternately interfere with its freedom to operate. The alternatives were:

1. Patenting:
One of the most common methods companies employed to protect their intellectual
property (IP) was patenting. Patent grants gave inventors an exclusive period of benefit (20
years in the U.S.) in exchange for disclosure of the invention. The idea was that others
could build on the knowledge embodied in the patent, either with proper compensation (in
the form of licensing) or after the expiration of the patent exclusivity period.

By filing lots of patents, the LEGO Group could also get some assurance of freedom to
practice by having IP to trade with other patent holders (in the form of a cross-license) in
case it needed access in the future to cutting-edge technologies developed by others. This
was what economists called a real option.

However, there were some drawbacks to this approach. In addition to the cost of filing and
maintaining a patent, public disclosure of the invention could encourage competitors to
copy or imitate by making minor changes or small incremental inventions.
It was also sometimes difficult to prove infringement of manufacturing process-based
inventions because their use was hard or impossible to detect.

The culture in the LEGO Groups manufacturing division did not favor this direction. Our
core is the minifigurines and bricks. Our culture is not about trading,

2. Trade secret
One way to avoid public disclosure of inventions as well as associated expenses was by
maintaining the inventions as trade secrets.

This was a risky strategy. Employees who left a company carried knowledge in their heads
with them, so they posed a spillover risk. Job swapping in these environments was a
significant problem, as employees in search of better compensation and benefits carried
tacit knowledge out the companys door and into the competitors. In a worst-case
scenario it ran the risk of losing its freedom to operate if imitative competitors succeeded
in appropriating and patenting the companys inventions.

3. Strategic disclosure
A third possible route was simply publishing inventions. A cheaper alternative to patenting,
publishing inventions established them in the public domain as prior art, which meant
nobody else could patent them. This provided some measure of freedom to operate,
though if a competitor should develop a patent portfolio that the LEGO Group needed
access to, it would not have as much in its portfolio to trade. The LEGO Group would also
essentially be giving away the fruits of its R&D, without recovering any potential license
income to offset the costs.

Case work - Lego:

Senior managers at the LEGO Group are faced with a quandary concerning their production
processes:
1. Should they patent inventions coming out of their manufacturing process development
work?
2. Should they keep them as trade secrets?
3. Or should they publish them so that they would go into the public domain and nobody else
could patent them?
They wish to preserve their freedom to practice, but they are very concerned about competitors'
operate.

Related articles in this respect are:
The critical role of timing in managing intellectual property by Lemper, Timothy A.,
Business Horizons (2012) In regard to: Aspects of patents and trade secrets
Protecting growth options in dynamic markets: The role of strategic disclosure in integrated
intellectual property strategies by Peters, T., Thiel, J. and Tucci, C.L. (2013) in regard to:
Their considerations of disclosure and their want for freedom to operate

and Oberholzer-Gee. (2013) In regard to: Options of IP holders and appropriability + why
IP is important to consider from the beginning + patenting vs. trade secrets

licensing and public policy by Teece, David J (1986) in regard to: How to move forward
while minimizing the chances of being copied

Discussion what should LEGO do?

LEGO wish to preserve their freedom to practice, but they are very concerned about competitors'
operate. When including IP management in strategy formulation, managers should generally
consider the following issues:

1. Research to see if knowhow, brands, inventions etc. are new (novelty test)
2. Determine which ways the different IP rights can be protected
3. Determine the value of each of the IP assets
4. Prioritize the IP rights
5. Apply and otherwise ensure your IP rights

In the following section the pros and cons of LEGOs three options of either 1) practicing patents,
2) keeping the manufacturing process as a trade secret or 3) to alternatively disclose their IP are
presented and discussed in regard to the issues stated above.

1) Patent:

One of the most common methods companies employed to protect their intellectual property (IP)
was patenting. Patent grants gave inventors an exclusive period of benefit (20 years in the U.S.) in
exchange for disclosure of the invention.

Pros:
By patenting, others could build on the knowledge embodied in the patent, either with
proper compensation (in the form of licensing) or after the expiration of the patent
exclusivity period.

By filing lots of patents, the LEGO Group could also get some assurance of freedom to
practice by having IP to trade with other patent holders (in the form of a cross-license) in
case it needed access in the future to cutting-edge technologies developed by others. This
was what economists called a real option.

Cons:

However, there were some drawbacks to this approach. Patents are by far the most time-
sensitive type of intellectual property. If the inventor wants patent protection for an
invention in several countries, he must obtain a patent for the invention in each country
(however, international patent laws make it easier to obtain patents for the same
invention in multiple countries). To add to the difficulty, each country has its own rules
about what constitutes public disclosure of an invention, including whether it applies to
disclosures in foreign countries or only to disclosures inside the country.

Patent owners are required to pay maintenance or renewal fees to maintain their patents
in many countries and the patent owner must be diligent in taking legal action against
those who infringe his patent. Even after a patent is granted, the patent owner may have
to defend its patent against competitors claims that it was improperly granted.

In addition to the cost of filing and maintaining a patent, public disclosure of the invention
could encourage competitors to copy or imitate by making minor changes or small
incremental inventions.

It is also sometimes difficult to prove infringement of manufacturing process-based
inventions because their use is hard or impossible to detect.

The culture in the LEGO Groups manufacturing division did not favor this direction. Our
core is the minifigurines and bricks. Our culture is not about trading,

2) Trade secret:

Pros:
One way to avoid public disclosure of inventions as well as associated expenses was by
maintaining the inventions as trade secrets.

Trade secrets are among the least time-sensitive forms of IP. Legal protection exists the
moment a business develops confidential proprietary information, so there are no legal
formalitiesno need to file an application or obtain a registration from the government,
for exampleto obtain trade secret rights. Furthermore, it obviously has no legal
expiration date.

Cons:
To protect trade secrets, a business must take comprehensive steps to maintain the
confidentiality of its information before it is disclosed, such as restricting access to
information, marking materials as confidential or trade secret, training employees
regarding the handling of confidential information, and requiring employees and trade
partners to sign confidentiality and non-compete agreements.

Ensuring trade secret protection for confidential information therefore often requires
significant planning, effort, and money. But the cost of maintaining the secrecy of
confidential information often pales in comparison to the cost of trying to repair the
damage once trade secret information is disclosed to others. Practicing very valuable trade
secrets is often a very risky strategy, as a trade secret is good only as long as it is kept.

In a worst-case scenario it ran the risk of losing its freedom to operate if imitative
competitors succeeded in appropriating and patenting the companys inventions. The
absolute worst case would be if we come up with an innovation and then our competitors
use it, or even worse, they prevented us from using it!

Once confidential information becomes sufficiently public, it ceases to be eligible for
legal protection as a trade secret. In such cases, trade secret owners can still seek
monetary damages against the party who publicly disclosed their trade secrets. But the
true value of a trade secret may often be hard to quantify. The most efficient and effective
way to manage trade secret information is to ensure that it remains a trade secret.

3) Strategic disclosure:

Pros:
A third possible route was simply publishing inventions. A cheaper alternative to
patenting, publishing inventions established them in the public domain as prior art, which
meant nobody else could patent them. This provided some measure of freedom to
operate (FTO).
Because patent applications are evaluated in light of the prior art, a firm trailing in a given
patent race has an incentive to disclose its research to the public. The incentive in this case
is not the conventional possible patent monopoly. The incentive is the possibility that by
disclosing information the laggard will create prior art that will in turn narrow or even fully
preempt any patent application the leader might ultimately file. While some firms may
consider having the power to prevent others from copying inventions to be an important
motive, many other actors are predominantly interested in a somewhat broader concept
of freedom to operate (FTO): The ability to compete in a fair marketplace on the merits of
the product without being excluded by opportunistic actors and frivolous patent litigation.

As alternatives to the prevailing dichotomy of patenting vs. secrecy, non-patenting
disclosure can sometimes either substitute for resource-intensive patenting or can be
combined to enhance the value of the patents. Publishing inventionseither in
conjunction with existing patents, or as a substitutecan yield significant benefits in
terms of speed, cost, and available options in the innovation and commercialization
process, thus helping protect and strengthen the market position of firms in highly
dynamic market environments.

Generally, disclosing IP is worth considering when FTO (freedom to operate) is a primary
consideration, reduction of patenting & litigation costs is a priority, when there is more
revenue from product related services than from product itself and when reverse
engineering is possible and there is uncertainty about the security of trade secrets.

Cons:
However, if a competitor should develop a patent portfolio that the LEGO Group needed
access to, it would not have as much in its portfolio to trade. The LEGO Group would also
essentially be giving away the fruits of its R&D, without recovering any potential license
income to offset the costs.

The benefits of strategic disclosure are generally limited when your business model is
dependent on licensing, you have a highly novel technology with near-term market
potential, you intend to seek outside or VC funding or when your technology has a
narrowly defined market application.

Reflection/discussion/conclusion:

The LEGO case is a discussion on whether they should 1) exercise their market power through
patenting or practicing trade secrets or 2) if they should disclose their IP.

Factors worth considering in regard to trade secrets vs. patents:

1. First, trade-secret protection is potentially infinite in duration, whereas a patent lasts only
for 20 years from the date the patent application is filed.
2. Second, maintenance of trade-secret protection will require the firm to impose
confidentiality obligations on its employees whose aggregate costs may well exceed the
costs of obtaining a patent.
3. Third, licensing the use of a trade secret is logistically more difficult than licensing the use
of a patent because the latter poses a smaller risk that the innovation will be inadvertently
released into the wild.
4. Finally, the choice between trade-secret protection and patents also hinges on the strength
of property rights. Because patenting involves the (partial) disclosure of information, the
likelihood of rival firms imitating a patented product increases if property rights are weak
and the innovation is particularly valuable. As a consequence, it can be optimal to patent
little ideas but keep the most promising innovations secret.

Ironically, even though the purpose of both these strategies is to protect the companys
intellectual property, they both include great risk, potentially creating increased incentives for
companies to replicate LEGOs manufacturing processes without violating the companys IP rights.

By practicing trade secrets, LEGO will run the risk of losing its freedom to operate if imitative
competitors succeeded in appropriating and patenting the companys inventions, as a trade secret
is good only as long as it is kept. As stated in the case: The absolute worst case would be if we
come up with an innovation and then our competitors use it, or even worse, they prevented us
from using it!. Thus by using trade secrets, LEGO will not only risk other companies using their
manufacturing processes but also they will not be able to use them themselves.
As a result, LEGOs high R&D costs will not just be wasted but they will also loose tremendous
strength in the market. Even though this strategy, if held secret, has the greatest potential in
terms of returns, this strategy seems too risky.

On the other side, as patenting involves the (partial) disclosure of information, the likelihood of
rival firms imitating a patented product increases if property rights are weak and the innovation is
particularly valuable. In this respect, it is important to notice, that it is sometimes difficult to prove
infringement of manufacturing process-based inventions because their use is hard or impossible
to detect. Also the fact that LEGO have comprehensive production capacity in China a country
traditionally known for practicing weak IP protection laws is a central issue.
So even though practicing patents, has great potential in terms of returns, not to mention the
assurance of freedom to practice by having IP to trade with other patent holders (real-options),
this strategy also involves great risks as public disclosure of the invention could encourage
competitors to copy or imitate by making minor changes or small incremental inventions. As
stated in the case: The culture in the LEGO Groups manufacturing division did not favor this
direction. Our core is the minifigurines and bricks. Our culture is not about trading,. As pointed
out, LEGOs (main) competitive advantages is based on their product, not on their processes.

The third possible route is simply to disclose their inventions. A cheaper alternative to patenting,
publishing inventions in the public domain as prior art, which means nobody else can patent them.
This will provide some measure of freedom to operate (FTO) a main concern of LEGO as stated in
the case. Publishing inventionseither in conjunction with existing patents, or as a substitute
can yield significant benefits in terms of speed, cost, and available options in the innovation and
commercialization process. However, disclosing their information as prior art, would exclude
LEGOs cross-licensing opportunities. If a competitor should develop a patent portfolio that the
LEGO Group needed access to, it would not have as much in its portfolio to trade. The LEGO Group
would also essentially be giving away the fruits of its R&D, without recovering any potential
license income to offset the costs.

To summarize: Trade secrets have the greatest prospects in terms of returns and market power,
but also in terms of risk. A risk that could potentially threaten the company and its business
model. Patents would also make LEGO capable of exercising their market power and it would
furthermore give the company several cross-licensing opportunities. However, enforcing the
patents seems challenging and also their is the risk of competitors inventing around the
companys disclosed inventions. Lastly, practicing strategic disclosure is cheaper and nobody
would be able to patent their inventions. It would give greater freedom to operate and could
potentially yield significant benefits in terms of speed and cost of further development. The
downside includes less negotiable power and also the fact that LEGO would basically be giving
away the fruits of its R&D, without recovering any potential license income to offset the costs.

Conclusion:
Given the fact that trade secrets are evaluated to be too risky and patenting is extremely
expensive and seems too challenging to enforce, these alternatives are found to be excluded and
surpassed compared to the pros and cons of simply publishing their inventions. As stated in the
text: Our core is the minifigurines and bricks. Our culture is not about trading (cf. cross-
licensing). This would mean (partially) giving away the fruits of their R&D, but also that no one
would be able to patent their inventions, and also LEGO would avoid the risk of wasting gigantic
sums and energy on ineffective patents. In stead the company would achieve greater freedom to
operate (FTO), thus being able to focus on the companys core business, its competitive
advantage, its brand, its bricks. A low risk, however, more long term and stable solution.
Case: 1366 Technologies: Scaling the
Venture

Abstract:
1366 Technologies is a company based in Bedford, Massachusetts that has developed a technique
to produce silicon wafers by casting them in their ultimate shape directly in a mold, rather than
the prevailing standard method in which wafers are cut from a large ingot. For some time, 1366's
co-founders, Frank van Mierlo and Ely Sachs, had faced a choice, which was now made all the
more stark:
1366 could expand to produce silicon wafers itself, raising the required capital from
"friendly" investors and building shipment volume slowly, or
1366 could accelerate its market entry dramatically by partnering with the Asian
manufacturers that had begun to dominate the world-wide solar industry.
While accelerated growth was attractive to 1366 and its current investors, the company believed
that it would face considerable risks if it were to expose its intellectual property to the "wrong"
partners. 1366 had no intention of losing control of its technology, but given the pace of
innovation and the active role of governments in the solar industry, 1366 feared this might not be
a race that could be won by the cautious.
Political influence Obama is talking about funding clean energy It is potentially a

lucrative industry. Obama says: by 2035, 80% of the nations energy should come from
clean sources
Competition Most of the competitors are located in China. China have lucrative subsidies
(free land, reduction in taxes), that makes it nearly impossible for outside competitors to
compete. Chinese solar companies grow faster and are more profitable than American.
Big market 1366 hope to become the global low-cost leader in the fast growing $25
billion per year silicon wafer market.

Problems
Grid parity definition: The point in time, at which a developing technology will produce
electricity for the same cost as traditional technologies.
Grid parity Solar power is expensive compared to coal and natural-gas.
Technological Innovation Fracking has doubled the amount of available gas.
Financial crisis Government and venture capitals may hold back on funding and
financing.
Why is 1366 successful? Stregnths:

Technological Innovation 1366 has invented a more effective solar cell that reduces
costs greatly, Direct Wafer. This manufacturing technology had the potential to
significantly boost solar cell conversion efficiency while simultaneously dramatically
reducing solar cell production costs. The technology provided a radically new way to
produce silicon wafers with less wasted material, cutting the total cost per watt of silicon
solar cells by more than 50%
Strong government support Department of Energy (DOE) has given cheap loans and the
government has given subsidies. They secured a $4M R&D grant from the US Department
of Energys ARPA-E program in October 2009
Good entrepreneurial team Experienced entrepreneur, Frank, and genius inventor, Ely.
IP protection 1366 have protected their innovation, however, they are afraid that the IP
wont be enforced in China (See Exhibit 7 about China and IPR).
The case:

1366 Technologies is a company that had developed a technique to produce silicon wafers by
casting them in their ultimate shape directly in a mold, rather than the prevailing standard method
in which wafers are cut from a large ingot. This manufacturing technology had the potential to
significantly boost solar cell conversion efficiency while simultaneously dramatically reducing solar
cell production costs.
1366 had the opportunity of producing the silicon wafers itself using its Direct Wafer production
technology. In this scenario, 1366 would need to build up a complete organization on its own
raising the required capital from traditional venture capital and growth equity investors.
Alternatively, 1366 believed that it could accelerate its market entry dramatically by raising money
from strategic investors in exchange for sharing 1366s unique equipment and process with one or
more of the high-volume Asian manufacturers that had begun to dominate the world-wide solar
industry.
Originally, 1366 had no intention of losing control of its technology, but given the pace of
innovation and the active role of governments in the solar industry, 1366 feared this might not be
a race that could be won by the cautious. Rapidly changing technology could cause their IP right to
become obsolete soon before 1366 had even become profitable and secured a position in the
market. China had lucrative subsidies (free land, reduction in taxes), that makes it nearly
impossible for outside competitors to compete. Also, Chinese solar companies grow faster and are
more profitable than American.
However, while exploiting their first mover advantage by accelerating growth was attractive to
1366 and its current investors, the company believed that it would face considerable risks if it
were to expose its intellectual property to the "wrong" partners.

Thus, even with a strong local partner, locating in Asia was not an obvious choice. Many
companies had lost their intellectual property advantage to unscrupulous local partners and
individual employees; the legal remedies permitted by the host governments were often quite
limited, and the operational protections for IP could nearly always be breached given enough
time. Worst case scenario, they could lose control and protection of their innovation, and also
they would ruin their relationship with the US government and the Department of Energy (DOE
had given cheap loans and the government had given subsidies). Of these reasons 1366 eventfully
chose to go with the DOE, the Go solo-approach.

They want high speed-to-market, but they also need control over their IPR to appropriate rents
from their invention. Why did they not consider a collaboration arrangement with an US partner?

CASE: X-IT and Kidde

Abstract:

The case involves the start-up company, X-IT Products LLC, whose founders had designed an
innovative, lightweight, and easy-to-use-yet strong-escape ladder.

After X-IT had filed a patent application for the ladder in the United States, X-IT was approached
by Kidde PLC, one of the largest vendors of fire protection products in the world. Negotiations to
license X-IT's invention or to buy X-IT ensued. The parties entered into a confidentiality
agreement, which gave Kidde's patent counsel access to X-IT's confidential patent application for
the narrow purpose of reporting to Kidde whether the patent claims were weak or strong.

After the X-IT founders saw Kidde representatives displaying a ladder at a major trade show that
was almost identical to X-IT's ladder, X-IT's CEO had to decide what to do next. Although suing
Kidde for violating the confidentiality agreement was an option, X-IT barely had sufficient cash to
fill orders, not to mention pay attorney fees.

Related articles:
From the syllabus, the following texts are relevant I relation to the case:

Slides from session 10 In regard to: Patent trolls/sharks


and Oberholzer-Gee. (2013) In regard to: The costs and risks of exercising market power +
options for IP non-holders, rapid dissemination

The critical role of timing in managing intellectual property by Lemper, Timothy A.,
Business Horizons (2012) In regard to: The implications of trade secrets (and patents)

The LEGO Case in regard to: LEGOs fear of competitors inventing around their
inventions and/or even patenting them.


licensing and public policy by Teece, David J (1986) in regard to: The fact that first movers
often loose
Summary:

X-IT is a company that makes fire escape ladders that are half the size, half the weight, and twice
as strong as the leading product. They had filed for a U.S. Patent in May 1998 and for intellectual-
property protection soon after. This new innovative product caught the attention of one of the
leading fire safety companies, Kidde PLC. X-IT, which had already been selling its product to stores
such as Kmart, Home Depot, and Amway.

In April 1999, Kidde contacted the X-IT to inquire whether or not they would consider selling its
ladder or entering into a business alliance which would allow Kidde to market the ladder in a joint
manufacturing or distribution arrangement. Around the same time, Kiddes Chinese manufacturer
had two copies of the X-IT ladder produced at a cheaper cost that what X-IT was paying. Following
this, on June 8, 1999, a confidentiality agreement was executed between the two companies
whereby X-IT would provide Kidde with information about its business, financial, and operational
conditions and Kidde would hold all such information confidential. However, when Kiddes offer of
$600,000 plus a $2 royalty per ladder offer was rejected by X-IT, Kidde began to investigate
whether or not they could produce their own version without violating any patent or intellectual
property.

Kidde used Charles Oslakovic, their outside patent attorney, to examine their patent and its
intellectual property strength. There was a nondisclosure agreement and Kidde agreed that
Oslakovic would not communicate the claims, specifications, or content of X-ITs application.
However, Oslakovic did provide information about the patent claims to Kidde, specifically
information about the design of the strap that held X-ITs ladder together, which was covered by
patent. The information provided to Kidde allowed them to design their own ladder without
violating X-ITs patent once it was issued.

When Kidde displayed their copy of X-ITs ladder at the National Hardware Show in Chicago in
August 1999, X-IT was stunned at their actions and when confronted about the similar products,
Kidde stated that Oslakovic had introduced himself to X-IT as representing Kidde and shared the
details of X-ITs patent application accordingly. In short, Kidde had disregarded their
confidentiality agreement and used the information that their lawyer got out of X-ITs patent
application to build an identical product without violating the patent when it was issued.

X-IT was now in a difficult position. They had a legitimate case against Kidde in an intellectual
property and patent lawsuit and were able to prove it via the Panduit Test. However, the company
did not have sufficient funds to afford legal expenses in a lawsuit because they were in a state of
decline and is suffering due to the harm caused by the IP infringement and could barely afford to
continue operations. Kiddes buyout offer severely undervalued the company, but X-IT was unable
to compete against Kidde. X-IT must now decide how to deal with the situation.

Case work

Review of situation What X-IT did wrong
The X-IT vs. Kidde case can teach future business owners about intellectual property and the
importance in keeping it confidential. X-ITs CEO, Andrew Ive, was taken advantage of by Kidde
which is a bigger and much more powerful company. That being said, Ive did make some mistakes
along the way which contributed to his downfall. While most people would agree Kidde was in the
wrong, there are two major mistakes Ive committed while doing business with Kidde.

1. First, Ive did not have an attorney present while Kiddes president, Apperson, asked Ive
if Kiddes attorney could look over the patent for a better appraisal; even though Kiddes
CEO, Harper, said he would not offer them anymore than the last offer which was
$500,000 and $2.5 in royalties on each ladder. This is a mistake on Ives end because if he
had had a professional legal opinion present, his attorney could have advised against it or
created sufficient legal support to foresee and protect X-IT against Olsakovics devious
move.

Also, having legal representation read over the agreement sent from Kiddes attorney
could point out the business risk of sending Kidde this information.

2. The second mistake of Ive is, even though X-IT is a relatively smaller company than its
competitors, it should have kept tabs on Kidde and their business actions since they are
one of their biggest competitors; this is also important since X-IT was sharing confidential
information.

Strategies of sharks
Hiding (intentionally) the existence of certain IP rights so that companies unknowingly lack
vital information when creating new products
Use preliminary injunctions threatening to shut down operations (US)
Seek monetary damages in court
Trap manufacturers with patent-protected technologies that are difficult to substitute for
under any circumstances once it is integrated into a complex product or technology
Rambus case

What can firms do?
1. Move away from building huge patent portfolios for the purpose of cross-licensing with
competitors
2. Simplify technical standards and create more modular designs
3. Begin cooperating with competitors early in the R&D process both to avoid costly patent
races, and to increase the chances of spotting predators
4. Foster interdepartmental and intercompany cooperation, seeking legal expertise early on
5. Stop flooding patent offices with insignificant inventions

What can X-IT do?
Sell the product to Kidde
Sue Kidde (expensive)
Sell to another large competitor
Seek investment to develop new product (and face strong competition)
Close the business
Continue to market the ladder (under the intense market conditions)

Part B:
As a result of Kidde braking the regulations of the NDA, they were sued by X-IT for violation of the
trade secret. Knowing their economic superiority, Kidde tried to make the law suit very long and
expensive to break down X-IT. However, X-IT ended up winning the case.

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