How Lenovo Navigates The Patent Gauntlet

Most people have no idea of the patent roadblocks their smartphones have to go through before they ever reach the hands of consumers.

Take my company Lenovo, a $50 billion technology enterprise that is one of the world’s top makers of smartphones, tablets, personal computers, and other smart gadgets. We spend tens of millions of dollars each year to patent our innovations. Yet despite all our diligent patenting efforts, Lenovo is still forced to run a gauntlet of patent claims from others.

Most PC and mobile phone companies operating in the U.S. face similar patent claims. In part, this is because today’s smartphones and other complex technology products incorporate innovations from multiple technology fields — including audio, video, computing, software, and wireless communications — and these technologies may be covered by many thousands of patents. Not surprisingly, therefore, dozens of patent owners contact us every year claiming that one or another of our products are infringing their patents and that we need to pay for a license.

What makes this patent gauntlet so difficult for product makers like Lenovo to navigate is that unlike in the real property business, intellectual property licensing offers little transparency in pricing, no independent appraisal of the assets (i.e., patents), rarely any information (or “comps”) about what others have paid, and few if any ground rules as to what constitutes fair negotiating practices between patent owners and product makers.

The problem is worse when it involves wireless products like smartphones, where tens of thousands of patents have been claimed (by self-interested owners) to be “essential” to the 4G LTE wireless standard — all without any independent evaluation of those claims whatsoever.

“a patent owner’s license terms must make rational economic sense.”

As one analyst put it, “It is a wireless gold rush — with plenty of fool’s gold posing as the real thing.”

As vice president of litigation and intellectual property at Lenovo, I’ve seen my share of horror stories trying to navigate this patent gauntlet.

I’ve had patent owners come to me, for example, and insist that their patents were so essential to the wireless standard that they warranted a license fee in excess of 2% of the price of our smartphone. Now, it’s been many years since I took high school math, but I’m pretty sure Lenovo would quickly go out of business were we to pay each of the thousands of wireless patent holders out there 2% of the price of our phone.

The point being that a patent owner’s license terms must make rational economic sense. At a minimum, the price of the patent license must not exceed (and should be substantially less than) the total risk-adjusted cost to Lenovo of defending against a patent infringement lawsuit over the relevant patents.

Determining the risk-adjusted cost can be somewhat subjective, of course, as it factors in the probability of the patent owner prevailing in litigation as well as an estimate of the damages it may be awarded in the event it prevails on at least some patent claims. But realistically, this probability is never 100% even for the best patents, and is frequently less than 50% for patents that have never been tested in litigation. And it is dramatically lower still if the patent owner is asserting weak patents that do not clearly cover our products, as is often the case.

I have also been confronted with patent owners who refuse to offer complete patent and product coverage. Product makers like Lenovo must be assured that if we take a license, this will eliminate patent liability for all products made and/or shipped during the license period, even if the licensor later acquires additional patents during the life of the license. We certainly don’t want to enter into a license assuming that the fees are set and all patent issues resolved only to have the patent owner return for multiple bites at the same apple. But sadly, this does happen in our business, and we won’t take a license without complete patent and product coverage.

Finally, we are often approached by patent owners who refuse to tell us which other companies have taken a license or what they have paid. Imagine buying a house with no way to determine the price paid for similar houses in the neighborhood and you’ll see the problem.

One smart solution to these patent roadblocks are the patent pools managed by San Francisco-headquartered Via Licensing, which offer product makers like Lenovo the efficiency, transparency, flexibility and fairness so often lacking in the patent field. Via’s LTE wireless pool, for example, offer licenses to patents from multiple innovative companies at once — and importantly, these have been vetted by independent neutral evaluators to verify their essentiality to the wireless technology standard.

Few if any other patent owners offer such demonstrable assurance of patent quality, which is vitally important to product makers who don’t want to end up paying for the intellectual property equivalent of “fool’s gold.”

Via also publicly discloses its license pricing and terms, which are consistent for all licensees, as well as the list of its licensees. And Via is unique in offering discounted rates for low-volume sales — a benefit particularly to smaller businesses — as well as to manufacturers with sales in less developed emerging markets like China, where economic conditions don’t support the higher rates in more developed markets like the U.S. and Western Europe.

For all these reasons, Lenovo and other major companies in the wireless market have joined Via’s LTE patent pool as both licensors and licensees.

It is an axiom of economics that markets function better when there is adequate information and impartial ground rules for buyers and sellers. If patent owners and product makers wish to avoid a repeat of yesterday’s costly smartphone war in tomorrow’s connected car business, we had better bring a lot more transparency and fairness to the patent business.