7. February 2008 by Martin Suter.

One of the most contentious areas in licensing negotiations is in the area of ownership of derivative IP. The most effective articulation of the issue that I have seen was by Jill Riola, a highly capable licensing attorney working at Akerman Senterfitt in Orlando. During negotiations with a team of attorneys from a Fortune 500 firm that was licensing our IP, she brought it back to first principles:

·         We own our IP (blue Play-Doh)

·         You own your IP (red Play-Doh)

·         We are granting you the right to create purple Play-Doh, using our blue in combination with your red

·         But you do not own purple Play-Doh, because by definition, purple must contain some blue.

Furthermore, when viewed this way, all of the terms contained within the licensing agreement, including restrictions on Field of Use, royalty rates, etc., apply for all shades of purple Play-Doh.

We could get down in the weeds and occasionally lose sight of the issue, so it was amusing to watch how Jill would bring it back to first principles. “If it’s blue Play-Doh it’s ours…You own all of the red you can develop, but if it’s purple, you don’t own it, and you owe us if you sell any.”

Agree on who owns what Play-Doh upfront, and the specifics of the agreement will be much easier to draft later.

That’s my .02!

Martin

(martin.suter@iplicensing.net)

Play-Doh is a registered trademark of Hasbro, Inc. Its use herein is strictly to illustrate a legal concept. No endorsement by Hasbro is expressed or implied.

Posted in License Terms, Licensing, Derivative Work, IP | Print | No Comments »

5. February 2008 by Martin Suter.

In May 1988, scant weeks after graduating with an undergraduate business degree, I had the chance to spend 3 weeks touring around China. Deng Xiaoping, the octogenarian leader, appeared to have recognised the need to open up to the west, but equally importantly, to loosen the internal controls imposed by a centralized, State-driven economy. In 1988, “free markets” were in their infancy within the country, giving farmers, traders and entrepreneurs the ability to freely trade, and profit, from their efforts. Using US fast food as a barometer for development, it was very early days. Beijing had but one KFC and Pizza Hut, and bicycles still ruled the capital. Pudong, across the river from Shanghai, was a vision, but ground hadn’t yet been broken. It was a time of general optimism in the country.

That winter, I moved to Beijing, and became an active observer and participant in the apparent opening up of the country. Not once did I feel threatened or that my actions were controlled in any way. I traveled the country freely, engaged in open discussion with students wherever I went, and watched, without any trepidation, as the student/democracy movement took shape in late spring 1989. When the army rolled into Tian an’Men Square on June 3-4, 1989, I felt betrayed. My naiveté and the western lens through which I had witnessed China’s “opening up”, had prevented me from acknowledging that it remained a tightly controlled, Communist country. The brutal crackdown, and subsequent months of living under martial law, gave me an up close and personal look at how effectively the Party leadership was able to swing the other way – moving from open to closed overnight.

Years have passed. Deng Xiaoping is dead and the torch has been passed to a generation of leaders that is too young to have been on the Long March. Beijing is now a sea of privately owned cars, Pudong glistens, and the world is beating a path to Beijing’s door for this summer’s Olympics.

But as I sit here this morning, I was appalled to see that a Chinese court has just sentenced Lu Gengsong to four years in prison on subversion charges. His crime? He published 19 essays on the Internet about corruption. Now, apparently “corruption” is something the Chinese take seriously. Many bureaucrats, including city mayors, have taken a bullet in the back of the head during periodic crackdowns. But Mr. Lu must have hit a nerve as he will spend the next four years in a Chinese jail. Having been inside of a prison in Shandong, think Midnight Express without the opium to dull the pain.

Is Lu Gengsong’s case an isolated incident? Not according to the article:

“China’s ruling Communist Party is cracking down on human rights activists ahead of the Olympics, and still maintains tight control over all media and the Internet.A leading Chinese dissident, Hu Jia, who chronicled the plight of other dissidents through the Internet, was taken from his home in December and was recently arrested and charged with inciting subversion.The New York-based Committee to Protect Journalists labels China the world’s leading jailer of journalists, saying at least 29 reporters are currently locked up.”

I know what you’re thinking. “This is a blog on intellectual property. So where’s the connection?”

Intellectual property is a fundamental principle in a free market system. Individual rights and freedoms are integral elements, and include freedom of expression. How can a country that represses free speech, controls information access (Great Firewall of China) ever be expected to play within the rules established for the treatment of intellectual property.

US foreign and economic policy is born of convenience. It needs access to vast quantities of oil to preserve the industrial base, so the Saudi’s sponsorship of madrassas throughout the Muslim world was ignored, even though much of the hatred and vitriol directed our way was fomented from within these schools. The US needs access to the Chinese market and knows that a disproportionate amount of its debt is held by the Chinese, and so it conveniently ignores gross breaches of human rights.

The world reacted in horror in 1989, pulled back momentarily, but economics abhors a vacuum. The world feigned shock at the brutal actions of the central government, but on reflection decided that its suppression of the student movement was somehow to have been expected.

China has a different playbook, and while they may appear to play by civilized rules, their actions show otherwise.

That’s my .02 for today.

Martin Suter

(martin.suter@iplicensing.net)

Posted in China, IP | Print | No Comments »

27. January 2008 by Martin Suter.

In my last blog, I described some of the real challenges facing start-ups that need to get a technology to market. Of course, there are categories of companies for which the front-end load of R&D costs to productise is lower (e.g. software vs. hardware), however the challenges of funding the commercialization of a product are relatively common across all categories.

Frequently, a start-up may attract seed funding on the basis of the team, an idea, and a vague view of some massive, future market opportunity. For this, the founders give up a big chunk of the company, and embark on delivering a proof-of-concept. This critical milestone is typically the trigger mechanism for another round of funding designed to get the company closer to product and customer traction. Ideally, this proof-of-concept is leveraged into customer/partner/market interest, with sufficient “buzz” to secure enough money at a reasonable valuation, so the founders and the seed guys aren’t crushed.

The problem, is the disconnect between where the company’s really at in the eyes of new investors (“So you’ve got no product, no customers, limited market proof points…but we DO like you”), and the eyes of the company and the seed guys (“Hey, this stuff really works. You should be blown away by the technical accomplishment”).

So, therein lays a challenge. Facing massive dilution from new investors, likely alongside liquidation prefs, other onerous terms and a promise to hold additional funds in reserve to ensure later financing is available, the early stage guys and the founders face a difficult decision. Lose control of the company to later stage investors in order to get to revenues or…What other options do they have?

An important option that remains, IMO, largely misunderstood, is the licensing of technology to an 800 lb gorilla as a non-dilutative means of generating revenues and helping you to monetize your technology. Frequently, their strengths are your weaknesses: money, customers, sales coverage (direct and channel), manufacturing/supply chain relationships, global support, brand, etc. Trying to displace an 800 lb gorilla that is intent on maintaining market share on your own, is like me trying to budge a sumo wrestler. It ain’t gonna happen.

However, if you think about what you bring to the table when viewed thru the eyes of the big guys: innovation, agility, de-risking of technology development, competitive advantage and time-to-market, all of which are worth something to the right partner. Their motives may be offensive (moving into a new market with a disruptive technology to displace an incumbent), or defensive (preserving dominant status in beachhead markets with next generation technology). In either case, knowing where the hot buttons are will be key to getting to the negotiating table.

Structured correctly and presented with conviction, technology licensing can be a means to generate early revenues, get market traction and acceptance without requiring a massive shareholder dilution post-proof-of-concept.

What do these deals look like? What are the issues? Stay tuned…I’ll get to that soon.

That’s my .02!

Martin Suter

(martin.suter@iplicensing.net)

Posted in Licensing, Start-ups, IP | Print | No Comments »

24. January 2008 by Martin Suter.

A very real dilemma facing the majority of early stage, pre-critical mass companies is how best to commercialise their technology. Most companies grossly underestimate the time and expense to first productise and then again to commercialise their IP. Depending on the physical form factor of the “product” to be commercialized (i.e. software vs. hardware vs. semiconductors), the cost of productisation may be in the tens of millions of dollars.

But this is what engineers do, they build. Damn the torpedos, full speed ahead. But taking an “If we can build it, they will come” view of the opportunity is dangerous and naive. Getting product to market is exceedingly difficult; often more so than building the product in the first place. Companies present rosy market forecasts to their potential investors, but building up a sales force and a channel that is adequate for coverage and sales capacity to get anywhere near most projections is very expensive and time-consuming.

How much quota are the reps going to carry? What’s a reasonable ramp? If it’s an evangelical sale, it’s unlikely that any rep will get anywhere near quota for at least 18 months. What is the per rep revenue number that you expect to bring in? What headcount do you need to support this…Marketing to create programs and demand generation, Finance to manage a growing payroll, along with accounts payable and receivable, Customer Service and Technical Support to scale to the projected number of customers required by the projections, etc.

What is the market window? If it takes 2-4 years to build a highly functioning sales channel, what percentage of the market opportunity has already passed?

Lastly, young companies almost always underestimate the stickiness of vendor/supplier relationships, especially if they’ve got a component that they’re trying to embed in someone else’s device. Imagine how difficult it is to sell into a risk adverse industry like the automotive industry, where their product roadmaps extend beyond 15 years, while yours are lucky to extend 15 months. Security of supply, financial stability, and corporate longevity are just three, of many, considerations that a start-up must contend with in order to close a sale of this type.

Next, I’ll talk about IP licensing as a go-to-market strategy.

That’s my .02!

Martin

(martin.suter@iplicensing.net)

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22. January 2008 by Martin Suter.

The biggest problem that I have with the open source ecosystem is that it obfuscates its commercial motives behind this banner of altruism. The attempted distinction between commercial vs. open-source, with the implication that open source is somehow not commercial, is a red herring.

Open-source is also commercial. Look at the companies behind Linux - IBM, Google, Oracle, Sun, Novell, Red Hat. Does anyone really believe their support of Linux is altruistic or that they’re motivated by the distribution of “free” software? If profit is not their motive, someone better tell their shareholders!

In the mid-80’s, the Canadian government reduced the patent protection afforded to pharmaceutical companies from 20 years to 10. From this, tremendous wealth was created for the owners of two generic drug manufacturers, Apotex and Novopharm. Were these companies acting out of the interest of the general population or were they parasitic offspring from a flawed premise? Each of these companies chose to remain private, and therefore able to keep their financial records away from public scrutiny, while the “commercial” pharmaceutical companies opened their books to the market, and to criticism. The owners of the generics became billionaires, not because they were running charities, but because they were able to monetize others’ IP and risk capital.

Sure, Big Pharma is profitable, but it is not at the expense of society. Rather, it is frequently to the benefit of society. Look at how the invention of H2 receptor antagonists changed the treatment of ulcers and reflux esophagitis. Twenty five years ago, ulcers often required surgical intervention, but Tagamet changed the rules of the game. Did the profit that SKF made come at the expense of society or did the invention of a disruptive technology (if you were a GI surgeon!) warrant these profits?

Under what terms does Google license Linux? How much does it “give back”? I’m suggesting that it is highly selective as to what it “gives back” to the open source community, and makes these decisions based on its own self-interest, not out of some altruistic motive. Google search algorithms are deeply guarded secrets, and its vaunted server farm architecture is “proprietary”. Is there anything wrong with this? Of course not. Just don’t pretend that you’re somehow better than the “commercial” vendors because you promote open source development opportunistically.

“This is what [Summer of Code] is really about: infecting students with the free software spirit, giving them the opportunity to grow into a community like ours.”

There’s another more subtle benefit, as DiBona explains. Thanks to the Summer of Code, “Google now knows all the people working on all these software projects, on which it depends,” he says. “That’s incredibly useful to us. Every once in a while we’ll come out with a new API and there’ll be some projects in the open source world that might be useful in either using that API or being a customer. You can just call them up and say, ‘hey guys, it’s Google, we’re you’re pal,’ and let them just check it out.” (http://redmondmag.com/features/article.asp?editorialsid=2395)

I have never heard, nor do I ever expect to hear, any allusions from Microsoft that it is anything but a profit-driven, commercial software vendor. As a shareholder, I expect nothing less.That’s my .02!

Martin

Posted in Microsoft, Google, Linux, IP | Print | 2 Comments »

11. January 2008 by Martin Suter.

This past week, I decided to add blogging capabilities to this site and was surprised to find that my web hosting service (1and1.com) only has blogging options in its Linux Hosted Business offering. Coming from the commercial software business, I made a conscious choice 4 years ago to opt for the Windows Hosted service. But, I was now confronted with a choice that required some serious thinking about whether the move to open source was compromising my moral code.

“What’s he talking about?”, I can hear you asking.

As an Objectivist (by choice), a capitalist (by default), and an IP licensing executive (by profession), my quandary over open source software really sits at the intersection of these three areas.

My moral compass has largely been set by the influences of Ayn Rand in my formative years. Her views on individuals’ rights to their own work motivated me to gravitate towards IP licensing. Her view on capitalism (in its purest form), is that it’s the only moral economic and political ideology and is the manifestation of an individual’s right to their work as well as their ability to profit from it. As a consequence of the nobility of the profit motive, she profoundly mistrusted altruism.

Is Linux/open source, software for socialists? Are those involved in its development doing so out of an altruistic agenda? Does its use equate to theft of someone else’s IP?

I opted to start with the last question first, and printed off the GNU General Public License that I was required to enter into if I were to switch over to Linux. It’s highly readable, much more so than most commercial EULAs, and is eminently clear about the rights and obligations assumed by developers who choose to modify the code base. While everyone has the right to do so, any changes they make must also be made available, as source code, under the exact same terms as the original license - free of charge and without warranty.

Now as a named co-inventor on only 1 patent, I’m not smart enough to be called an inventor myself. I do know, however, that most inventors will say that their work builds on the work of others. “Prior art” is an important concept in intellectual property, requiring citation in academic publications and patent filings. Is the source code that one gets not the same as prior art? What about derivative works based on this prior art?

Two of my favourite words to help answer this are “but for”. In discussions about IP licensing, a key principle that arises regarding ownership of derivative IP can be summarised as follows: “But for the existence of the background IP, the derivative work could not have been created.” This gives the background work foundational status and means that the creator of the derivative works has a legal obligation to the owner of the background IP.

In this regard, I guess that I’m OK with the requirement to forgo any claims to derivative works. Developers decide, of their own free will, to build on top of open source knowing full well what the implications are for their IP.

Next time I’ll take a swing at the question: Is open source software for socialists?

Posted in Ayn Rand, Objectivism, GPL, Derivative Work, Linux, IP | Print | No Comments »