[Ecommerce] Changing norms in Japan on patents

[James Love]

http://www.yomiuri.co.jp/newse/20030205wo12.htm

Changing role of intellectual property divisions

Kunihiro Shimomukai Special to The Daily Yomiuri

In a move reflected by the Basic Law on Intellectual Property, which was 
adopted in November, the country is experiencing a major shift away from 
an export-oriented economy to one built on intellectual property.

This means that corporations with more intellectual property assets will 
become more competitive. Therefore, it is important for businesses that 
create intellectual property and apply for patents to adopt a new mind-set.

To date, Japanese companies generally have been defensive in their 
patent strategies, meaning they apply for patent rights as a matter of 
course, with the primary aim of protecting their technologies from 
competitors.

As a result, the role of intellectual property departments has been to 
apply for patent rights on almost all the inventions produced by 
departments developing technology.

Intellectual property departments typically create a wall of patent 
rights to prevent competitors from encroaching on their markets. Their 
common mission has been to watch for any cracks in this wall or for any 
possible intruders trespassing on their territories. Then they opt to 
make the wall taller and thicker by applying for more patents.

Today, Japanese companies are under pressure to break with this 
defensive strategy for three reasons:

-- They are less able to afford the massive costs of applying for and 
maintaining an enormous number of patent rights at a time when earnings 
are stagnant. Companies are watching closely to see whether investments 
in research and development yield results. In this regard, patent rights 
no longer guarantee safety, making corporations increasingly selective 
about patent applications.

-- Gaiatsu, or pressure from other countries, is the second reason. 
Japan has a long-standing practice of companies offering each other 
necessary patent rights in comprehensive cross-licensing deals. 
Traditionally, firms feel a sense of belonging to the same community, 
and tolerated minor cases of patent infringement by competitors to 
refrain from rocking the industry boat.

But with increasing globalization, companies have to deal with 
competitors from Europe, the United States and China, which aggressively 
pursue financial gains through patent disputes against foreign 
companies, including Japanese firms.

At long last, Japanese companies have started realizing the need to 
shift their strategies from the defensive to the offensive, meaning 
firms are becoming more proactive in managing patent rights assets.

-- Intellectual properties increasingly are an important factor in 
assessing a company's value. Leading pension funds in the United States 
are very sensitive to the value of intellectual property assets when 
selecting companies in which to invest, and companies in turn are 
required by investors to disclose what intellectual properties they 
possess. Therefore, companies have no choice but to place greater 
importance on quality of patent rights over quantity to ensure proper 
financial strategies.

However, an offensive patents strategy does not mean merely cutting back 
on the number of patent applications while increasing the number of 
licensees. An offensive strategy can be defined as a way of heightening 
a firm's value by closely connecting its patents, technology development 
and overall business strategies.

Take a look at how widely this proactive approach to patent rights has 
spread among companies. In a Japan Patent Office survey of companies' 
intellectual property departments last fiscal year, most respondents 
said firms should license patent rights to other parties that hope to 
commercialize the patents for profit. But few actually secured patent 
rights without due consideration of this possibility or took concrete 
steps for licensing activities.

The survey also found that companies believe licensable patent rights 
should be marketable to other parties, but a large majority said that, 
in reality, only patents that were no longer useful or would be 
abandoned anyway would be transferred to others. Less than 10 percent of 
the companies surveyed by the Patent Office had clear criteria for 
making patent rights available to generate more profits.

The gap between firms' awareness of the need to shift patent strategies 
to the offensive and their lack of efforts to commercialize their patent 
rights apparently reflects the fact that intellectual property 
departments are still in transition and lack the necessary resources, 
including human resources.

It is necessary to educate personnel to understand both technology and 
business issues, like the patent portfolio managers at some leading U.S. 
and European companies, who are very active in managing intellectual 
property assets. But it would be wise to swiftly build a system to 
effectively manage intellectual property assets by using outside sources 
such as private patent offices and consulting firms.

In relation to this, I would like to bring up two cases that hint at the 
future of patent asset management by intellectual property departments. 
They both depict the active involvement of intellectual property 
departments in their companies' business strategies.

Last year, a domestic automobile manufacturer said it would buy 
technology from its competitor that would be key to producing 
next-generation cars. Since the two companies had always competed 
fiercely in both technological development and sales, this news must 
have surprised the public.

Behind the deal was an internal tug-of-war between the automaker's 
technology development and intellectual property departments. The former 
wanted to use only the firm's own inventions. The latter, after 
analyzing the cost and time needed to develop similar technology to its 
competitor, concluded it would be more beneficial for the company to 
introduce the rival's technology than to cling to company pride. At the 
end of the day, the company's management adopted the intellectual 
property department's recommendation.

The second case involved a European electric appliance manufacturer that 
used its intellectual property department as a profit center. The 
company made the department a subsidiary under a holding company and the 
group has been posting profits for many years. The subsidiary's revenue 
from license fees goes to the group after costs and the amount needed 
for reinvestment (including the sum needed for "licensing-in" other 
companies' patent rights) have been deducted. At its own discretion, the 
intellectual property department also buys any worthwhile patents or 
commercialization rights at cheap prices, and resells them to other 
firms at higher prices.

In my opinion, the future mission of a firm's intellectual property 
department is to raise the company's value by associating more actively 
with its overall business strategy as well as the technology department 
and its operations, instead of passively supporting those departments as 
it has in the past. The intellectual property department should play a 
leading role in making more effective use of intellectual property assets.

Shimomukai is a consultant at the Manufacturing Industry Consulting 
Department of Nomura Research Institute.
-- 
James Love, Director, Consumer Project on Technlogy
http://www.cptech.org, mailto:james.love@cptech.org
tel. +1.202.387.8030, mobile +1.202.361.3040