Managing intellectual capital: Licensing and cross-licensing in semiconductors and electronics

California Management Review

Volumn , Issue 2, 1997, Pages 8-41

  Grindley, Peter C ^a   Teece, David J ^a  

^a NONE

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EID: 0031501143     PISSN: 00081256     EISSN: None     Source Type: Journal    
DOI: 10.2307/41165885     Document Type: Article

References (97)

1. By "IT," we refer of course to information technology.
2. In cross-licensing, two or more firms license their IP to each other.
3. Cross-licensing is not the same as a patent pool, in which member firms contribute patents to a common pool and each member accesses them on the same conditions. In cross-licensing, firms agree one-on-one to license their IP to each other and retain control over their proprietary technology, which is used for competitive advantage via product manufacturing and further licensing.
4. Other examples of "cumulative systems" include aircraft and automobiles. In aircraft, problems of blocking patents, stemming from different approaches by pioneers such as the Wright Brothers and Curtiss, were only resolved during World War II when automatic cross-licensing was introduced. In automobiles, the Association of Licensed Automobile Manufacturers (although formed to exploit the Selden patent) developed means for automatic cross-licensing of patents early this century. In both cases, the lack of cross-licensing probably held up industry development. R. Merges and R. Nelson, "On the Complex Economics of Patent Scope," Columbia Law Review, 90 (1990): 839-916.
5. In chemicals and pharmaceuticals, although patenting is extensive, individual technology development paths are less likely to overlap, and cross-licensing may be used to ensure broad product lines. For licensing strategy in the chemicals industry, see P. Grindley and J. Nickerson, "Licensing and Business Strategy in the Chemicals Industry," in R. Parr and P. Sullivan, eds., Technology Licensing Strategies (New York, NY, NY: Wiley, 1996), pp. 97-120.
6. The early history of radio is described in: G. Archer, History of Radio to 1926 (New York, NY: American Historical Society, 1938); W. Maclaurin, Invention and Innovation in the Radio Industry (New York, NY: Macmillan, 1949); J. Jewkes, D. Sawers, and R. Stillerman, The Sources of Innovation (New York, NY: Norton, 1969) pp. 286-288; G. Douglas, The Early Days of Radio Broadcasting (Jefferson, NC: McFarland, 1987); Merges and Nelson, op. cit., pp. 891-896.
7. The early history of radio is described in: G. Archer, History of Radio to 1926 (New York, NY: American Historical Society, 1938); W. Maclaurin, Invention and Innovation in the Radio Industry (New York, NY: Macmillan, 1949); J. Jewkes, D. Sawers, and R. Stillerman, The Sources of Innovation (New York, NY: Norton, 1969) pp. 286-288; G. Douglas, The Early Days of Radio Broadcasting (Jefferson, NC: McFarland, 1987); Merges and Nelson, op. cit., pp. 891-896.
8. The early history of radio is described in: G. Archer, History of Radio to 1926 (New York, NY: American Historical Society, 1938); W. Maclaurin, Invention and Innovation in the Radio Industry (New York, NY: Macmillan, 1949); J. Jewkes, D. Sawers, and R. Stillerman, The Sources of Innovation (New York, NY: Norton, 1969) pp. 286-288; G. Douglas, The Early Days of Radio Broadcasting (Jefferson, NC: McFarland, 1987); Merges and Nelson, op. cit., pp. 891-896.
9. The early history of radio is described in: G. Archer, History of Radio to 1926 (New York, NY: American Historical Society, 1938); W. Maclaurin, Invention and Innovation in the Radio Industry (New York, NY: Macmillan, 1949); J. Jewkes, D. Sawers, and R. Stillerman, The Sources of Innovation (New York, NY: Norton, 1969) pp. 286-288; G. Douglas, The Early Days of Radio Broadcasting (Jefferson, NC: McFarland, 1987); Merges and Nelson, op. cit., pp. 891-896.
10. These included the high-frequency alternator, high-frequency transmission arc, magnetic amplifier, selective tuning, crystal detector, heterodyne signal detection, diode valve, triode valve, high vacuum tube, and directional aerials.
11. Not all early inventors were independent. Alexanderson - who improved the Fessenden alternator, invented a magnetic amplifier, electronic amplifier, and multiple tuned antenna, and co-invented the "Alexanderson-Beverage static eliminator" - was a General Electric employee.
12. AT&T acquired the de Forest triode and feedback patents in 1913-1914 for $90,000, and his remaining feedback patents in 1917 for $250,000; Westinghouse cross-licensed the Fessenden heterodyne interests in 1920, and acquired the Armstrong super heterodyne patents in 1920 for $335,000. Archer, op. cit., p. 135; Maclaurin, op. cit., p. 106.
13. The fact that GE and AT&T alone were each devoting major research attention to the vacuum tube led to no less than twenty important patent interferences in this area. Maclaurin, op. cit., p. 97.
14. Federal Trade Commission, The Radio Industry (Washington DC: FTC, 1923); Maclaurin, op. cit., p. 99.
15. To cite one important example, Marconi and de Forest both had critical valve patents. Marconi's diode patent was held to dominate de Forest's triode patent. Both technologies were vital to radio, yet the interests refused to cross-license. [Archer, op. cit., pp. 113-114; Douglas, op. cit., p. 12. ] The application of the triode (audion) to feedback amplification was also the subject of a long-running patent priority dispute between de Forest and Armstrong (finally resolved in de Forest's favor by the Supreme Court in 1934). Its use in transmission oscillation was the subject of four-way patent interference between Langmuir, Meissner, Armstrong, and de Forest. [Maclaurin, op. cit., p. 77.] These problems held up the use of the triode - a crucial component of signal transmission, detection, and amplification, which has been called "the heart and soul of radio" [Douglas, op. cit., p. 8], and "so outstanding in its consequences it almost ranks with the greatest inventions of all time" [Nobel Prize physicist Rabi, quoted in Maclaurin, op. cit., p. 70].
16. A main concern of the U.S. Navy was that international wireless communications were dominated by the British firm Marconi, and the patent impasse helped perpetuate this. It favored the establishment of an "All American" company in international communications. RCA was formed by GE in 1919, and simultaneously acquired the American Marconi Corp. Major shareholders included GE, AT&T (1920) and Westinghouse (1921). Archer, op. cit., pp. 176-189; Maclaurin, op. cit., p. 105.
17. As part of its role in the formation of RCA, the U.S. Navy also initiated cross-licensing to resolve the patent situation in radio manufacture. It wished to have clear rights to use the radio equipment it purchased, without risking litigation due to the complex patent ownership - noting in 1919 that "there was not a single company among those making radio sets for the Navy which possessed basic patents sufficient to enable them to supply, without infringement, . . . a complete transmitter or receiver." A formal letter suggesting "some agreement between the several holders of permanent patents whereby the market can be freely supplied with [vacuum] tubes," sent from the Navy to GE and AT&T in January 1920, may be seen as an initiating point for cross-licensing in the industry. Archer, op. cit., pp. 180-186; Maclaurin, op. cit., pp. 99-110.
18. RCA concluded cross-license agreements with firms including GE, Westinghouse, AT&T, United Fruit Company, Wireless Specialty Apparatus Company, Marconi (Britain), CCTF (France), and Telefunken (Germany). Archer, op. cit., p. 195; Maclaurin, op. cit., p. 107.
19. A distinction was that the RCA cross-licenses typically granted (reciprocal) exclusive rights to use the patents in given territories or markets, compared with the non-exclusive cross-licenses that became the norm later. The cross-license with GE (and later Westinghouse) included provisions for the supply of components to RCA. The RCA cross-licenses were for very long terms - many for 25 years, from 1919 to 1945. They covered current and future patents. Other radio manufacturers took licenses with RCA, starting in the late 1920s. Some of RCA's cross-licensing policies were later questioned on antitrust grounds, and modified following a consent decree in 1932. Archer, op. cit., pp. 381-387; Maclaurin, op. cit., pp. 107-109, 132-152.
20. Historical perspective on competition in the telecommunications industry is given in: M. Irwin, "The Telephone Industry," in W. Adams, ed., The Structure of American Industry, 5th ed. (New York, NY: Macmillan, 1977), pp. 312-333; G. Brock, The Telecommunications Industry: The Dynamics of Market Structure (Cambridge, MA: Harvard University Press, 1981); Office of Technology Assessment, Information Technology Research and Development: Critical Trends and Issues (New York, NY: Pergamon Press, 1985); R. Noll and B. Owen, "The Anticompetitive Uses of Regulation: United States v. AT&T," in J. Kwoka and L. White, eds., The Antitrust Revolution (New York, NY: Macmillan, 1989); G. Rosston and D. Teece, "Competition and "Local" Communications: Innovation, Entry, and Integration," Industrial and Corporate Change, 4/4 (1995).
21. Historical perspective on competition in the telecommunications industry is given in: M. Irwin, "The Telephone Industry," in W. Adams, ed., The Structure of American Industry, 5th ed. (New York, NY: Macmillan, 1977), pp. 312-333; G. Brock, The Telecommunications Industry: The Dynamics of Market Structure (Cambridge, MA: Harvard University Press, 1981); Office of Technology Assessment, Information Technology Research and Development: Critical Trends and Issues (New York, NY: Pergamon Press, 1985); R. Noll and B. Owen, "The Anticompetitive Uses of Regulation: United States v. AT&T," in J. Kwoka and L. White, eds., The Antitrust Revolution (New York, NY: Macmillan, 1989); G. Rosston and D. Teece, "Competition and "Local" Communications: Innovation, Entry, and Integration," Industrial and Corporate Change, 4/4 (1995).
22. Historical perspective on competition in the telecommunications industry is given in: M. Irwin, "The Telephone Industry," in W. Adams, ed., The Structure of American Industry, 5th ed. (New York, NY: Macmillan, 1977), pp. 312-333; G. Brock, The Telecommunications Industry: The Dynamics of Market Structure (Cambridge, MA: Harvard University Press, 1981); Office of Technology Assessment, Information Technology Research and Development: Critical Trends and Issues (New York, NY: Pergamon Press, 1985); R. Noll and B. Owen, "The Anticompetitive Uses of Regulation: United States v. AT&T," in J. Kwoka and L. White, eds., The Antitrust Revolution (New York, NY: Macmillan, 1989); G. Rosston and D. Teece, "Competition and "Local" Communications: Innovation, Entry, and Integration," Industrial and Corporate Change, 4/4 (1995).
23. Historical perspective on competition in the telecommunications industry is given in: M. Irwin, "The Telephone Industry," in W. Adams, ed., The Structure of American Industry, 5th ed. (New York, NY: Macmillan, 1977), pp. 312-333; G. Brock, The Telecommunications Industry: The Dynamics of Market Structure (Cambridge, MA: Harvard University Press, 1981); Office of Technology Assessment, Information Technology Research and Development: Critical Trends and Issues (New York, NY: Pergamon Press, 1985); R. Noll and B. Owen, "The Anticompetitive Uses of Regulation: United States v. AT&T," in J. Kwoka and L. White, eds., The Antitrust Revolution (New York, NY: Macmillan, 1989); G. Rosston and D. Teece, "Competition and "Local" Communications: Innovation, Entry, and Integration," Industrial and Corporate Change, 4/4 (1995).
24. Historical perspective on competition in the telecommunications industry is given in: M. Irwin, "The Telephone Industry," in W. Adams, ed., The Structure of American Industry, 5th ed. (New York, NY: Macmillan, 1977), pp. 312-333; G. Brock, The Telecommunications Industry: The Dynamics of Market Structure (Cambridge, MA: Harvard University Press, 1981); Office of Technology Assessment, Information Technology Research and Development: Critical Trends and Issues (New York, NY: Pergamon Press, 1985); R. Noll and B. Owen, "The Anticompetitive Uses of Regulation: United States v. AT&T," in J. Kwoka and L. White, eds., The Antitrust Revolution (New York, NY: Macmillan, 1989); G. Rosston and D. Teece, "Competition and "Local" Communications: Innovation, Entry, and Integration," Industrial and Corporate Change, 4/4 (1995).
25. OTA, op. cit.; M. Noll, "Bell System R&D Activities: The Impact of Divestiture," Telecommunications Policy, 11 (1987): 161-178; R. Harris, "Divestiture and Regulatory Policies," Telecommunications Policy, 14 (1990): 105-124.
26. OTA, op. cit.; M. Noll, "Bell System R&D Activities: The Impact of Divestiture," Telecommunications Policy, 11 (1987): 161-178; R. Harris, "Divestiture and Regulatory Policies," Telecommunications Policy, 14 (1990): 105-124.
27. The two substantive provisions of the 1956 consent decree were that (a) it confined AT&T to providing regulated telecommunications services, and its manufacturing subsidiary Western Electric to making equipment for those services (effectively prohibiting it from selling semiconductors in the commercial market), and (b) all patents controlled by the Bell System should be licensed to others on request. Licenses for the 8,600 patents included in existing cross-licensing agreements were royalty free to new applicants, and licenses to all other existing or future patents were to be issued at a non-discriminatory "reasonable royalty" (determined by the court if necessary). AT&T was also to provide technical information along with the patent licenses for reasonable fees. Licenses were unrestricted, other than being non-transferable. [USA v. Western Electric Co. Inc. and ATθT, Civil Action, 17-49, Final Judgment, January 24, 1956; Brock, op. cit., pp. 166, 191-194; R. Levin, "The Semiconductor Industry," in R. Nelson, ed., Government and Technical Progress (New York, NY: Pergamon, 1982), pp. 9-101.] In fact, AT&T went beyond the Consent Decree in its efforts to diffuse transistor technology, including symposia and direct efforts to spread know-how. [Levin, op. cit., pp. 76-77.]
28. See section later in this article on "Lessons for Innovation Management."
29. "We realized that if [the transistor] was as big as we thought, we couldn't keep it to ourselves and we couldn't make all the technical contributions. It was to our interest to spread it around." AT&T executive, quoted in Levin, op. cit., p. 77, after J. Tilton, International Diffusion of Technology: The Case of Semiconductors (Washington, D.C.: The Brookings Institution, 1971).
30. By 1983, Bell Labs had received 20,000 patents. This may be compared to about 10,000 currently at IBM and 6,000 at Texas Instruments.
31. W. Kefauver, "Intellectual Property Rights and Competitive Strategy: An International Telecommunications Firm," in M. Wallerstein, M. E. Mogee, and R. Schoen, eds., Global Dimensions of Intellectual Property Rights in Science and Technology (Washington, D.C.: National Academy Press, 1993), pp. 236-240.
32. For the capture model, see section below on "Policy Issues." The survivorship period could be as much as 17 years from the grant date (possibly several years after filing), under U.S. patent rules prior to 1995, or 20 years from the filing date, after 1995.
33. In the U.S., during 1953-1968, 5,128 semiconductor patents were awarded. Bell Laboratories was granted 16% of these; the next five firms were RCA, General Electric, Westinghouse, IBM, and Texas Instruments. Tilton, op. cit.
34. E. von Hippel, "Cooperation Between Rivals: Informal Know-How Trading," Research Policy, 16 (1987): 416-424; A. Saxenian, "Regional Networks and the Resurgence of Silicon Valley," California Management Review, 33/1 (Fall 1990): 89-112.
35. E. von Hippel, "Cooperation Between Rivals: Informal Know-How Trading," Research Policy, 16 (1987): 416-424; A. Saxenian, "Regional Networks and the Resurgence of Silicon Valley," California Management Review, 33/1 (Fall 1990): 89-112.
36. There are also transactions costs reasons for using bundled licensing, as noted previously.
37. If the parties could not agree on a reasonable royalty rate, the court could impose one. Patent rights could be very long lived, since, at that time, patent life was 17 years from the grant date, which might be some years after the filing date. The patent licensing provisions ended in 1961. The decree also included other provisions related to the sale of IBM products and services. USA v. International Business Machines Corporation, CCH 1956 Trade Cases para. 68, 245, SDNY 1956.
38. This increased from $345 million in 1993 [IBM Annual Report, 1994]. IBM initiated a more active approach to licensing in 1988, when it increased the royalty rates sought on its patents from 1% of sales revenue on products using IBM patents to a range of 1% to 5%. Computerworld, April 11, 1988, p. 105.
39. R. Smith, "Management of a Corporate Intellectual Property Law Department," AIPLA Bulletin (April/June 1989), pp. 817-823; C. Boyer, "The Power of the Patent Portfolio," Think, 5 (1990): 10-11.
40. R. Smith, "Management of a Corporate Intellectual Property Law Department," AIPLA Bulletin (April/June 1989), pp. 817-823; C. Boyer, "The Power of the Patent Portfolio," Think, 5 (1990): 10-11.
41. Gary Markovits, IBM patent process manager, in Boyer, op. cit., p. 10.
42. Jim McGrody, IBM VP and director of research, in Boyer, op. cit.
43. Roger Smith, IBM assistant general counsel, in Boyer op. cit. In all, IBM has about 11,000 active inventions, with about 35,000 active patents around the world. Smith, op. cit.
44. Many firms in the U.S. semiconductor industry were reported to be "dismayed" and "outraged" over the higher royalties and more active IP strategies of TI and others. [S. Weber, "The Chip Industry is Up in Arms Over TI's Pursuit of Intellectual Property Rights at the ITC," Electronics (February 1991), p. 51.] For example, T. J. Rodgers, CEO of Cypress Semiconductor described the practice of increased litigation over patent rights as a "venture capital investment." [Upside (December 1990).] Others have questioned whether the strengthening of patent rights might be hindering innovation, by enabling IP holders to demand "crippling royalties from young companies." Several small Silicon Valley semiconductor firms, including Cypress Semiconductor, LSI Logic, and VLSI Technology, formed a consortium to defend themselves against patent suits. [B. Glass, "Patently Unfair: The System Created to Protect the Individual Inventor May be Hindering Innovation," InfoWorld, October 29, 1990, p. 56.] Although some Japanese manufacturers reportedly described royalty demands as "possibly exorbitant," the Japanese response has generally been to increase their own patenting effort. [Computergram, September 14, 1990; Weber, op. cit.] Similar objections to increased patent strength and licensing activity have also been evident in resistance to the growing use of patents for computer software, which it has been claimed may restrict innovation by small enterprises. [B. Kahin, "The Software Patent Crisis," Technology Review (April 1990), pp. 53-58.] However, here too, many software firms who at first resisted the trend have now accepted the need to build their own patent portfolios. [M. Walsh, "Bowing to Reality, Software Maker Begins Building a Patent Portfolio," The Recorder, August 17, 1995, p. 1.]
45. Many firms in the U.S. semiconductor industry were reported to be "dismayed" and "outraged" over the higher royalties and more active IP strategies of TI and others. [S. Weber, "The Chip Industry is Up in Arms Over TI's Pursuit of Intellectual Property Rights at the ITC," Electronics (February 1991), p. 51.] For example, T. J. Rodgers, CEO of Cypress Semiconductor described the practice of increased litigation over patent rights as a "venture capital investment." [Upside (December 1990).] Others have questioned whether the strengthening of patent rights might be hindering innovation, by enabling IP holders to demand "crippling royalties from young companies." Several small Silicon Valley semiconductor firms, including Cypress Semiconductor, LSI Logic, and VLSI Technology, formed a consortium to defend themselves against patent suits. [B. Glass, "Patently Unfair: The System Created to Protect the Individual Inventor May be Hindering Innovation," InfoWorld, October 29, 1990, p. 56.] Although some Japanese manufacturers reportedly described royalty demands as "possibly exorbitant," the Japanese response has generally been to increase their own patenting effort. [Computergram, September 14, 1990; Weber, op. cit.] Similar objections to increased patent strength and licensing activity have also been evident in resistance to the growing use of patents for computer software, which it has been claimed may restrict innovation by small enterprises. [B. Kahin, "The Software Patent Crisis," Technology Review (April 1990), pp. 53-58.] However, here too, many software firms who at first resisted the trend have now accepted the need to build their own patent portfolios. [M. Walsh, "Bowing to Reality, Software Maker Begins Building a Patent Portfolio," The Recorder, August 17, 1995, p. 1.]
46. Many firms in the U.S. semiconductor industry were reported to be "dismayed" and "outraged" over the higher royalties and more active IP strategies of TI and others. [S. Weber, "The Chip Industry is Up in Arms Over TI's Pursuit of Intellectual Property Rights at the ITC," Electronics (February 1991), p. 51.] For example, T. J. Rodgers, CEO of Cypress Semiconductor described the practice of increased litigation over patent rights as a "venture capital investment." [Upside (December 1990).] Others have questioned whether the strengthening of patent rights might be hindering innovation, by enabling IP holders to demand "crippling royalties from young companies." Several small Silicon Valley semiconductor firms, including Cypress Semiconductor, LSI Logic, and VLSI Technology, formed a consortium to defend themselves against patent suits. [B. Glass, "Patently Unfair: The System Created to Protect the Individual Inventor May be Hindering Innovation," InfoWorld, October 29, 1990, p. 56.] Although some Japanese manufacturers reportedly described royalty demands as "possibly exorbitant," the Japanese response has generally been to increase their own patenting effort. [Computergram, September 14, 1990; Weber, op. cit.] Similar objections to increased patent strength and licensing activity have also been evident in resistance to the growing use of patents for computer software, which it has been claimed may restrict innovation by small enterprises. [B. Kahin, "The Software Patent Crisis," Technology Review (April 1990), pp. 53-58.] However, here too, many software firms who at first resisted the trend have now accepted the need to build their own patent portfolios. [M. Walsh, "Bowing to Reality, Software Maker Begins Building a Patent Portfolio," The Recorder, August 17, 1995, p. 1.]
47. Many firms in the U.S. semiconductor industry were reported to be "dismayed" and "outraged" over the higher royalties and more active IP strategies of TI and others. [S. Weber, "The Chip Industry is Up in Arms Over TI's Pursuit of Intellectual Property Rights at the ITC," Electronics (February 1991), p. 51.] For example, T. J. Rodgers, CEO of Cypress Semiconductor described the practice of increased litigation over patent rights as a "venture capital investment." [Upside (December 1990).] Others have questioned whether the strengthening of patent rights might be hindering innovation, by enabling IP holders to demand "crippling royalties from young companies." Several small Silicon Valley semiconductor firms, including Cypress Semiconductor, LSI Logic, and VLSI Technology, formed a consortium to defend themselves against patent suits. [B. Glass, "Patently Unfair: The System Created to Protect the Individual Inventor May be Hindering Innovation," InfoWorld, October 29, 1990, p. 56.] Although some Japanese manufacturers reportedly described royalty demands as "possibly exorbitant," the Japanese response has generally been to increase their own patenting effort. [Computergram, September 14, 1990; Weber, op. cit.] Similar objections to increased patent strength and licensing activity have also been evident in resistance to the growing use of patents for computer software, which it has been claimed may restrict innovation by small enterprises. [B. Kahin, "The Software Patent Crisis," Technology Review (April 1990), pp. 53-58.] However, here too, many software firms who at first resisted the trend have now accepted the need to build their own patent portfolios. [M. Walsh, "Bowing to Reality, Software Maker Begins Building a Patent Portfolio," The Recorder, August 17, 1995, p. 1.]
48. Many firms in the U.S. semiconductor industry were reported to be "dismayed" and "outraged" over the higher royalties and more active IP strategies of TI and others. [S. Weber, "The Chip Industry is Up in Arms Over TI's Pursuit of Intellectual Property Rights at the ITC," Electronics (February 1991), p. 51.] For example, T. J. Rodgers, CEO of Cypress Semiconductor described the practice of increased litigation over patent rights as a "venture capital investment." [Upside (December 1990).] Others have questioned whether the strengthening of patent rights might be hindering innovation, by enabling IP holders to demand "crippling royalties from young companies." Several small Silicon Valley semiconductor firms, including Cypress Semiconductor, LSI Logic, and VLSI Technology, formed a consortium to defend themselves against patent suits. [B. Glass, "Patently Unfair: The System Created to Protect the Individual Inventor May be Hindering Innovation," InfoWorld, October 29, 1990, p. 56.] Although some Japanese manufacturers reportedly described royalty demands as "possibly exorbitant," the Japanese response has generally been to increase their own patenting effort. [Computergram, September 14, 1990; Weber, op. cit.] Similar objections to increased patent strength and licensing activity have also been evident in resistance to the growing use of patents for computer software, which it has been claimed may restrict innovation by small enterprises. [B. Kahin, "The Software Patent Crisis," Technology Review (April 1990), pp. 53-58.] However, here too, many software firms who at first resisted the trend have now accepted the need to build their own patent portfolios. [M. Walsh, "Bowing to Reality, Software Maker Begins Building a Patent Portfolio," The Recorder, August 17, 1995, p. 1.]
49. Many firms in the U.S. semiconductor industry were reported to be "dismayed" and "outraged" over the higher royalties and more active IP strategies of TI and others. [S. Weber, "The Chip Industry is Up in Arms Over TI's Pursuit of Intellectual Property Rights at the ITC," Electronics (February 1991), p. 51.] For example, T. J. Rodgers, CEO of Cypress Semiconductor described the practice of increased litigation over patent rights as a "venture capital investment." [Upside (December 1990).] Others have questioned whether the strengthening of patent rights might be hindering innovation, by enabling IP holders to demand "crippling royalties from young companies." Several small Silicon Valley semiconductor firms, including Cypress Semiconductor, LSI Logic, and VLSI Technology, formed a consortium to defend themselves against patent suits. [B. Glass, "Patently Unfair: The System Created to Protect the Individual Inventor May be Hindering Innovation," InfoWorld, October 29, 1990, p. 56.] Although some Japanese manufacturers reportedly described royalty demands as "possibly exorbitant," the Japanese response has generally been to increase their own patenting effort. [Computergram, September 14, 1990; Weber, op. cit.] Similar objections to increased patent strength and licensing activity have also been evident in resistance to the growing use of patents for computer software, which it has been claimed may restrict innovation by small enterprises. [B. Kahin, "The Software Patent Crisis," Technology Review (April 1990), pp. 53-58.] However, here too, many software firms who at first resisted the trend have now accepted the need to build their own patent portfolios. [M. Walsh, "Bowing to Reality, Software Maker Begins Building a Patent Portfolio," The Recorder, August 17, 1995, p. 1.]
50. This section is based in part on discussions with Texas Instruments executives. However, the views expressed here are those of the authors and should not be seen as necessarily reflecting those of Texas Instruments.
51. The costs of manufacturing facilities have risen dramatically. A new wafer fabrication plant cost $10-20 million in 1975 (4-kilobit DRAM), $300-400 million in 1990 (16-megabit DRAM) and over $1 billion in 1991 (256-megabit DRAM). SEMATECH, Annual Report, 1991; "Foreign Alliances Which Make Sense," Electronic Business, September 3, 1990, p. 68.
52. The costs of manufacturing facilities have risen dramatically. A new wafer fabrication plant cost $10-20 million in 1975 (4-kilobit DRAM), $300-400 million in 1990 (16-megabit DRAM) and over $1 billion in 1991 (256-megabit DRAM). SEMATECH, Annual Report, 1991; "Foreign Alliances Which Make Sense," Electronic Business, September 3, 1990, p. 68.
53. Without field-of-use cross-licenses, a typical semiconductor firm might need to reverse engineer an average of two or three competitors' products a day, as each is introduced over the course of a five-year license, to ascertain whether these are infringing its patents. It must do the same for its own products. This would be prohibitively expensive. Tracking sales by each of hundreds of affected products, on a patent by patent basis, to ascertain royalties, would be virtually impossible.
54. In some cases, where there are only a few very specific overlaps between two firms' technology needs, firms may choose to license single patents. Although an option, it is rarely convenient compared with field-of-use cross-licensing when there are substantial technology overlaps.
55. R. Levin, A. Klevorick, R. Nelson, and S. Winter, "Appropriating the Returns to Industrial R&D," Brookings Papers on Economic Activity, 3 (1987): 783-820. Of course, even reading the patent is a helpful guide to someone knowledgeable in the field.
56. The most powerful threat to enforce a patent is an injunction to close down the infringer's production line. This could be ruinous for a manufacturing corporation, especially in fast developing markets such as electronics and semiconductors. The threat of damages may also be important, but as these are often based on projected royalties (and hence may be little worse than freely negotiated licensing terms) they are less potent, unless multiplied by the court.
57. For the economics of technology transfer see D. Teece, "The Market for Know-How and the Efficient International Transfer of Technology," Annals of the American Academy of Political and Social Science, 458 (1981): 81-96.
58. Reverse engineering a semiconductor product is not a simple matter, involving as it does decapping and microscopic examination at the submicron level. Although the process is by now largely automated, it can take 400-500 man-hours per device.
59. For cross-licenses with firms outside the semiconductor industry, such as the personal computer industry, the process used is simpler. In this case, there may be few patents to balance against the proffered patents. Licensing follows precedents long established in the computer industry, primarily under the leadership of IBM, as the holder of many of the patents used in the industry. The negotiations are similar, but the weighting process is not involved. Royalty rates are influenced by industry norms.
60. In some cases licensees may only wish to license a few selected patents, rather than all patents in a field-of-use. For this reason licenses are generally also offered for individual or specific patents, as well as for all patents in a given field. However, there are significant transactions savings to both sides from a field-of-use license, and the cost per patent is likely to be higher when only a few patents are licensed.
61. For general considerations affecting royalty rates, see M. Lee, "Determining Reasonable Royalty," Les Nouvelles, 27 (1992): 124-128; R. Parr, Intellectual Property Infringement Damages: A Litigation Support Handbook (New York, NY: Wiley, 1993).
62. For general considerations affecting royalty rates, see M. Lee, "Determining Reasonable Royalty," Les Nouvelles, 27 (1992): 124-128; R. Parr, Intellectual Property Infringement Damages: A Litigation Support Handbook (New York, NY: Wiley, 1993).
63. To an extent this may be a transitional problem. As licensing becomes more widespread, individual licenses are more likely to be negotiated in the knowledge that other licenses, potential or actual, must be taken into account.
64. For strategies to establish standards see R. Hartman and D. Teece, "Product Emulation Strategies in the Presence of Reputation Effects and Network Externalities," Economics of Innovation and New Technology, 1 (1990): 157-182; L. Gabel, Competitive Strategies and Product Standards (London: McGraw-Hill, 1991); P. Grindley, Standards, Strategy, and Policy: Cases and Stories (Oxford: Oxford University Press, 1995).
65. For strategies to establish standards see R. Hartman and D. Teece, "Product Emulation Strategies in the Presence of Reputation Effects and Network Externalities," Economics of Innovation and New Technology, 1 (1990): 157-182; L. Gabel, Competitive Strategies and Product Standards (London: McGraw-Hill, 1991); P. Grindley, Standards, Strategy, and Policy: Cases and Stories (Oxford: Oxford University Press, 1995).
66. For strategies to establish standards see R. Hartman and D. Teece, "Product Emulation Strategies in the Presence of Reputation Effects and Network Externalities," Economics of Innovation and New Technology, 1 (1990): 157-182; L. Gabel, Competitive Strategies and Product Standards (London: McGraw-Hill, 1991); P. Grindley, Standards, Strategy, and Policy: Cases and Stories (Oxford: Oxford University Press, 1995).
67. However liberal the licensing terms, the patent holder should not inadvertently assign away IP rights beyond those specifically needed to operate the standard, and may need to condition rights over its IP to uses related to the standard. The innovator might otherwise be deterred from participating in standards setting. There is a balance to be drawn between committing to an open standard and limiting that commitment to what is needed for the standard and to keep access open in future.
68. Risks include the likelihood that the validity of the patents would be challenged in court, that firms - and nations - would retaliate, and that the corporate image with customers would suffer. Patent assertion against customers and partners is an especially sensitive area.
69. R&D agreements with Hitachi have ranged from a 4-megabit DRAM know-how exchange in 1988 to a 256-megabit DRAM co-development agreement in 1994. According to Yasutsugu Takeda of Hitachi, "You can't create [a successful cooperative venture] just because you sign up a lot of companies that are barely committed and don't have anything to bring." The Hitachi-TI collaboration on 256-megabit memory chips has been successful because it is a "meeting of equals" [Business Week, June 27, 1994, p. 79]. Complementary capabilities are generally considered important factors in selecting international collaborative venture partners. D. Mowery, "International Collaborative Ventures and the Commercialization of New Technologies," in N. Rosenberg, R. Landau, and D. Mowery, Technology and the Wealth of Nations (Stanford, CA: Stanford University Press, 1992), pp. 345-380.
70. R&D agreements with Hitachi have ranged from a 4-megabit DRAM know-how exchange in 1988 to a 256-megabit DRAM co-development agreement in 1994. According to Yasutsugu Takeda of Hitachi, "You can't create [a successful cooperative venture] just because you sign up a lot of companies that are barely committed and don't have anything to bring." The Hitachi-TI collaboration on 256-megabit memory chips has been successful because it is a "meeting of equals" [Business Week, June 27, 1994, p. 79]. Complementary capabilities are generally considered important factors in selecting international collaborative venture partners. D. Mowery, "International Collaborative Ventures and the Commercialization of New Technologies," in N. Rosenberg, R. Landau, and D. Mowery, Technology and the Wealth of Nations (Stanford, CA: Stanford University Press, 1992), pp. 345-380.
71. TI entered joint ventures during 1989-1990 to build manufacturing plants with total investments over $1 billion: with the Italian government; Acer (Taiwan); Kobe Steel (Japan); and the Singapore government, HP, and Canon (Singapore).
72. This section is based in part on discussions with Hewlett-Packard executives. However, the views expressed here are those of the authors, and should not be seen as necessarily reflecting those of Hewlett-Packard.
73. Examples include Research Disclosure and other publications. Such journals charge fees to authors, yet often have large circulations for reference libraries and research laboratories.
74. Surveys of executives in a range of industries taken in the early 1980s typically rated methods such as lead time and superior sales and service effort as the most effective means of protecting innovations, rather than patent protection, which was considered relatively ineffective. Levin et al., op. cit.
75. The original transistor process patents were held by AT&T, so that all transistor manufacturers needed to cross-license their own patents at least with AT&T. Similarly, the key patents for the integrated circuit (IC) technology were held by two firms, TI and Fairchild, ensuring that these too were widely licensed. With the critical patents widely available, the cumulative nature of innovation guaranteed broad cross-licensing. Levin, op. cit., pp. 79-82.
76. The first commercial producers of transistors in the 1950s, using AT&T licenses, included Shockley Labs, Fairchild, Motorola and TI. These gave rise to a wave of spin-off companies in the 1960s, such as National Semiconductor, Intel, AMD, Signetics and AMI, which in turn gave rise to subsequent waves of new companies, such as, Cypress Semiconductor, Cyrix, LSI Logic, Chips and Technologies, Brooktree Semiconductor, and others.
77. At TI this approach was formalized in the Objectives, Strategies, and Tactics (OST) product development management process, including "design to cost" methods formalizing experience curve pricing procedures. Business Week, September 18, 1978; B. Uttal, "TI Regroups," Fortune, August 9, 1982, p. 40; M. Martin, Managing Technological Innovation and Entrepreneurship (Reston, VA: Reston, 1984).; R. Burgelman and M. Maidique, Strategic Management of Technology and Innovation (Homewood, IL: Irwin, 1988).
78. At TI this approach was formalized in the Objectives, Strategies, and Tactics (OST) product development management process, including "design to cost" methods formalizing experience curve pricing procedures. Business Week, September 18, 1978; B. Uttal, "TI Regroups," Fortune, August 9, 1982, p. 40; M. Martin, Managing Technological Innovation and Entrepreneurship (Reston, VA: Reston, 1984).; R. Burgelman and M. Maidique, Strategic Management of Technology and Innovation (Homewood, IL: Irwin, 1988).
79. At TI this approach was formalized in the Objectives, Strategies, and Tactics (OST) product development management process, including "design to cost" methods formalizing experience curve pricing procedures. Business Week, September 18, 1978; B. Uttal, "TI Regroups," Fortune, August 9, 1982, p. 40; M. Martin, Managing Technological Innovation and Entrepreneurship (Reston, VA: Reston, 1984).; R. Burgelman and M. Maidique, Strategic Management of Technology and Innovation (Homewood, IL: Irwin, 1988).
80. At TI this approach was formalized in the Objectives, Strategies, and Tactics (OST) product development management process, including "design to cost" methods formalizing experience curve pricing procedures. Business Week, September 18, 1978; B. Uttal, "TI Regroups," Fortune, August 9, 1982, p. 40; M. Martin, Managing Technological Innovation and Entrepreneurship (Reston, VA: Reston, 1984).; R. Burgelman and M. Maidique, Strategic Management of Technology and Innovation (Homewood, IL: Irwin, 1988).
81. Tilton, op. cit.; M. Borrus, J. Millstein, and J. Zysman, International Competition in Advanced Industrial Sectors: Trade and Development in the Semiconductor Industry (Washington, D.C.: U.S. Department of Commerce, 1982).
82. Borrus et al., op. cit.
83. The same is broadly true of IBM's entry into Japan.
84. Dataquest figures, quoted in United Nations Organization (UNO), The Competitive Status of the U.S. Electronics Sector (New York, NY: United Nations Organization, 1990). For comments on the U.S. recovery since the late 1980s, see W. Spencer and P. Grindley, "SEMATECH After Five Years: High-Technology Consortia and U.S. Competitiveness," California Management Review, 35/4 (Summer 1993): 9-32; P. Grindley, D. Mowery, and B. Silverman, "SEMATECH and Collaborative Research: Lessons in the Design of High-Technology Consortia," Journal of Policy Analysis and Management, 13 (1994): 723-758.
85. Dataquest figures, quoted in United Nations Organization (UNO), The Competitive Status of the U.S. Electronics Sector (New York, NY: United Nations Organization, 1990). For comments on the U.S. recovery since the late 1980s, see W. Spencer and P. Grindley, "SEMATECH After Five Years: High-Technology Consortia and U.S. Competitiveness," California Management Review, 35/4 (Summer 1993): 9-32; P. Grindley, D. Mowery, and B. Silverman, "SEMATECH and Collaborative Research: Lessons in the Design of High-Technology Consortia," Journal of Policy Analysis and Management, 13 (1994): 723-758.
86. Dataquest figures, quoted in United Nations Organization (UNO), The Competitive Status of the U.S. Electronics Sector (New York, NY: United Nations Organization, 1990). For comments on the U.S. recovery since the late 1980s, see W. Spencer and P. Grindley, "SEMATECH After Five Years: High-Technology Consortia and U.S. Competitiveness," California Management Review, 35/4 (Summer 1993): 9-32; P. Grindley, D. Mowery, and B. Silverman, "SEMATECH and Collaborative Research: Lessons in the Design of High-Technology Consortia," Journal of Policy Analysis and Management, 13 (1994): 723-758.
87. For contrasting views on the responses of Silicon Valley to international competition, see R. Florida and M. Kenney, "Why Silicon Valley and Route 128 Can't Save Us," California Management Review, 33/1 (Fall 1990): 66-88; Saxenian, op. cit.
88. Hazards for innovation when a firm is remote from business transactions, and hence from the technological frontier, are outlined in J. de Figueiredo and D. Teece, "Strategic Hazards and Safeguards in Competitor Supply," Industrial and Corporate Change, vol. 5.2 (1996). The similar vulnerability of the "virtual corporation," which contracts out development and manufacturing, is discussed in H. Chesbrough and D. Teece, "When Is Virtual Virtuous: Organizing for Innovation," Harvard Business Review (January/February 1996), pp. 65-73.
89. Hazards for innovation when a firm is remote from business transactions, and hence from the technological frontier, are outlined in J. de Figueiredo and D. Teece, "Strategic Hazards and Safeguards in Competitor Supply," Industrial and Corporate Change, vol. 5.2 (1996). The similar vulnerability of the "virtual corporation," which contracts out development and manufacturing, is discussed in H. Chesbrough and D. Teece, "When Is Virtual Virtuous: Organizing for Innovation," Harvard Business Review (January/February 1996), pp. 65-73.
90. For the nature of dynamic capabilities of firms and their relationship to innovation, see D. Teece and G. Pisano, "The Dynamic Capabilities of Firms: An Introduction," Industrial and Corporate Change, 3.3 (1994): 537-556; D. Teece, G. Pisano, and A. Shuen, "Dynamic Capabilities and Strategic Management," Strategic Management Journal (forthcoming in 1997). For the role of complementary assets in commercializing innovation, see D. Teece, "Profiting from Technological Innovation," Research Policy, 15 (1986): 285-305.
91. For the nature of dynamic capabilities of firms and their relationship to innovation, see D. Teece and G. Pisano, "The Dynamic Capabilities of Firms: An Introduction," Industrial and Corporate Change, 3.3 (1994): 537-556; D. Teece, G. Pisano, and A. Shuen, "Dynamic Capabilities and Strategic Management," Strategic Management Journal (forthcoming in 1997). For the role of complementary assets in commercializing innovation, see D. Teece, "Profiting from Technological Innovation," Research Policy, 15 (1986): 285-305.
92. For the nature of dynamic capabilities of firms and their relationship to innovation, see D. Teece and G. Pisano, "The Dynamic Capabilities of Firms: An Introduction," Industrial and Corporate Change, 3.3 (1994): 537-556; D. Teece, G. Pisano, and A. Shuen, "Dynamic Capabilities and Strategic Management," Strategic Management Journal (forthcoming in 1997). For the role of complementary assets in commercializing innovation, see D. Teece, "Profiting from Technological Innovation," Research Policy, 15 (1986): 285-305.
93. Indeed, in some cases the firm might conceivably do better if it has strengths in an area where the licensee is relatively weak, since it will have greatest difficulty avoiding their patents in those areas, whereas where it is strongest it may have more ability to invent around the patents.
94. An example is Brooktree Corporation, a small semiconductor design company in San Diego, which concluded a favorable cross-licensing agreement with TI in 1993.
95. See E. Sherry and D. Teece, "The Patent Misuse Doctrine: An Economic Reassessment," in Antitrust Fundamentals, ABA Section of Antitrust Law, Chicago (forthcoming).
96. IP rights to the transistor were given away to U.S. and foreign firms for very small amounts. Levin, op. cit.
97. DOJ/FTC, Antitrust Guidelines for the Licensing of IP, April 6, 1995 (Washington, DC: U.S. Department of Justice and the Federal Trade Commission, 1995).