Written by: Mark Terry

Alibaba Group Holding Ltd. is preparing its estimated $16 Billion IPO by fortressing itself with patents. Although Alibaba has more than 1,900 issued patents and pending applications in Asia, it has also been aggressively filing patent applications in the U.S. China’s largest e-commerce company has obtained 102 U.S. patents, including 20 purchased from IBM Corp. Alibaba has 300 pending patent applications for technologies like product recommendations, payment processing and picture searches. Why the patent buying spree?

If you’re an innovator like IBM, you obtain patents to protect the hard work and millions of dollars that has gone into research and development. A patent protects a company’s products in an offensive and defensive manner. A company can use a patent to sue a competitor that has copied its invention and it also protects a company from lawsuits by competitors. Ownership of patents has become front page news as large companies such as Apple and Samsung have billions of dollars at stake in ongoing lawsuits over patent infringement. Besides these high profile lawsuits, here are some stories that may shed light on why Alibaba is actively bolstering its patent portfolio. Twitter had nine patents before their IPO and about 48 hours before its IPO, they disclosed that IBM was ready to file patent infringement claims – which affected the IPO. Twitter went ahead with the IPO and later settled with IBM by purchasing 900 patents from them. Facebook had 12 patents before its IPO and ended up having to buy 750 patents from IBM after its IPO due to potential patent infringement litigation from Yahoo. Later, Google paid Yahoo to resolve patent infringement disputes and eventually bought 1,000 patents from IBM to protect its Android operating system. Besides the legal implications discussed above, there are also valuation implications. According to a 2012 study by a researcher at the University of Bordeaux in France, each additional patent obtained by a corporation prior to an IPO increases IPO proceeds by 0.9 percent. That may not sound like much but when you consider that billions are at stake in an IPO it becomes quite a relevant number. Billions are also at stake post IPO as well because companies can become vulnerable to lawsuits from competitors. As a side note, doesn’t it seem like IBM is the big winner here? IBM is a perfect example of how it pays to invent even if you don’t intend to produce the product or process. IBM has never been in the social networking, product review or micro-blogging business, but somehow it has managed to sell millions of dollars in patents in these areas. Thus, IBM knows that if you have a novel and potentially lucrative idea, it’s probably a smart move to patent it, even if IBM doesn’t intend to build it.

Mark Terry is a Board-Certified Specialist in the area of Intellectual Property Law. Along with Derek Fahey, they operate as patent attorneys in West Palm Beach, Naples, Fort Lauderdale, and Miami. Contact Mark Terry if you have any questions regarding enforcement of patents, trademarks and copyrights.