PROVEN STRATEGIC NAVIGATION

3 July 2000

Last week, Ventius interviewed David Hulston, managing director of London-based QED Intellectual Property Ltd. QED specialises in creating value for their clients by commercialising patents. Last week, QED began taking action to enforce a patent on hyperlink technology held by British Telecom.

Ventius:

QED is the licensing arm of Scipher (ed. note: Scipher is a technology development company with a patent portfolio serving diverse fields from the Internet to pharmaceuticals). Could you share with us the origins of QED and its success to date?

Hulston:

Scipher was established through an MBO from Thorn EMI in 1996 and went through a successful IPO in February this year, resulting in a market capitalization today of approximately US$750 m. Our heritage extends back to the late 1920's and our research labs have been responsible for such inventions as stereo-recording, public broadcast television, airborne radar and the medical CT scanner for which the inventor, who is still with Scipher, received the Nobel Prize. QED began as the internal patent department protecting and licensing Scipher's inventions. QED then looked at ways of extending our services to external customers, leveraging on the experience we had gained licensing our own technologies. We have built a true IP development and commercialization business.

Ventius:

QED and Scipher received significant media coverage last week with the announcement that QED is assisting British Telecom in enforcing their hyperlink patent. The results could have a major impact on the Internet. What will be your strategy in enforcing this particular patent?

Hulston:

Initially we are inviting the major ISPs to discuss licensing the patent. Our approach is, as always, to do this is on a reasonable and amicable basis.

Ventius:

Was this global media attention expected?

Hulston:

We knew this was a significant patent and the reaction to it was fully expected.

Ventius:

Since this patent has such far-reaching implications, how have you determined which companies to target for licensing royalties?

Hulston:

It is very early days in the licensing program and we are presently approaching those companies we believe are receiving the greatest benefit from the invention.

Ventius:

This must have been a very exciting engagement to secure. What impact do you feel the outcome of this licensing strategy will have on QED?

Hulston:

British Telecommunications are just one of our major clients. We have been working with BT for about a year now to help them license certain patent families. We expect that the reasonable and professional way we go about licensing will be recognized in the market, and any potential licensees will therefore talk to us willingly. Of course, we are confident that others will want to use our services to deliver value from their under-exploited assets.

Ventius:

When and how did British Telecom discover it held this patent, and what was the reaction internally once it was discovered?

Hulston:

BT holds something like 15,000 patents. These require constant review and re-assessment. BT should be applauded for having recognized the significance of this asset base and their willingness to extract value from it. Too often companies are found sitting on patents for mainly defensive purposes and not extracting any value from them.

Ventius:

The patent has expired outside of the US, and will expire in the U.S. in 2006. Is it common to commercialize a patent at this stage of its life? How have you adjusted your strategy in light of the age of this patent?

Hulston:

Patent owners are entitled to royalties as long as the patent is in force. Companies have a duty to their shareholders to realize value from their assets

Ventius:

What impact on the Internet do you predict if British Telecom can successfully defend this patent in court?

Hulston:

It will be up to the licensees to decide whether or not to pass on the cost of licensing, which we expect will only be a modest fraction of their revenues.

Ventius:

In working to generate revenue from intellectual property, do you rely strictly upon licensing, or are other commercialization methods used?

Hulston:

QED is about generating value from patents. That can be either licensing or outright sale. Scipher commercializes IP in a number of ways: licensing; new start-up businesses; or through joint ventures.

Ventius:

What criteria does QED use to select technology to commercialize? Is there a preference for government, university or private sector technology?

Hulston:

QED looks for patents that result in a genuine step change in technology. We prefer to concentrate on patents from large international organizations with a significant R&D capability.

Ventius:

In addition to patents, does QED commercialize other types of intellectual capital?

Hulston:

QED concentrates on patents and know-how. We also refer earlier stage technologies to Scipher, our parent company. The 120 scientists and engineers in Scipher's research labs can develop the value of a patent by creating products in collaboration with the inventors.

Ventius:

IP commercialization is an intricate process, requiring a range of abilities: patent portfolio mining, technology assessment, valuation, negotiation and potentially, litigation. Does QED provide all of these services in-house, or work with partners to do so?

Hulston:

With our team of licensing executives and patent and commercial attorneys, QED has all of the necessary expertise in-house to develop and implement appropriate licensing strategies for IP. We also have the benefit of being able to use the resources of Scipher's technologists in determining the 'state of the art' and, where necessary, in conducting forensic investigations. We use external lawyers where litigation is required.

Ventius:

What is the standard licensing relationship between QED and the companies whose technology QED markets?

Hulston:

We look for an exclusive license, with the right to sub-license. We take on board all the costs in developing and implementing the licensing strategy. We return 50% of all income received to the client, without deducting any of our costs. We generally set agreed performance criteria, such as the number of licenses to be achieved in the first 24 months, to show we are committed and not just building an excessive portfolio of cases.

Ventius:

QED is based in London, but you commercialize technology in markets throughout the world. What are some of the major differences and challenges you have encountered when dealing outside the U.K.?

Hulston:

QED works worldwide, we have recently acquired technology from the U.K., Canada, the U.S., and Australia and licensed to companies in France, Sweden, Germany, Japan and the U.S. The depth of experience we have gained in licensing worldwide throughout the Company's history provides us with the international expertise to conduct these activities globally.

Ventius:

There has been a great deal of controversy in the US in recent months over whether patents should be granted on fundamental functionality such as Amazon.com's "one-click" system and Priceline's reverse-auction method. Do you predict any changes in the patent approval process as a result of these issues?

Hulston:

The sheer volume of patents going through the US system now may result in some change. Any changes though are unlikely in the short-term but will be watched with great interest by everybody in the IP community.

Ventius:

QED provides a valuable opportunity for companies that are not capable of or interested in commercializing technology on their own. Do you find your company providing a great deal of education to potential clients?

Hulston:

Certainly education of the importance and value of IP is required in almost all organizations. Books like 'Rembrandts in the Attic' and 'Patent Wars' have started to bring the issues to the attention of CEO's, but the potential, or even the risks, remain surprisingly misunderstood.

Ventius:

With the significance of intellectual property increasing continuously and becoming a major strategic focus, what do you foresee as the expanding role for QED and its competitors in the New Economy?

Hulston:

Our clients are responding to an environment of increasingly rapid change. CEO's are rightly demanding that their Intellectual Property departments contribute to the bottom-line. QED solves this by delivering efficient, independent licensing services to assist in both extracting value from their portfolios and in defending their business from competition. QED's role will only increase and we intend to be the leading provider of these services to the Global 1000 companies