les Nouvelles November 2020 Article of the Month:
Why Digitalization Needs Value-Driven Intellectual Property Strategies

Beat Weibel

Siemens AG,
Chief IP Counsel, Munich, Germany

Rudolf Freytag, PhD

Siemens AG,
Head of Licensing and
CEO of Siemens Technology Accelerator GmbH, Munich, Germany

Abstract

Digitalization, with its enormous opportunities, is the dominant game-changer of the moment for every company. In this context, many companies are wondering what the right intellectual property strategy ("IP strategy") might be—because such a strategy must on the one hand effectively protect the business of the future. On the other hand, changing conditions make that same future very uncertain. One method has been tested in practice and can offer such protection: a value-driven IP strategy together with a value-driven business strategy. The authors show from their own experience how this approach works in both theory and practice. A value-driven IP strategy makes IP a unique strategic competitive tool for businesses.

Introduction

Many companies still believe that the number of their invention disclosures or patent applications and the size of their portfolio of granted intellectual property rights is an important yardstick of their capacity for innovation. So they invest money and resources to apply for as many patents as possible for the inventions from their research and development departments.

There are different ways to realize the value of an IP right, however, ultimately the value of these intellectual property portfolios for business emerges only when a company must actually enforce its rights against an infringer and prevent the infringer from interfering with the company's own market presence. At that point, disenchantment often sets in, because the allegedly strong IP portfolio proves to be legally difficult or almost impossible to enforce. And the company realizes that while it has many intellectual property rights, it does not have the appropriate ones. The same also often applies when the company tries in vain to license out parts of its IP portfolio on attractive terms.

Digitalization presents many companies with an urgent question: What is the best intellectual property strategy for effectively protecting future business with the right intellectual property rights?

The goal is to make the most out of the rich opportunities of digitalization, keep the risks manageable, and ensure effective IP protection for future business—despite a highly dynamic market and the associated uncertainty.

Based on the authors' many years of experience from the viewpoint of both established companies and startups, a clear, value-driven IP strategy can provide precisely this effective protection for future business. This article shows how this goal can be achieved, and what should be given particular attention to in this regard. It also provides a deeper view of specific challenges of digitalization, together with the future expanded understanding of a patent attorney's profession.

What is a Value-Driven IP Strategy?

Customers do not buy a product or a service. Customers primarily buy a customer benefit, for which they are willing to pay a certain price. For that reason, a company competes with other companies to provide customer benefit. Hence any business strategy, and any IP strategy that supports it, must consistently be "value-driven" [1].

Figure 1 shows the basic concept. The ultimate goal of a value-driven business strategy is to establish a business with a unique and competitive customer benefit. A business's financial figures, such as profit, growth and enterprise value, then become criteria for how effectively and efficiently this value-driven business strategy is being implemented in operational terms. What can happen if one mistakenly focuses on financial figures rather than customer benefit as primary management parameters has been shown more than clearly by the fate of many companies that have committed themselves to maximizing shareholder value.

Figure 1 shows that the pathway to a business with unique customer value has two phases. In the first phase, one must prioritize what future business model shall be implemented. This prioritization must then in a second step be translated into function-specific strategies: for example, research and development, marketing, production, and of course, IP. In the event of new findings, it may be necessary to revise the prioritized business model and the functions' individual strategies in an iteration loop. For safety's sake, in any case the prioritization of the business model should be reviewed at least once a year, for example during the budget planning process.

Prioritizing the Future Business Model

A business model means a description of what customer benefit an organization wants to generate for which customers (the customer perspective) and how the organization is supposed to provide this customer benefit (the operational perspective). In other words, a business model answers two questions:

• Customer perspective: Who will pay for what, why, how much, and in what way?
• Operational perspective: How will the organization generate this "what," and at what cost?

Prioritizing the future business model in the first phase in Figure 1 means carefully considering a number of questions: What are the hypotheses about customers, markets, technologies, the competition, and other influencing factors? And if those hypotheses are valid, which business models will be attractive for the future, which business model is the preferred one, and which models are considered interesting alternatives? The underlying hypotheses must be tested carefully with market studies, interviews with customers and experts, product prototypes, pilot sales, and similar efforts.

All functions within the company should cooperate in developing and prioritizing the future business model and its alternatives, including strategy, innovation management, research and development, marketing, production, finance, and of course also the IP function. At established companies, as a rule these functions are performed by departments; at startups, especially in the initial phase, they all will have to be taken care of by the founders. Nevertheless, it's important for startups to look at their business model from the viewpoint of all these functions.

The result of the first phase in Figure 1 is that all functions within the company have a shared and coordinated understanding of what the company's future business model will look like. In highly dynamic markets, alongside the prioritized business model, there will also be alternatives that must be considered as matters advance, at least as a fallback option. To keep complexity low, however, the number of alternatives should be limited.

An Example: The eScooter Startup

As an example, let's consider a fictional startup company that has invented an innovative wheel-hub motor that is very well suited for driving electric scooters (eScooters), which are now becoming a more and more popular means of short-distance transportation even among adults. In scooters, this wheel-hub motor has significant advantages over other electric motors, most of which require a transmission: It is a more efficient drive, and can also be used as a braking system which very efficiently feeds braking energy back into the battery, thus greatly increasing the range of travel.

To prioritize their future business model, our eScooter founders apply the Business Model Canvas method [2], which is widely used among startups and now quite popular among established companies as well. It allows them to document the main components of a business model in an easy-to-view, easy-to-understand form, and to discuss them in workshops.

The founders discuss a variety of business models, each of which they map in Business Model Canvas displays. They choose "eScooter sales" to private individuals as their priority business model. And they intend to position themselves as the top high-end premium brand for electric scooters, using the wheel hub motor as their unique selling proposition. Alternative business models would be "eScooter sharing," i.e. offering large numbers of eScooters for short-term rental in cities, or a "wheel-hub motor supplier" that sells the wheel-hub motor as a component to electric scooter manufacturers or system integrators.

Developing the Value-Driven IP Strategy

In the second phase in Figure 1, the function-specific value-driven strategies are developed, such as the R&D strategy, the marketing strategy, the production strategy, and of course the IP strategy. Here the shared interdepartmental understanding developed during the first phase in Figure 1 is an indispensable prerequisite for these function-specific value-driven strategies to be genuinely coordinated with one another and focused on the same goal, namely creating a business with a unique customer benefit and thus a competitive advantage.

The objective of a value-driven IP strategy is to protect the future business model and its alternatives as effectively as possible with IP, thus helping to provide legal safeguards for the competitive advantage of a unique customer benefit. Here, two different tasks must be performed, which are shown in Figure 2:

• Ensuring freedom to operate: This is about ensuring that the implementation of the own prioritized future business model does not infringe any third-party rights. These activities are a prerequisite for being able to operate the future business at all.
• Preventing imitation: This is about legally ensuring that one offers a unique customer benefit on the market. By building up IP rights, others can be prevented from imitating one's products and services and thus be kept away from appearing as competitors on the market.

As the arrow on the bottom of Figure 2 shows, "preventing imitation" supports "ensuring freedom to operate," because IP protection for one's implementation of a business model also safeguards one's freedom to operate.

To ensure the freedom to operate, first of all, one must check for all relevant countries whether implementing one's future business model or one of its alternatives will infringe any IP rights of third parties, such as patents, utility models, designs, trademarks or copyrights—all in all, a complicated but necessary task. If the implementation is not "free from third-party rights," then a remedy must be quickly found. Two basic approaches are possible, as shown in Figure 2:

• Change your own approach: This intends to avoid an IP infringement by choosing a different approach. For instance, if our eScooter startup realizes that a design detail of its wheel-hub motor is protected by a patent owned by a potential competitor, it could try to avoid this IP infringement by way of a redesign. Analogously, it would have to choose a new name for the company or product if the planned one is already protected by someone else's trademark that also extends to uses in electric scooters. The startup would also have to respond similarly to an internet domain name that has already been taken.
• Get a license or buy rights: An alternative to changing one's approach is to get at least a limited license from the owner of the rights that the implementation of the business model would infringe, or to buy those rights. For instance, if our eScooter startup finds out that the patent holder for the above discussed design detail of its wheel-hub motor operates only in the business of large motors for the construction industry, it might attempt to get an exclusive license to use the patent in the micromobility market. In the case of technologies that are standardized worldwide, such as technologies in telecommunications, there is even an obligation for patent holders in those technologies to grant a license on terms that are "Fair, Reasonable and Non-Discriminatory" (FRAND).

To prevent imitation, advantage should be taken of the fact that IP rights are prohibitive rights. As Figure 2 shows, it is important to build up an IP portfolio that can be asserted legally and that has the following characteristics:

• IP protection for intended implementation: The planned implementation of the prioritized future business model and its alternatives is to be protected by all kinds of intellectual property rights, including patents, utility models, designs, trademarks and copyrights. This will keep potential competitors from directly copying one's customer offering. Our eScooter startup needs to think about protecting the fundamental technology of the wheel-hub motor as well as ensuring that customers actually perceive the benefit of their product. That might be done by such means as a striking colored design element on the motor that flickers through the wheel spokes and is protected by a design right. The startup could also try to protect the eScooter as a whole with a design or trademark right. An ear-catching tune could conceivably be protected as an "audio mark" and play when the eScooter is being switched on.
• IP protection for alternative implementations: Apart from direct copies of the offering to customers, however, one also wants to prevent competitors from finding options to design around and thus offering customers the same benefit, or something confusingly similar. So it's necessary to think carefully about what ideas competitors might come up with, and to protect these implementations for oneself through all forms of IP rights. Protection here is not about actually implementing these ideas oneself but about keeping others from doing so. Our eScooter startup should therefore think about other motor and braking concepts that offer benefits similar to the wheel-hub motor, and try to patent them as well to keep potential future competitors away. One option might be motors that are produced not by casting, but by 3-D printing processes that yield a high-strength yet very lightweight honeycomb structure.
  
  It's important to recall that there are basically two methods for building up an IP portfolio to prevent imitations: either apply for the IP rights yourself or license or buy them from others. Furthermore, it is also necessary to work out the countries where protection is needed.

Like all other functional strategies, a value-driven IP strategy contributes to creating a unique customer benefit. But it differs from them very significantly in several points:

• IP rights are prohibitive rights: The holder of an IP right can forbid third parties to do something. This is an important difference from all other company functions, which can only aim to do something better than competitors but cannot affect those competitors directly in any way.
• IP rights have effects for the future: Depending on the particular right and the country concerned, the prohibitive effect of an IP right often extends considerably more than 10 years into the future. No activity of any other function within the company has such a binding effect for the future—their activities depend on conditions in the market and on the competition.
• IP rights are priority rights: Whether an IP right is granted or not is not just a question of content, it crucially depends on the application date, because only the first applicant will be granted the right. So IP activities depend not only on whether you file an application at all, but also when you file it. That is particularly important in company crisis situations. If IP application activity is reduced for reasons of cost, it usually cannot be caught up through increased IP application activity later. By contrast, in all other business functions, like research and development, that is largely possible.

Value-Driven IP Strategy and Digitalization

Because of its clear orientation to creating a unique customer benefit and using a prioritized business model as a basis, a value-driven IP strategy is very well suited for any company in a dynamic environment, and thus especially for today's era of the Digital Transformation. However, digitalization has special characteristics that should be considered when applying a value-driven IP strategy. These characteristics will be discussed, at least briefly, below.

As digitalization advances, obviously more and more attention has to be paid to how software is handled in developing an IP strategy [3]. There is still a misconception, as widespread as it is fatal, that software cannot be protected through IP, and thus there is no need to worry about it:

• Normally, a software product's source code is protected by copyright without any further action needed. This protection helps only to forbid direct copying of the source code. However, another company's development of a program based on the idea behind the source code is not prevented by copyright protection.
• In most countries, software is not patentable per se. But if software is part of a process that solves a technical problem, it may very well be patentable, and such a patent can also exercise its prohibitive effect.
• Finally, using open source software must be carefully considered. On the one hand, open source software libraries are an immense help in getting ahead fast with software development. But on the other hand, "open source" does not in any way automatically mean "freely usable." As soon as a user of open source software no longer uses it only for internal purposes but releases it to third parties in connection with a product, the underlying licenses, such as the GNU General Public License, must be complied with. In the simplest case, it will only be necessary to name the original copyright holder. But the license agreements that one automatically accepts when using open source software may also go so far that the own software incorporating the open source software automatically also becomes open source software as a whole, under the same licensing terms ("Copy Left"). As a rule, of course, that is something one does not want by any means, unless an explicit strategy is being pursued to advance the own business model indirectly by way of open source software.

Digitalization is more than just a technical revolution. It's a revolution in the exchange of information within, and especially between, companies. Since this information exchange comes at practically no cost, it makes business ecosystems possible, like those of Amazon, Uber and Airbnb [4]. These business ecosystems are partnerships among established companies, small and medium enterprises (SMEs), and startups. From the customer's point of view, this means that customer value is generated by the combined value added by all partners in such an ecosystem, and no longer by the value added by just one of the partners alone.

• Therefore, for any company that is part of such an ecosystem, it's crucial to consider one's business model as part of the ecosystem's entire business model, and to understand one's contribution accurately. That is the only way to derive an appropriate and suitable IP protection for the business model.
• In setting up an IP protection strategy, it should also be taken into account that such ecosystems are not necessarily set up to last indefinitely. Partners in an ecosystem can very quickly become competitors, and a company's IP strategy must take that into account from the outset.
• For that reason, it's very important to document and safeguard one's own contribution to the ecosystem. Since digitalization is primarily about intangible contributions to customer value, intangible property rights are a perfect option for this purpose. They legally define what can be credited to whom, and what belongs to whom. Without these legal safeguards, intellectual contributions, because of their volatility and ubiquity, would simply go up in smoke without providing any contribution toward a business's unique selling proposition.

The Differences Between a Value-Driven and an Invention-Driven IP Strategy

The value-driven IP strategy described above has proved its worth in numerous practical instances, at both established companies and startups. Nevertheless, many companies still—to some extent unconsciously—take a different approach: an invention-driven IP strategy.

In a traditional, invention-driven IP strategy, the starting point is that an inventor within the company believes he or she has invented something innovative that is of interest to the company and eligible for protection. Whether an intellectual property right is applied for, and how it is drafted, depends not so much on what the inventor and the patent attorney know about the company's current and future planned business model, but rather on the desire to apply for as many patents as possible, or it may be driven by considerations of the inventor's rights.

And precisely this is the core difference to a value-driven IP strategy, where the goal is to selectively protect the prioritized business model that has been coordinated across function boundaries. Thus, IP is selectively and actively procured with a focus on whether an idea is worth protecting, rather than simply eligible for protection. Moreover, an invention-driven IP strategy generally does not include the early, selective safeguarding of freedom to operate as does a value-driven IP strategy (see Figure 2).

All in all, then, a value-driven IP strategy leads to effective IP protection for future business, while an invention-driven IP strategy generally only achieves an unclear protective effect.

The difference between a value-driven IP strategy and an invention-driven IP strategy becomes less and less the longer a company is in existence and the less the business environment changes. In the latter case,   a company usually has an adequate IP portfolio, and all employees are quite familiar, from experience, with the business model and its further evolution and they intuitively know what is needed for a successful IP strategy.

But precisely that environmental stability is not available in today's era of digitalization. The more uncertain the future, the more sharply the prioritized future business model and its alternatives will diverge from one another and from the present situation. In the same way, the IP strategy must ensure that all of them are protected as well as possible. That makes applying a value-driven IP strategy a competitive advantage in the digital transformation.

The Need For Patent Attorneys To Have An Expanded Understanding Of Their Profession

Patent attorneys' present understanding of their profession is still very much oriented to the invention-driven approach of an IP strategy, which is focused on the invention and its eligibility for protection.

But since digitalization necessarily requires a transition of one's IP strategy to a value-driven approach, patent attorneys' understanding of their own profession must also change accordingly:

• The starting point is the prioritized future business model and its alternatives (see Figure 1), and a patent attorney must be very familiar with these—ideally will even be included in developing them.
• Only then the patent attorney can design the IP strategy to be "value-driven" (see Figure 1) and actively ensure that exactly the right intellectual property rights are procured to protect the planned business and its unique customer benefit against imitation. Only then the patent attorney can make sure in time that the company's freedom to operate in running its business is assured (see Figure 2).

In particular, that also means that in the future, patent attorneys will need to be quite familiar with the company's strategy, as well as its market, technology and competitive environment, and must be able to speak the same "language" as the strategy, product management, development and production departments. That particularly also includes working with the Business Model Canvas. It is the patent attorneys themselves, not their colleagues in other functions, that need to do the work of making the transition from the strategic level to the IP specialist level, and thus especially of translating the strategy into legal language.

So that they can perform this role in developing a value-based IP strategy, in the future patent attorneys will need to have a high level of communication skills, creativity and team management. In this way, IP work will become an integral part of business, and thus the contribution of the IP function to business success will become clear to all other functions in the company.

Patent attorneys with this expanded understanding of their profession will make a crucial contribution toward developing value-driven IP strategies at companies, and thus achieving a competitive advantage in the Digital Transformation. ■

Available at Social Science Research Network (SSRN):
https://ssrn.com/abstract=3470192

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