CRAFTING AN EFFECTIVE PATENT STRATEGY: HOW DROPBOX BUILT ITS PORTFOLIO

In this blog series, we’re examining how successful startups have approached the patent process, and how those strategies dovetail with our discussions in earlier blog posts about crafting a smart patent strategy. Previous posts in the series: Uber, FitBit, Square.

About one year ago, the cloud storage company Dropbox successfully filed for an initial public offering. Almost every startup aims to achieve a successful exit — and this is one of the biggest tech IPOs in recent memory.

In this post, we’ll examine how Dropbox leveraged their patent strategy to achieve commercial success.

DROPBOX’S SERVICE OFFERINGS

Dropbox is a software as a service (SaaS) company that started out, simply, as a cloud file hosting service.

The company has since expanded its service offerings to encompass multiple aspects of content collaboration, including:

• The capability to sync information across multiple devices, enabling easy file sharing
• Business users on enterprise-level subscription plans enjoy seamless integrations with products like Salesforce and Microsoft Office
• A real-time collaboration tool called Dropbox Paper

Dropbox relies on its free service in order to convert users into paying customers. It currently has 500 million registered users in total. 11 million of those are paying subscribers — the majority are individual users, but 30% are business accounts.

DROPBOX’S MARKET VALUATION

Prior to its IPO, Dropbox was valued at $10 billion. Indeed, the company set a record as the most highly-valued tech unicorn (a startup valued at over $1 billion).

Its 2018 fiscal revenue was $1,391.7 million.

DROPBOX’S POSITION IN THE INDUSTRY

The market for cloud storage services is extensive, which means Dropbox faces a number of close competitors:

• Box is Dropbox’s main competitor, especially in enterprise storage for businesses.
• The market for consumer cloud offerings is fairly crowded and includes the likes of Google, Microsoft, and Amazon.
• The other key player in the space for worker collaboration is Atlassian.

AN OVERVIEW OF DROPBOX’S PATENT PORTFOLIO

Like many tech startups, Dropbox didn’t pursue much patenting activity until right before its IPO.

For example, data reported by IAM Media supports this claim. The data trend reported by IAM Media shows:

• Earliest patenting activity took place in 2003
• Low patenting activity through 2013
• Increased patenting activity from 2013-2015
• Exponentially increased patent activity from 2015-2017

THE ROLE OF ACQUISITIONS IN DROPBOX’S PATENT STRATEGY

Starting around 2012 and 2013, Dropbox began relying heavily on acquisitions to expand its patent portfolio, according to IAM Media.

As a result, the company picked up key patents from larger companies like Sony (63 patent assets in 2014) and IBM (105 patent assets in 2016).

DROPBOX’S PATENT FILINGS BY GEOGRAPHY

According to Relecura, the top three jurisdictions where Dropbox files its patent applications are:

1. The United States (70.6%)
2. Europe (8.9%)
3. Australia (7.5%)

In other words, Dropbox has a very U.S.-centric portfolio. This suggests that international patent protection is not a key focus for the company, and Dropbox’s long-term business goals are better served through building a robust domestic portfolio.

DROPBOX’S PATENT PORTFOLIO: TECHNOLOGICAL BREAKDOWN

The type of technology that Dropbox is patenting is relatively homogeneous; the company’s portfolio primarily focuses on its core technology for managing shared content.

According to Relecura, the majority of Dropbox’s patents claim either data processing (44.8%) or data transmission (31%) technology.

The remainder of Dropbox’s patents relates to communications, content management, data presentation, and predictive modeling.

OPEN-SOURCE SOFTWARE: AN INTEGRAL PART OF DROPBOX’S TECHNOLOGY

In a previous blog post, we’ve discussed how using open-source software could potentially complicate your IP strategy. For this reason, some SaaS companies tend to shy away from open-source code.

But Dropbox takes a somewhat different, hybrid approach: They do incorporate open-source software in their products, as well as in the development process. One good example is their streaming image compression format, Lepton.

As Gideon Myles — the Lead Counsel for Patents & Open Source for Dropbox — told IPWatchDog, “Our engineers are encouraged to consider open source for build tools, compilers, and analytics tools that allow us to evaluate our products.”

WHY DROPBOX USES A HYBRID STRATEGY

In writing for both IPWatchDog and Dropbox’s own blog, Myles raised four key reasons why Dropbox uses a hybrid approach:

1. Peace of mind: Because the open source community is helping to refine and upgrade the code, it’s more likely that weaknesses and bugs will be identified and fixed.
2. Cost savings: By distributing the development legwork to the open source community, Dropbox is helping to lighten their engineers’ workloads.
3. Promote your platform: Offering a useful, free service could help convince people to convert into paying customers. (And as we mentioned at the start of the post, that’s how Dropbox’s entire business model works!)
4. Attract and retain talent: Open-source code showcases the achievements of Dropbox’s engineers to the rest of the community — and could maybe even attract like-minded folks to join the team.

HOW DROPBOX INCORPORATES OPEN-SOURCE CODE INTO THEIR PATENTED SOFTWARE

Myles outlined several “ground rules” governing Dropbox’s use of open-source code:

1. Keep track of what open-source code has been used, so as to avoid IP conflicts down the line.
2. Avoid using any restrictive code that would require Dropbox’s final product to be open-sourced.
3. Actively contribute to the open-source community by participating in other people’s projects, and also offering some open-source projects some of their own projects.

HOW TO PROTECT PROPRIETARY IP THAT INCLUDES OPEN-SOURCE CODE

To protect “hybrid” IP that incorporates a mix of proprietary and open-source code, Myles recommends using:

• Licensing agreements: Ensure that licensees can use your code only for the specified implementation, and not for other functions.
  • Apache 2.0 license
  • Custom licenses with more defensive termination clauses
• Defensive aggregators: Many companies feel that they can reduce the risk of IP litigation by joining forces with similar companies.
  • LOT Network
  • Open Innovation Network

CRAFTING A SMART PATENT STRATEGY FOR SAAS STARTUPS 

Software patents have always been controversial, and they’ve presented some unique legal challenges over the year, especially in the wake of the Supreme Court’s 2014 ruling on Alice.

But software is still generally eligible for patent protection. Avoid potential landmines by engaging a patent professional to help prepare your patent application.

At Henry Patent Law Firm, we’re always eager to hear from other tech innovators. Contact us now to find out how we can help!