Platt Perspective on Business and Technology

Considering a cost and benefits analysis of innovation 8: licensing agreements 2

Posted in macroeconomics by Timothy Platt on August 5, 2014

This is my eighth installment in a series on the costs and benefits of innovation as it is tracked and measured through a complete innovation manufacturing cycle – as that is measured and understood from both the supply and demand sides (see Macroeconomics and Business, postings 162 and loosely following for Parts 1-7.)

I focused in Part 7 of this series on the value and limitations of licensing agreements in the context of wholly owned proprietary innovations that would be offered outside of the developing business to specific licensed users, under defined terms and for defined and specified fees. And at the end of that posting I said that I would turn here to more fully discuss open source usage agreements, as initially touched upon in Part 7 and in Part 6 of this series.

I begin that by noting the core precept that is built into essentially any such contractual agreement:

• Ongoing continuity of open source availability and usage of the innovation so offered, and regardless of how it is successively developed and elaborated upon by members of its user community, or how it is used by participating businesses and innovators.

If an innovation is developed and offered as open source the basic intent is to keep it that way, and regardless of how it evolves and grows through usage in real-world business and other systems. Think of this as a mirror image opposite of the proprietary access and usage agreement, where open source innovations gain value through open and widespread use and proprietary innovations maintain their value to their owners through controlled limited remunerative access and use.

A Google search for queries such as “open source usage policy” or “open source usage contract” yields a wealth of resources for framing and specifying these contract types and my goal here is not to attempt to reiterate that. Instead, I am going to focus here on the potential for points of conflict and friction between open source and proprietary. When an organization such as the World Wide Web Consortium (W3C) offers suites of internationally standardized, open source online connectivity protocols and scripting languages, they offer what might be considered one of the cleaner, clearer examples of how open source can unequivocally be seen and used as open source and without challenge. But as the case study example of Java as an actively used online-enabling language shows, even online connectivity and overall, commonly used features can show examples of friction and legal conflict. Consider as a case in point example there, the legal battles played out between Oracle and Google over the legality of Google’s use of what Oracle has claimed to be proprietary software technology in its Android operating system. There, much of this conflict played out over claims of violation of Oracle owned patent rights, which that company offered as legal basis for their contractual ownership.

• In practice, proprietary ownership rights that would enter into usage contracts are primarily based on patent claims and on patents awarded, and patents filed for that are awaiting final disposition.

And this brings me back to a point that I made more in passing in Part 7, in the context of a briefly sketched out example:

• “Let’s assume that the owning business for this innovation has robust, multinational patent protection coverage that is generally enough written to prevent ready circumvention from development of same-results analogous algorithm solutions.”

Both the potential for patent infringement claims, and the likelihood that they would be upheld in court depend on how generally a patent claim is written, and how readily it can be sustained if challenged in court. That, at least is how this should work, with patent protection providing a safe harbor in protecting innovators and the innovative process. But recent history has shown that the potential costs for even frivolous patent violation court challenges can prompt businesses that need to use innovations to pay – and these fees are called licensing fees and a variety of other things. And there are now businesses that primarily just buy up patents, so they can make claims of patent violation against other, innovation using businesses. And collectively businesses that pursue this tactic as a core route to profitability, add significant friction to the innovation development and diffusion process. Companies that pursue this approach as their basic business model are called patent trolls. And that side to this story, makes patent protection a more complex, two edged sword in its impact on innovation and from both the innovation producer and the innovation user perspective.

I am going to look more fully into the issues of patents and patent protection as they both encourage and limit innovation, in my next series installment. Meanwhile, you can find this and related postings at Macroeconomics and Business.

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