Published online: 03 February 2006, doi:10.1038/bioent902

IBM opens the IP vaults

*George S. Mack is a freelancer based in Columbia, South Carolina.

Low fees for licensing patents could attract small entrepreneurs, but for some companies the price could be high.

Venturing forth: Deborah Magid, Director of Strategic Alliances, IBM Software Group IBM

There's a big discount sale going on at IBM. The Armonk, New York-based information technology company with a market value of $128 billion is promoting a new program aimed at young companies who just might want to enjoy a virtual smorgasbord of more than 40,000 patents. In a variation on the all-you-can-eat buffet, small companies can use as many of IBM's patents as they need for just one small fee. But the devil is in the details, and it's possible that certain unintended consequences could boomerang.

The new program, IBM Ventures in Collaboration, which was (surprisingly) quietly unveiled about a month ago, entitles a stage 1 company, IBM's cut-off point for a business with under $10 million in annual revenue, to access any or all of the company's more than 40,000 patents for a period of three years for just $25,000. After three years that deal can be renewed at the same rate, provided the startup is still under the $10-million revenue cap. But stage 2 companies, those with revenue above the $10-million bar, must enter a five-year agreement and pay IBM a 1% royalty on any product or technology using the licensed intellectual property (IP; see Box 1).

Among other things, IBM's life sciences know-how includes software developed to make drug research and development proceed more rapidly and with fewer failed drug candidates. The company is also producing information technology for in silico molecular design of drugs, as well as for analysis of genomic and phenotypic data in both diagnostics and biomarker discovery. IBM has also designed remote-device management technology useful for scientific instrument and medical technology device manufacturers.

The company has also developed ways of streamlining management of medical images and other data for hospitals and clinics. Just using what a spokesman says is "a narrow definition" that includes healthcare, medicine and pharmaceuticals, IBM has on the order of 200 US patents, 50 foreign counterpart patents and 150 pending applications in its patent portfolio.

		"The IBM Venture Capital Group does not itself invest directly in companies, but serves a more strategic role for the giant IT firm."

Initially the Ventures Program is being offered to the portfolio companies of approximately 100 venture capital (VC) firms in a consortium brought together by Menlo Park, California-based IBM Venture Capital Group. The network of partners includes companies investing in life sciences only such as Oxford Bioscience Partners in Boston, and Greenwich, Connecticut-based Tullis-Dickerson. There are also firms included that invest in life-sciences and IT portfolios, like US Venture Partners and Kleiner Perkins Caufield & Byers, both of Menlo Park.

Legal skeptic: Michael Fuller, a partner at the law firm, Knobbe Martens Olson & Bear KMOB

The IBM Venture Capital Group does not itself invest directly in companies, but serves a more strategic role for the giant IT firm. "Our VC group is important to our business," says Deborah Magid, director of Strategic Alliances in IBM's Software Group. "It's really an ecosystem play [that includes] investors, entrepreneurs and the companies themselves that are important to the growth of the industry, and therefore important to our growth."

To be sure, the patent access is offered as a cross license, which means that IBM has a right to use, without fee, the related IP of the smaller companies that have licensed IBM's patents. "If IBM wants to use your technology, they can," says patent attorney Michael Fuller, a partner at the law firm, Knobbe Martens Olson & Bear in San Diego. Fuller's hunch is that among other things IBM's motivation is to shield itself from lawsuits by any of the small companies that might want to bring an action against the giant IT firm for using their technology. "I can't imagine them [IBM] having a contract saying that they can take your new technology and exploit it for their own purposes," he says.

In fact, that is the very purpose of the program—IBM wants to leverage its own IP, as well as that of small, energetic entrepreneurs and their emerging companies. IBM's Magid explains it this way. "The startup does give us a license to any patents they have been awarded, but conversely they get a license to nearly all of [our] patents. In essence," she says, "we are paying for these rights by giving back rights to our much larger patent portfolio. We each have the right to create technology or products that leverage the other company's patents. It's truly reciprocal and provides both companies with the same freedom of action." Michael Fuller says he would advise his client companies to be "very cautious" about entering into this type of licensing agreement.

		"'While it appears that IBM has the best of intentions, we are skeptical,' says Carl Weissman, President and CEO of Seattle, Washington-based VC firm Accelerator Corp."

But patent attorney Stephen Maebius, a partner at Washington, DC-based Foley & Lardner, believes anytime a company moves forward to commercialize a product in the face of a related patent that might still be far away from expiration, a startup is putting itself at risk of patent infringement litigation, despite whatever assurances the small company may have given investors to the contrary. "It makes investors nervous," says Maebius. "If the patent is close enough to what they are doing, it does create a business risk factor. I think this could be potentially useful for startups—it's going to depend on how much of an obstacle it really is."

Another major issue for investors in nascent companies is the competitive environment, and it is the nonexclusivity of the cross license that makes some people nervous. "Most VCs [venture capitalists] are looking to invest in companies that have some ability to prevent competition," says Fuller. "Otherwise your competitor could come out with the same exact thing. That's why IP is so important to the venture capitalist."

"While it appears that IBM has the best of intentions, we are skeptical," says Carl Weissman, President and CEO of Seattle, Washington-based VC firm Accelerator Corp., a joint venture between the Institute for Systems Biology, also of Seattle, and VC firm MPM Capital of Boston. Weissman believes the license terms, although modest and reasonable at first blush, on closer inspection seem to contain a number of conditions that "will significantly constrain" the freedom of small companies to commercialize their products.

But Magid is confident that IBM's good intentions will be born out by the market. She says her group went to the mat to design the new program "collaboratively" with the VC's in IBM's network. "If the program seriously constrains the actions of their [the VCs'] portfolio companies, we could have never gone down this path," she says. "That's one of the reasons we have a VC group to begin with — to understand the needs of that community."