Tough Policy on Patents Scares Smaller Firms : Technology: Big companies are digging in to protect their intellectual wealth. Will bigger royalties come at the expense of competition?

Just inside the lobby of Texas Instruments’ headquarters in Dallas hang two of the electronics giant’s most important documents: its patents for the integrated circuit and the handheld calculator.

Clearly, Texas Instruments, which holds more than 5,000 patents covering other significant technology advances, is patent proud. If the company gets its way, it will be patent wealthy as well.

Already, patent licensing fees generate about $150 million in annual revenue for the company. This continuing royalty stream was the reason Texas Instruments--whose operations are losing money--was able to report a profit in its most recent quarter.

Further, analysts have estimated, a new round of patent licensing negotiations under way could generate annual revenue for Texas Instruments of $400 million to more than $1 billion, or as much as about 15% of the company’s total 1989 revenue.

Texas Instruments is widely considered the most aggressive U.S. corporation in mining the moneymaking potential of its patents. Its bold moves have generated considerable controversy and ill will within the high-tech industry, and several patent lawsuits involving the company have been filed in recent weeks.

But the company is just one of a rising number of electronics companies that are recognizing the increasing value of patents and trying to exploit them for cash, technology bartering and market-share protection, as well as for their traditional role of fostering better, more technically advanced products.

Spurred in part by increased competitive pressures and strengthened patent laws, electronics firms such as Motorola and International Business Machines are also in the act. They are aggressively filing lawsuits against perceived patent infringers, increasing royalty fees charged for use of their patented technology under license and seeking new patents in record numbers.

Advocates of this patent push--principally large firms that have invested billions in new technology--say this trend will spur U.S. technological competitiveness by rewarding them for their efforts and providing revenue to fund continued advances.

“Why should we invest billions and billions in research and development if some company can just rip it off?” asks John McDonnell, chief patent counsel for American Telephone & Telegraph. “Patents are a weapon in our competitive arsenal.”

Critics--including some newer, smaller semiconductor companies--say this trend could make it impossible for entrepreneurial firms to compete with big ones. That, they contend, could harm American competitiveness, because small firms often develop new technologies but need access to older technologies to do so.

Patents in the United States give their owners complete control over new, useful and “non-obvious” ideas or inventions for 17 years. In some industries, particularly pharmaceuticals and chemicals, technology covered by patents is rarely licensed to rivals because products produced by the technology provide major revenue.

Until recently, electronics companies had rarely given their patents that level of protection, in part because business didn’t dictate it. The potential market was too large for one company to serve alone, and it was still rapidly expanding.

But the U.S. electronics industry is experiencing increasing competition, particularly from foreign technology giants, at a time its once-torrid growth rate is slowing.

“For many years and for many companies, patents were a prize to hang on a wall. One of my clients even had his 15 patents bronzed,” says Larry Rogers, an attorney with Fish & Neave, a New York law firm specializing in patent law. “But now companies are discovering that their patents have more value than they ever realized. And they are moving to extract that worth out of them.”

As Texas Instruments is so amply demonstrating, once-overlooked and undervalued patent portfolios are a source of revenue to replace lost sales. Increasing patent royalties are also helping to underwrite the skyrocketing costs of maintaining research and development laboratories, facilities that U.S. companies are repeatedly accused of ignoring.

But, perhaps most important, aggressive patent enforcement is being used to thwart competition, particularly from foreign rivals who in past years have blatantly copied U.S. technology, despite its presumed patent protection, and proceeded to take over electronics markets once dominated by U.S. companies.

But patent protection for key inventions doesn’t last forever. As the arms race among technology companies escalates to include patents, companies must continuously replenish their patent stockpiles or risk being left behind--or worse yet, wiped out.

And as pressure mounts to accumulate significant patent portfolios, either for technological edge or barter, smaller high-tech companies are complaining that they are at the mercy of older and larger competitors and in danger of being stomped out.

Patents only recently moved off the sidelines of corporate affairs, a development widely credited to Congress’ 1982 establishment of the U.S. Court of Appeals for the Federal Circuit as the single appellate court for patent cases. Until then, patent appeals were heard in any one of 12 regional courts, with rulings varying according to each court’s view.

Creation of the new court was followed in the mid-1980s by literally dozens of new laws aimed at protecting patent holders and their “intellectual property.”

“This more ‘pro-patent’ approach allowed corporations to view their patents as an asset they could count on to protect their existing market share or gain new share,” explains Vince Belusko, an attorney with Spensley, Horn, Jubas & Lubitz, a Los Angeles firm specializing in patent law.

Initial patent protection actions were aimed at foreign competitors, namely the large Japanese electronics makers that were selling computer memory chips, known as DRAMs, at prices far below those of U.S. manufacturers. Although U.S. companies complained that pricing was unfair because the semiconductors were being “dumped” below cost, the real insult to many U.S. companies, particularly Texas Instruments, was that the DRAMs were being made with technology the U.S. firms had patented.

Texas Instruments sued eight Japanese firms and one Korean concern in the mid-1980s and won. That set the stage for DRAM licensing agreements that have proven lucrative, bringing the Dallas-based firm $600 million in revenue during the past four years. The company has actively sought similar licensing agreements throughout the U.S. semiconductor and computer industry, resorting to lawsuits when its licensing efforts have been spurned.

Further, according to Japanese newspaper accounts, as its initial DRAM licensing agreements are set to expire at year-end, Texas Instruments is said to be asking Japanese semiconductor makers for royalties of 10% of production value, about twice the average rate charged by other companies. Texas Instruments officials refuse to comment on the speculation.

Motorola’s pioneering cellular telephone operation was also in danger of falling prey in the mid-1980s to below-cost pricing by Japanese manufacturers using the American company’s patented technology without permission. Motorola filed actions with U.S. trade authorities and demanded immediate royalty payments for use of its patents.

In general, Motorola got what it wanted. And today, the company credits the new patent laws for helping it save its cellular business, a unit widely viewed as among the nation’s most innovative technology operations.

But Motorola is deliberately holding back some of its radio and cellular patents from its licensing program. “Patents are more valuable to us now,” says Vincent Rauner, Motorola’s senior vice president for patents, trademarks and licensing. “We use them to protect our key technology.”

IBM, whose patent portfolio is among the world’s largest, broadly licenses virtually its entire portfolio to other companies, often in exchange for equally broad cross-licensing agreements that give Big Blue access to a wide range of technology.

If the portfolios are of unequal value--and they often are--IBM demands royalties. However, industry sources say those rates have been increasing in recent years, and IBM has more aggressively challenged companies whose products appear to infringe its patents.

“We have an active licensing program and we will be calling on companies we feel are using our patents,” says Howard G. Figueroa, head of IBM’s intellectual property unit.

Even American Telephone & Telegraph, once the source of profuse and inexpensive technology licensing for the U.S. electronics industry, is starting to charge big bucks for its patents.

For nearly two decades, a court order required virtually every invention from its venerated Bell Laboratories to be put up for license because of Ma Bell’s monopoly status. But when AT&T; was broken up in 1984, that order was lifted. AT&T; has since refused to license some patents and has increased royalty fees.

“Royalties are more important now,” admits AT&T; chief patent counsel McDonnell, noting that the company spends about $3 billion per year running Bell Labs.

Such moves have upset many in the electronics industry.

Earlier this month, Tandy Corp. filed suit against Texas Instruments, claiming that its Dallas neighbor was demanding “unreasonably high” royalty payments. In addition, Tandy alleged that Texas Instruments is trying force it to pay for licenses it does not need as a condition of gaining access to technology it does want.

Meanwhile, in the Silicon Valley, eight small semiconductor makers, including such bitter competitors as Cypress Semiconductor, Integrated Device Technology, VLSI Technology and LSI Logic, have banded together to fight a recent spate of patent lawsuits from Texas Instruments as well as increased licensing fee demands from several large electronics companies.

“They have done it to themselves,” Jack Menache, an attorney for Integrated Device Technology, was quoted as saying of the large companies with extensive patent portfolios. “They have created the underground, the resistance.”

Resistance or not, Texas Instruments intends to stay the course. “Guys who made the inventions should reap the benefits,” says Mel Sharp, the firm’s patent counsel. “That may ruffle some feathers among U.S. companies that think they have a birthright to getting technology free. But it’s just tough.”