EEs want a bigger piece of patent royalty pie

EEs want a bigger piece of patent royalty pie
By Rick Merritt, EE Times
October 25, 2001 (9:49 a.m. EST)
URL: http://www.eetimes.com/story/OEG20011019S0146

MANHASSET, N.Y. — Intellectual-property licensing may be an increasingly crucial component of corporate revenues, but the engineers who create that IP say they are hamstrung by the patent agreements under which they work and grossly undercompensated for the patent work they do.

A handful of engineers are calling for royalties for their patents and ownership of technology they develop on their own time in disciplines unrelated to their employers' business. But corporate patent attorneys dismiss those requests as impractical, and the engineers themselves admit that they probably lack the lobbying clout to force such changes.

While several sources say it's standard corporate practice to pay engineers up to $2,000 for patents they earn, many engineers report they receive much less than that — if anything.

Meanwhile, engineers and some top patent-holding companies acknowledge widespread acceptance of the current practice of asking desig ners to sign pre-employment pacts that give companies broad ownership rights of any technology engineers create.

The debate comes at a time when IP licensing and litigation are on the rise. IBM Corp. — the world's largest holder of intellectual property, with a portfolio of some 33,000 patents, including fundamental patents on computers, semiconductors and hard-disk drives — garnered a stunning $1.7 billion in technology licensing fees last year, more than double the $800 million the company earned in 1996. While those fees include licenses on everything from trademarks to just plain technology know-how, patents are at the core.

"All the payments are largely because we have patented technology," said Jerry Rosenthal, vice president of intellectual property and licensing for IBM. "If the base technology was not patented it would be unlikely people would pay for it, because they could simply try to reengineer it."

Whether the industry as a whole is seeing similar gains is anybody's guess, since few companies report statistics on technology licensing. "That's a pretty private affair, but they are very big numbers — in the hundreds of millions," said Rich Belgard, a consultant on patent issues and a patent holder himself who is based in San Jose, Calif.

"We're hearing more about licensing income these days, and some companies are interested in IP asset management to get full benefit of their IP portfolios, but we don't have any industry figures on the revenues," said Herb Wamsley, executive director of the IP Owners Association (Washington). He cited roughly 12 percent growth in the number of U.S. patents awarded annually.

IBM's top patent attorney believes industry IP revenues may be on the rise. "There is definitely a lot more litigation going on now than at any time I have seen in my many years in the industry," said Rosenthal.

Patently important

For its part, IBM has 117 patent attorneys in the United States alone, where it consistently earns more patents an nually than any other company. "You can ask [IBM chairman] Lou Gerstner if [IP] is important, and he will tell you it is. He has commented on our IP and patent situation in our annual reports for several years," said Rosenthal.

But Rosenthal and his colleagues balk at the notion that IBM should pay royalties to its engineers or loosen up on agreements that now give IBM ownership of anything an employee develops that includes a market IBM is in or is planning to enter.

"I don't know how you could practically administer anything like that. We don't license any single patent on its own," said Rosenthal on the royalty issue.

He notes that the licensing revenues IBM garners go back to product divisions. "That's what keeps people employed. The money doesn't just go into a corporate coffer," he said.

Similarly, it would be impractical to determine whether technology an engineer developed in his garage was based on information the engineer had gleaned while working for the company.

Although many companies make only modest payments or none at all for patents, IBM pays its patent winners relatively well. A first filing nets an engineer $1,500 and subsequent filings $750. From there, designers acquire three points for each new patent they earn, netting $1,200 when they reach 12 points. In addition, each year IBM's patent attorneys rank that year's patents on a handful of criteria to determine which are the most significant. Those in the top 5 percent get $5,000, the next 25 percent get $1,500 and the rest get $500.

Finally, each year the group winnows a small handful of patents that have a proven track record of significance to the company, and a special bonus is paid to those who earned the selected patents. The company once paid as much as $100,000 for one landmark patent. "It may be 15 years into the life of a patent before someone gets this bonus," said Fred Boehm, senior IP counsel and associate general counsel for IBM.

Looking for action

But some say engineers should get a cut of the action with royalties rather than fixed bonuses. According the 1986 Federal Technology Transfer Act, engineers working in federally run or contracted labs are paid 15 percent royalties on their patents. That's a good standard for private companies to emulate, said Robert Kuntz, president of the California Engineering Foundation and a longtime activist on patent issues.

Orin E. Laney goes one step further, recommending that engineers ask for 20 percent royalties on any ensuing patents when they join a company. Laney, a member and former chairman of the IEEE Intellectual Property Committee, has compiled an extensive online guide on how engineers ought to approach negotiations with their employers over patent rights.

But "it will never happen," countered Belgard, who has consulted with as many as 30 companies on patent issues. "No company would do that. Generally, [patent compensation is] somewhere in the range of $1,000 to $2,000. That's what I recommend to companies I consult with."

Shared royalties

At least one company does pay its engineers a royalty. Sarnoff Corp., a design company with a business model heavily dependent on licensing technology, shares with employees a third of all royalties it garners from their innovations. But only 12.5 percent of total royalties actually go in cash to the inventor of the related patent. The remainder is split among senior management bonuses, a general employee fund and a special bonus fund geared for special cases such as new hires or retention.

"Is it adequate to keep you fired up? I can say it surely is," said Koen G. Verhaege, executive director of Sarnoff Europe. "It sure is a great way to focus on value, not on the number of patents and disclosures."

Mike Bershteyn, an engineer with Silicon Valley startup Cognigine, recalls a less generous royalty program from his days working in the former Soviet Union, where his career started.

The form of IP protection used in the USSR was the so-called Certificate of Authorship, Bershteyn recalled. "Roughly, this was an equivalent of the patent that was preassigned to the state, which served as one large corporation and a universal employer.

"The author was entitled to a token stipend similar to those paid by [U.S.] corporations," he said. "In addition to that, if the invention was put to use anywhere across the USSR, the inventors were entitled to royalties of up to 2 percent for a period of up to five years. I may be wrong about some specific numbers; it has been years since I left. But I am sure I have described the overall approach correctly."

Others see stock options as a proxy for royalties. "I believe that engineers should be fairly compensated for their contributions, and in the United States stock options have been used successfully for this purpose," said IEEE fellow Ken Krechmer, technical editor of Communications Standards Review and a senior member of the International Center for St andards Research at the University of Colorado in Boulder. "The Japanese economic problems are likely caused by many issues, but the lack of stock option incentive programs may well be a part."

The use of stock options as pay for patents "is — or, should I say, was — an appropriate alternative," agreed consultant Belgard. "But I don't know of anyone who does it."

Going too far

Apart from compensation, some say employer demands for ownership of the technology an engineer develops often extend too far. Many agreements cover technology that engineers develop on their own time, even if the technology is not related to its inventor's job. And the scope of some agreements extends to technology developed before the engineer joins the company or after he or she leaves it.

The IEEE Intellectual Property Committee (IPC) has developed draft legislation to protect so-called employee-inventor rights, but thus far the topic remains on the group's back burner, said Laney. IPC chairman L ee Hollaar agreed that the issue has so far been given short shrift but said he is setting up a subcommittee now to come up with recommendations.

"So far the only protection, in a limited number of states, is for things that are not related to your employment or are done on your own," said Laney. "It's a fig leaf, really. Some of the stuff I like to do in my garage, my company does in other divisions," and thus could be claimed by the company, he said.

Further, employers handle patent agreements casually, in Laney's view. He noted that when his company was acquired by Rockwell Collins Inc., "their response to my request to read the [patent agreement] was classic: 'We'll show it to you when you come in for your first day of work.' "

Laney insisted on seeing it first. It was in order, but he did attach a list of things he had developed or was working on prior to employment. "It's not an absolute barrier, but it gives me something in my favor," he said.

"The best solution is the Moss Bill of 197 7," said activist Kuntz, who lobbied hard for a bill he described as the most comprehensive and complex piece of IP legislation in the United States. But "it never even got a hearing in the House of Representatives."

In 1979, California enacted the Goggins Bill, which stated that employees had rights to any technology they developed that was not part of their employer's business. A later amendment gave a sweeping definition of the employer's business, effectively negating the import of the bill.

Now Kuntz is pessimistic about any push toward reform of employer agreements. The IEEE's IPC is the only place where the issue is currently being discussed. "If Orin [Laney] and I say adios to the IPC, it will not happen there," Kuntz said. "There is no large, active, well-heeled constituency for employee inventor rights. Without that, no policy is going to get passed or enforced."