Alibaba taking shine to patents ahead of IPO in the US

China's largest e-commerce company hopes to face down potential competitors by boosting defense

Alibaba Group Holding Ltd is beefing up its patent holdings in the United States, a move that may help it to avoid the pitfalls that bedeviled Google Inc, Facebook Inc and Twitter Inc ahead of their initial public offerings.

China's largest e-commerce company has obtained 102 US patents, including 20 purchased from IBM last year, according to researcher Envision IP. Alibaba also has applied for more than 300 others for technology such as payment processing, product recommendations and picture searches, the US Patent and Trademark Office's database shows.

"It's a smart move," said Maulin Shah, managing director of New York-based Envision. "When a company announces IPO plans, it instantly becomes a target for competitors already in the market who want to hamper the IPO or who see it as an opportunity to exploit the company at a vulnerable time."

Patents, designed to protect a company's products from being copied, are often used as a shield against lawsuits by competitors. Facebook, which had just 12 patents before going public, and Twitter, with nine, found themselves exposed to legal claims that their products infringed other companies' intellectual property.

"Right now is a time of great leverage with anyone who has an issue or potential issue with Alibaba," said Jim Altman, a patent attorney with Foster, Murphy, Altman & Nickel in Washington, DC, who often represents Chinese companies. "They don't want anything hanging up an IPO."

Yahoo patents

Alibaba last month said it would begin the process of filing for a US public offering that may be larger than the $16 billion raised by Facebook in 2012. While the Hangzhou-based company hasn't said how much it will seek in the IPO, a person with knowledge of the matter said Alibaba may sell about a 12 percent stake.

Yahoo owns a 24 percent stake in Alibaba and, according to a recent court filing, holds more than 1,500 patents.

Ashley Zandy, a spokeswoman for Alibaba in San Francisco, declined to comment.

Seven other Chinese Internet companies have filed to raise a total of $2.8 billion in New York this year, none of which has a US patent portfolio that could be found in a search of regulatory filings or patent office databases. Weibo Corp, a micro-blogging service that began trading on the US Nasdaq stock exchange on April 17, said in a regulatory filing that it owns one Chinese patent and has applied for 26 others.

"There are companies in China that are starting to have a sense for the western standards of intellectual property," Altman said. "Alibaba is shipping stuff into the United States on a fairly substantial basis. They want to play in the US market."

Increasing value

Patents can help drive up the proceeds in IPOs for software firms, according to a 2012 study by a researcher at the University of Bordeaux in France. An additional patent obtained prior to the debut may increase proceeds by about 0.9 percent, the study showed.

At the same time, the US Supreme Court is considering possible limits to the scope of the types of e-commerce patents that Alibaba owns. The high court in March heard arguments on standards for allowing patent protection in software, and this week heard arguments about what kind of limits can be placed on broadly worded patents.

Eliminating potential litigation also can be important.

Last October, Twitter warned investors that its lack of a large patent portfolio could make the company vulnerable to litigation. And about 48 hours before its November IPO, the San Francisco-based social-media company disclosed it was the target of infringement claims from IBM. Twitter went on to raise $1.82 billion in its IPO and later settle with IBM in January by agreeing to buy 900 patents from the computer company.

Facebook IPO

Facebook went through a similar fight with Yahoo and ended up buying 750 patents from IBM to settle their dispute in July 2012, two months after it began selling shares to the public.

Google paid Yahoo to resolve a patent dispute months before its 2004 public offering and in 2011 bought more than 1,000 patents from IBM as part of a strategy to defend its Android operating system from infringement claims.

IBM, the world's largest computer-services provider, declined to provide details of its patent sale to Alibaba. But Ken King, general manager of intellectual property for the New York-based multinational corporation, said in January that it has received more US patents than any other company for 21 straight years, regularly strikes sales and licensing deals.

Beyond the litigation risk, obtaining patents is a way to protect existing businesses from competition and find new niches that it can profit from, said Don Fancher, a principal of Deloitte Financial Advisory Services in Atlanta.

New revenue

"They're trying to look ahead and see where their strategic direction is in terms of building the business, and creating new revenue streams and do they have the patented technology to help them take that step," Fancher said. "It's a crowded field, but it's also a hugely opportunistic field. Everything's moving to e-commerce."

Inventors based in the Chinese mainland received 6,597 US patents in 2013, the sixth-highest of any non-US country, according to patent office figures. In 2003, 424 patents were issued to inventors based in China.

In the Asian market, Alibaba has more than 1,900 issued and pending applications, Shah of Envision said. In the US, the company filed 50 applications in 2011, 85 in 2012 and 104 last year.

"In their home market, they've been very active," he said. "After their IPO, their patent filings will naturally increase here as well."