Creative Approaches to IP Strategy
US patent law can be traced back to prior use of patents or similar constructs for centuries (https://en.wikipedia.org/wiki/History_of_United_States_patent_law). The typical arrangement involves a government granting a time-limited and territory-limited monopoly to an inventor as incentive to drive new inventions and their subsequent commercialization. This is meant to stimulate the creation of new businesses, which in turn would generate tax revenues for the government.
Anyone who has sought VC funding for a new venture knows that evaluation of the intellectual property (IP) landscape with respect to the business opportunity is a critical piece of the process. This generally involves assessment of IP from two perspectives: whether there is freedom to operate (FTO), and whether there is an opportunity to create a blocking position by obtaining issued claims around a company’s invention. The invention may be a product (composition of matter) or a process (method of use), but it must be novel, non-obvious, useful and enabled by the information provided in the patent application so that anyone skilled in the art can make and use the invention.
Given that most VC meetings involve 30-60 minute pitch presentations, there’s a tendency to place a lot of weight on the first order results of the IP analysis, and quickly conclude that the opportunity is attractive or not based on clear cut FTO and/or the likelihood of obtaining a patent that has strong enough claims to create a true blocking position vs. potential competitors.
One thing I learned over the years, however, is that this assessment usually doesn’t lead to a “go – no go” decision. Much more frequently it provides data that can be used to formulate a business strategy that takes into consideration the specific circumstances, and often involves making decisions in the absence of definitive information. For example, you appear to have FTO, but since US patent applications are unpublished for 18 months, it may be that someone else has already filed a blocking application. Or you find an application with claims that appear to be blocking, but they haven’t yet issued, and may not, or may issue and over time be successfully challenged and denied. So often you’re left in the position of having to develop a business strategy that considers what you know today, and what the IP landscape may look like in the future. Let me briefly discuss a few illustrative examples.
Perkin-Elmer Cetus “PCR Performance Guarantee” logo
When I managed the PCR business, first for Perkin-Elmer-Cetus Instruments, and later for ABI, we had one of the strongest patent estates in the history of life science research tools. We had patents covering Taq polymerase, the PCR process, DNA thermal cyclers, and hundreds of related products and applications. Nonetheless, during a strategic planning session in 1990 I recall Bob Board encouraging us to assume that our strong IP position would only buy us 2 years lead time vs. competitors. Rather than develop a strategy that assumed an ongoing monopoly, we thought about how to use that two year time window to build capabilities that our competitors couldn't, ensuring that we would be well differentiated should the patent protection evaporate for any reason. In point of fact, we already had multiple emerging competitive issues. One was that some of our major customers were academic institutions that were beginning to manufacturing their own Taq polymerase, and it’s never good to threaten to sue your customers – which we did not. Another issue was the fact that a product manufacturer can produce, market and sell an instrument or reagent that is used to perform PCR provided it has a “substantial non-infringing use”, and is not advertised or supported for use in PCR. Scientific journals were beginning to be filled with advertisements from low price manufacturers of Taq polymerase that never mentioned what the product might be used for. They didn’t have to because the customers already knew.
Our strategic solution was to work as fast as we could to develop a first class PCR applications support capability, along with a customer service function that would be highly differentiating. We ran a campaign to develop strong brand recognition as the leaders in PCR, and even provided a unique PCR performance guarantee. Use our instruments and reagents for PCR and we guarantee they'll perform as specified, which customers could measure for themselves using a special lambda control amplification kit. Over the ensuing years there were many lawsuits, many competitors, and many licensees, but over time that early decision to use our lead time to differentiate our offering proved highly successful, and played a key role in allowing us to maintain leading market share independent of the evolving IP landscape.
My second example can be traced back to the days when I was leading new business development for ABI, exploring emerging technologies that we might want to develop or acquire. This was in the mid 1990s and I was fascinated with the power of DNA microarrays, at the time a relatively new analytical tool in the field of genomics. My superiors felt that the key IP in the field was tied up by one (or a few) other players, and that it would be a waste of time to pursue this as we'd be embroiled in lawsuits. They were probably correct, especially given the large target they represented for a company seeking to sue.
However, I was young and naive and thought there must be another way to deal with this. I ultimately left the company and co-founded Genetic MicroSystems (GMS) in partnership with Jean "Coco" Montagu. Our mission was to make instruments to both create and analyze spotted DNA microarrays. We obtained our own patents around novel approaches to instrument design and performance, but we also knew full well that there were several key patents we’d need to license or risk being sued for infringement. We were a tiny company at first, and our view was that nobody would care about us until we were more successful - so we'd figure out a way to deal with it then. We actually thought that being sued was an indication of a degree of success, as the competition wouldn’t waste time and money suing a company they didn’t fear.
Genetic MicroSystems “pin and ring” DNA microarray patent
Over the next two years we proved out our concepts, developed prototype systems, published papers in the scientific literature, spoke at conferences, and started shipping instruments and running advertisements. As sales started to take off the IP risk was growing substantially. We therefore decided to approach the company most likely to sue us and told them that we understood they were buying their instruments from a third party at an exorbitant price, and that we could manufacture higher performing systems for a small fraction of their sales price. We offered to be an OEM manufacturer for them. Once they confirmed this information, they made a bid to buy our company rather than simply have us be a supplier, and a few months later we celebrated the acquisition.
Stan and Coco celebrate the closing
My last example comes from an experience I was reminded about when I read a recent article concerning China placing restrictions on transfer of data out of China if created in China (https://www.wbur.org/npr/1005467033/chinas-new-anti-foreign-sanctions-law-sends-a-chill-through-the-business-communi). This was particularly relevant to my experience as CEO of NimbleGen, where the free transfer of data across borders was critical to our success. Founded in 1999, NimbleGen utilized a novel approach to creating DNA microarrays that did not involve conventional photolithography, as did the early pioneers in the field. Instead, they invented maskless array synthesis (MAS) technology that utilized the Texas Instruments digital light processor (DLP) to direct light onto surfaces and drive photosensitive chemical reactions resulting in DNA probe synthesis in situ. I joined the company in late 2003, by which time they had already implemented a complex business model that was driven largely by their respect for the existing IP rights of others who were not willing to provide licenses under reasonable terms.
In lieu of a license to enable use of MAS systems to create and use DNA microarrays in the US, NimbleGen chose to set up a lab service business in Iceland, where there were no such IP constraints because the US patent owners failed to file for protection in Iceland. DNA arrays were manufactured at our factory in Reykjavik, biological samples were sent to our laboratory there, analyzed, and the data returned to our scientist customers in their respective countries. This enabled us to operate our business, and bought us time to develop a growth strategy that didn’t rely on the constraining IP.
What’s more, we discovered the wonderful people of Iceland, and the many benefits of establishing a lab service operation there. Iceland has the greatest number of PhD level scientists per capita in the world, many trained in the biological sciences, and most with international training/ experience/ outlook. English is spoken fluently by everyone, and there was a young, vibrant, dedicated labor force that was particularly motivated to show that they could produce work at a quality level as high if not higher than anyplace else in the world. Iceland is geographically close to Boston and London, with excellent air service for shipping and delivery of samples and other materials to the US and Europe. Lastly, for an information sharing business, the combination of high speed internet cables and low cost of energy and operations made Iceland an excellent location to set up such a business. All of these benefits would have been missed if we had not decided to find a territory where we could operate in the absence of IP constraints.
Senior management, the midnight sun, our Icelandic team, and the beauty of Gullfoss Falls
Before and after implementing our Iceland service strategy we maintained close working relationships with the companies that owned the IP rights we hoped to license. In fact, one of my first accomplishments after joining NimbleGen was to implement a collaborative program with Affymetrix, one of the owners of key IP, under which we jointly produced custom designed DNA microarrays for use on the Affymetrix GeneChip platform. Later on we periodically negotiated deals to acquire portions of the IP we sought in exchange for cash needed to surpass the expectations Wall Street had for quarterly results.
Ultimately our ability to operate with respect for IP, even though it was inconvenient and required “out of the box” thinking (think different!), combined with the constructive and mutually beneficial relationships we maintained throughout, influenced the IP owners to deal with us on more reasonable terms. In the end it was better to have us licensed and paying reasonable royalties rather than unlicensed and not paying anything. Once we were able to obtain the rights we sought, we could begin to develop new strategies for growth, in the absence of the risk of litigation or even shutdown that previously concerned potential investors or buyers. The collective impact ultimately enabled us to expand our operations, the breadth of our product offerings, and sales, and position the business for an IPO just prior to being acquired.