HP plays the patent game

More people than ever are hitting HP up for money for patents, but the company is getting more out of its own patent portfolio as well.

Hewlett-Packard, in some ways, illustrates both sides of the debate over intellectual property.

The company has increasingly been forced to deflect claims from companies and individuals who assert that HP owes them royalties. Some of the claims come from so-called patent trolls who buy patents on the open market and then use them to extract payments, Joe Beyers, vice president of intellectual property licensing at HP, said in a recent interview.

Patent claim activity "has really heated up," he said. "It has tripled in the last three to four years."

But HP, like Microsoft and IBM, is also extracting more from its own patents and intellectual property. The company created a group in January 2003 to better market and defend its intellectual property.

At that time, HP garnered around $50 million worth of value a year from its intellectual property. "Value" includes royalty payments to the company and discounts on royalties that it otherwise might pay.

Now, the group sports an annual run rate of around $200 million, or four times what it used to get. Notable deals including licensing its LightScribe technology, which lets a CD or DVD recorder burn a label onto a recordable disc, to several Asian manufacturers. It has also waged a lawsuit against Gateway.

"We've done 2,500 transactions in the last 2.5 years," Beyers said.

Intellectual property has emerged as one of the major flashpoints in the technology world. In the past several years, a few small companies have managed to land multimillion-dollar patent verdicts and settlements against large companies such as Microsoft and Intel.

Meanwhile, entrepreneurs such as Ross Perot and ex-Microsoft CTO Nathan Myhrvold have formed companies that are buying up thousands of patents that some believe could prompt a rash of lawsuits. Like others in Silicon Valley, Beyers said he is "quite concerned" about the rise of this type of company.

Washington politicians such as Rep. Lamar Smith, R-Texas, have written legislation to try to reform the patent system.

However, reforming the system is proving difficult. Tech companies have pushed for a law that would make it more difficult for plaintiffs to get an injunction against defendants in patent suits. The threat of an injunction, which can force a defendant to remove a product from the market, has forced many to settle suits.

Critics of the idea, including both small companies and large pharmaceutical manufacturers, contend that lifting the injunction threat will prompt defendants to let suits drag on.

Several sources say that Smith will drop the proposal to make injunctions more difficult in the final version of the bill.

Although questionable patents have been a problem since the U.S. Patent and Trademark Office was formed two centuries ago, intellectual property started to become a larger problem for the tech industry over the last decade. Flailing companies have increasingly turned to patent lawsuits to boost their bottom line.

The "IP" business model also began to emerge in the chip industry. In this model, small companies invent something and then license it to larger ones. Invariably, licensing discussions that start out amicably end up in lawsuits.

Partly out of fears about lawsuits, and partly out of a desire to help defray the burden of R&D budgets, large companies have also begun to shore up their own licensing practices.

This was the case at HP. Before the IP group was formed, the company's various product divisions controlled their own intellectual property. A group that tried to extract royalties from a third party would sometimes find out that a different group at HP had already given the third party a license in a separate transaction.

To help bring order to the process, the IP group runs under somewhat rigid rules. All licensing deals need to be personally approved by Beyers.

Obtaining royalties for at least some of its patents helps. "We spend over $3.7 billion a year in R&D," Beyers said.

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