Obtaining Value from EMS Patents

By Mark Nowotarski
Circuits Assembly, The Journal for Surface Mount and Electronics Assembly, 2002

EMS providers can obtain considerable value from well-managed patent portfolios.

Patents are becoming a major priority for electronics manufacturing services (EMS) companies. The recent success of patent-intensive original design manufacturer (ODM) companies, combined with the new opportunities of "business method" patents, will increase the strategic and monetary value of patents for EMS providers. To obtain value from patents, EMS companies are currently taking three critical steps:

  1. Planning strategically to incorporate patents and intellectual property ownership into the EMS business model.
  2. Training business leaders, technologists and customers to avoid the common pitfalls associated with obtaining and licensing patents.
  3. Tracking competitive patent activity to insure that new inventions do not infringe on someone else's patents.

Most EMS patent portfolios are small when compared to their original equipment manufacturer (OEM) counterparts (Figure 1). The actual patents are often viewed as an impediment to the basic EMS way of doing business.

Figure 1

FIGURE 1: Relative patent activity of OEM and EMS companies.

As Jim Sacherman, chief marketing officer of Flextronics, recently affirmed, "We don't own intellectual property."1

The ODM Challenge
The EMS industry, however, is being challenged by the patent-intensive ODM industry. ODMs provide product design as well as low-cost, high-volume manufacturing services—enabling the ability to offer "white box" products to OEMs. White box products include cell phones and laptops that are almost, but not quite, commodity products. An OEM will purchase white box products and resell them under the company's own brand. ODMs protect white box product designs with patents (Figure 2). Without patents, product designs would be immediately copied and those who invested in a design would not be able to compete with those that merely copied the design.

Figure 2

FIGURE 2: Patented white box cell phone.

ODM patent activity has skyrocketed in the past five years (Figure 3). Major players, like Hon Hai, are now producing patents at a rate that rivals that of OEM patent powerhouses such as IBM. ODMs appear to be viewing patents as a manufactured product and are ramping up production accordingly.2

Figure 3

FIGURE 3: ODM patents skyrocket.

In response to ODM successes, EMS companies are now incorporating product design into their offerings. This design activity will mean a substantial increase in patent activity. Those EMS providers that embrace patents will find that new opportunities arise for them not only in protecting intellectual property, but also in expanding business in new and substantial ways.

The Business Method Opportunity
Patents protect not only new products, but new ways of doing business as well. The key to an EMS provider's success is how its business is managed. Core competencies, such as inventory control, cash flow control, human resource management and inter- and intra-corporate communication, are critical to the bottom line. Innovations in core competencies can now be protected with a new type of patent—the "business method" patent.

The business method patent is a patent on a new and useful way to run a business. The number of business method patents has increased dramatically in the past few years (Figure 4), driven by the emergence of widespread interconnected computer networks (the Internet) that have enabled the automation of many distributed business operations. The rising numbers are also driven by the unambiguous 1998 decision by the U.S. Court of Appeals for the Federal Circuit (later upheld by the U.S. Supreme Court) that ruled that a pure algorithm, even for a new method of doing business, is patentable provided it is "applied in a 'useful' way."3

Figure 4

FIGURE 4: Business method patents surge.

Today, business method patents exist in virtually every aspect of business management, meaning inventors are now found in every part of an organization, not just in research and development (R&D). Information technology (IT) departments, in particular, are producing more patents than ever before. Business method patents can also provide a significant licensing opportunity. Best practices may be licensed to adjacent industries facing similar problems. For example, software improvement may be licensed back to software providers, and direct competitors may be prevented from unauthorized duplication of improved systems. Semiconductor foundries, such as Taiwan Semiconductor, are already developing substantial business method patent portfolios. The areas of "resource allocation" and "plant scheduling" are particularly active.4

Solectron appears to be the first major EMS provider to patent business methods. The company was recently awarded a suite of four patents5 issued on an improved e-mail routing system. The specific application of this invention is "engineering change notification." The patents are broadly written, however, and cover a variety of processes related to the handoff of e-mails in a chain of command. Vince DePalma, vice president of technology and new product development at Solectron, stated, "These patents are a beginning for us. We have a major effort in both internal and external communications technology. We want to make sure we maintain our leadership in this area."

A Successful Case History
A well-organized licensing program is the key to success concerning patents. Sanmina-SCI recently established a patent licensing program consistent with their EMS business model. The program is run by the Sanmina-SCI Licensing and Intellectual Property Group (SLIP) and is headed by George Dudnikov, senior vice president and chief technology officer for the printed circuit board (PCB) division. As with all successful licensing programs, the company incorporates three key steps in the patent process: 1) strategic planning; 2) employee training; and 3) the continuous monitoring of competitive activity.

Sanmina-SCI evaluates the licensing strategy for different technologies on a case-by-case basis. One strategy the company finds successful is to broadly license a technology under terms that maximize revenue—without impeding the adoption of the technology. The license package may include extensive technical support in addition to rights to practice the patents. Technology support materials and training may be routinely updated and access may be given to improvements in a particular technology as they are developed and proven. Basic patent training is provided to engineers, business managers and customers. Educating all involved in the process is an important part of the program. In particular, education programs have helped the company develop licensees in China, where patents and other basic concepts of intellectual property law are relatively new.

R&D engineers receive additional training on how to write effective invention disclosures—reports that patent attorneys and patent agents use to prepare formal applications submitted to the patent office. The applications include a description of the invention, the history of when each aspect of the invention was conceived, the names of those who contributed to the invention and other factual data required by the patent office.

A well-written invention disclosure can substantially reduce patent application preparation fees. U.S. patent applications can cost $7,000 to $20,000 to prepare and submit, depending upon the complexity of the invention. Such costs can be cut by up to 50 percent with well-written invention disclosures.

Competitive patent tracking at Sanmina-SCI is performed using government online databases (U.S. Patent Office, http://www.uspto.gov/) and commercial databases (Micropatent, http://www.uspto.gov/). When a patent of interest is discovered, the application is routed to the appropriate technical, business and legal staff for comment. The significance of the patent is then assessed, and the appropriate action is taken.

Conclusion
EMS companies are poised to substantially increase their patent activity. Until recently, most EMS providers have avoided building substantial patent portfolios. This avoidance will change, however, as EMS companies respond to both the challenge of the ODMs and the opportunity to protect their business method inventions.

Sustaining a well-managed patent portfolio allows EMS companies to protect innovations from copying, to grow income from licensing revenue and to increase their overall market through controlled dissemination of improved technologies. The critical steps to obtaining value from patents are: 1) strategic planning to incorporate patents into the company's business model; 2) the education of employees and 3) continuous monitoring of competitive patent activities.

References

  1. Serant, C. "Flextronics to begin selling internally developed mobile phones", EBN, July 3, 2002, www.ebnews.com/story/OEG20020703S0008.
  2. Original observation by Linda Jardin on III, Inc., Montara, CA.
  3. Rich, U.S. Court of Appeals for the Federal Circuit, "State Street Bank & Trust Co. vs. Signature Financial Group," No. 96-1327, July 23, 1998.
  4. U.S. class 700/099. For example, see U.S. patent 6,434,443, Method for performing dynamic re-scheduling of fabrication plant, assigned to Taiwan Semiconductor, August 13, 2002.
  5. U.S. patent 5,978,836, Workflow systems and methods, and related divisionals and continuations.
  6. U.S. patent 5,079,069, Capacitor laminate for use in captive printed circuit boards and methods of manufacture, January 7, 1992.
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