Could Twitter’s Patent Philosophy Backfire?

By Victoria Slind-Flor | October 21, 2013

Profits aren’t the only thing lacking at Twitter Inc. ahead of its planned initial public offering. It’s got a dearth of patents, too.

The microblogging service said in its prospectus last week that it has nine issued U.S. patents. That compares with 774 cited by Facebook Inc. before its initial public offering in May 2012 and International Business Machines Corp.’s 6,478 patents accrued last year alone. Twitter’s smaller patent trove reflects its philosophy of letting engineers and designers own their inventions.

While that policy is meant to limit patent litigation, some investors and analysts are concerned it could backfire. Evidence shows that intellectual property can help companies raise more funds in their offerings, as patents enable investors to quantify the value of technological breakthroughs.

“The lack of a large number of issued patents is a little concerning,” Maulin Shah, managing director at Envision IP LLC, an advisory and research firm in New York, said by phone. “If Twitter does deal with patent-infringement lawsuits, they don’t have too many patents to lean on to countersue. That does put Twitter at a disadvantage.”

Twitter said in its prospectus that many competitors have “substantially larger patent” portfolios, which could make it a target for litigation.

At the same time, Twitter has said that too many patents may hinder innovation. In May, the San Francisco-based company implemented the Innovator’s Patent Agreement, or IPA, to keep ownership of inventions in the hands of the people who created them. As part of the policy, Twitter can’t pursue offensive litigation without the inventor’s permission. The IPA ensures that the patents “will be used only as a shield rather than as a weapon,” according to Twitter’s website.

The IPA will help the company lure and retain more talented engineers, said Robert Clarkson, a partner in the capital markets practice at law firm Jones Day. More than 5,000 patent actions were filed last year, the most ever recorded, according to a 2013 study by PricewaterhouseCoopers LLP.

The policy’s biggest risk is that employees will take their inventions with them, posing a competitive threat if they leave, according to Jeff Sica, president and chief investment officer of Sica Wealth Management LLC.

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