Cisco's Patent Strategy: It's More Than Numbers

So innovation—at least as measured by patents—seems to fading in the U.S. As I wrote here in the current issue of Bloomberg BusinessWeek, patent applications fell in the year ended Sept. 30, for only the second time in the last 25 years. For the first time, moreover, foreigners obtained more patents than U.S. residents.

There’s plenty of reason for Americans to fret, as Mark Chandler, general counsel for Cisco Systems, tells me. The U.S. is turning out way to few scientists and engineers, he says. And it forces foreign students to go back home once they graduate, denying the U.S. their productivity years. “Unless we invest in training science and engineering graduates and encouraging people around the world to stay, we will continue to lose ground innovation competitiveness,” he warns.

But the drop in patent activity may also signal that companies are getting smarter about what they do with their intellectual property.

Cisco changed its patent strategy three years ago, Chandler says. Cisco never filed patent applications willy-nilly, he stresses. But like most high-tech companies, Cisco used to pursue quantity, in what he says was an patent arms race. Everyone wanted as many patents as possible to stake claims and defend their IP. The thinking was that the patents might hinder competitors or at least require them to pay royalties to license patented tech. Cisco has more than 5,000 patents and another 10,000-plus pending.

“The arms race approach doesn’t pay off,” he says. “It doesn’t do you a lot of good to have a lot of patents.”

Why? The patent landscape has changed dramatically. Patents often land companies in court as they fight over who invented the idea first. Lawsuits still might involve competitors, but increasingly Cisco finds it is battling what Chandler calls “non-practicing entities.” These are companies that exist only to acquire patents and then seek to extract money from big companies for infringing on them. The more patents you hold, the more likely one of these companies will sue you.

A few years ago, Cisco regularly applied for 1,000 patents a year. Now it files for no more than 700, choosing only breakthroughs in market adjacencies or the most critical inventions. To help him choose, Chandler now employs a half-dozen highly skilled, highly trained “innovation managers” who work directly with engineering teams. These managers, btw, are also all lawyers.

Yes, that means fewer patents—Cisco ranked 24th in 2008 with 704 vs. 4,186 for first-place IBM—but it doesn’t necessarily mean that it has stopped innovating.

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