Fraserburgh Ten rules for choosing a non-practising entity The universe of non-practising entities overprotected. Monetising excess has grown dramatically over the past 10 core patents generates income that is years; companies with quality patents to pure profit. monetise should consider 10 key factors • Changes in corporate strategy, restructuring when choosing which to work with or M&A activity create ‘orphan IP’. This no longer has operating value and so By Chris Donegan, Fraserburgh monetisation is an obvious strategy. • The patent assets of distressed companies The top 20 corporate investors in R&D may be worth more than the company’s deployed US$142 billion on sales of US$1.6 market capitalisation itself (eg, Kodak, trillion in 2011. Surprisingly, this huge Adaptix or Nortel). investment did not directly translate into • The value of key patents may underpin product innovation, higher margins, enhanced financing. One way to validate valuation is competitive positioning or market share. For to monetise all or part of the portfolio. example, the productivity of pharmaceutical company R&D remains below 10%, and Google, In each of these cases the most Apple and Amazon did not even make the list. straightforward route to patent monetisation is What this huge spend did create was to sell the assets. However, many trade buyers intellectual property, as illustrated by the are likely to be competitors, and while there relentless increase in patent filings in all have been some notable patent sales recently jurisdictions. The World Intellectual Property (eg, the US$4.5 billion sale of Nortel patents to Organisation records almost 1 million patents the Rockstar consortium), the notion of an filed since 1985. However, these are expensive active industry participant selling its patent for inventors to file, maintain and prosecute. trove to a competitor is counterintuitive. The In seeking returns on their sunk (and pharmaceutical industry is an exception in this usually expensed) IP spend, multinationals are regard, where the percentage of new drugs increasingly looking to monetise their patent derived from in-licensed patents ranged from portfolios. This activity is big business. Patent 13% (Merck) to 100% (Baxter) between 1989 and monetisation through licensing results in over 2004, with an industry average of over 50%. US$500 billion of revenues in the United If a straightforward patent sale is rejected States each year, while in the last 12 months as a monetisation option, the next choice for a alone notable patent sales have exceeded company is to generate income via assertion- US$30 billion. based licensing or enforcement using either The specific reasons for a patent in-house staff or external parties. In the monetisation effort may vary, but typically absence of an approved pool, the choice turns include the following: to in-house enforcement, with the business • Companies may wish to offset the costs of and reputational risks of countersuit, or via a their IP protection efforts by harvesting non-practising entity (NPE) – sometimes licensing fees. referred to as a patent troll. • Core business areas are often The universe of NPEs has grown 28 IP Monetisation www.iam-magazine.com Fraserburgh dramatically over the past 10 years, with the settlement. This is a ‘scorched earth’ approach. success of incumbents, intense industry An alternative approach, which can be competitiveness highlighting the strategic characterised as ‘conference room litigation’, value of patent assets and rising infringement relies on the NPE validating its claim through awards. For example, Acacia Technology (a rigorous industry and technical analysis, NASDAQ-listed NPE) has seen its market providing the infringer with a compelling capitalisation grow to almost US$2 billion business case for significant accrued royalty during that time. Consequently, companies payments. Typically, this approach takes longer with quality patents to monetise now have a to prepare and is more costly in terms of due choice of NPEs to work with. In determining diligence. It often involves fewer, more the best fit for a particular transaction, there significant participants and is focused on are 10 key factors to consider. getting the infringer to settle based on the quality and strength of the claim for amounts Understand market positioning that tend to be two to three times larger. The NPEs vary by size, quality and depth of staff, threat of litigation is there, but as a last resort. corporate culture, business model, investment For a company considering which NPE to horizon and risk appetite. An NPE may select, the choice of strategy depends on the IP specialise in a particular technology area (eg, portfolio itself, market conditions and appetite semiconductors) or have particular expertise in for reputational risk. dealing with blue-chip companies or geographic regions (eg, Asia). An NPE may have Be clear on targets a strong track record in US litigation or Asian Many companies do not wish an NPE to litigate licensing, or be more of a hybrid NPE/strategic against their customers, suppliers or other adviser/private equity investor. The market potential strategic partners. However, a NPE is positioning of a particular NPE is a reflection motivated by the straightforward desire to of its origin, legacy and modus operandi. Ideally, monetise to the fullest extent the patents that when selecting an NPE, a company should meet it acquires. To address this problem, the seller more than one and find a group which has a may wish to provide the NPE with only a specialism and culture that is aligned with the limited list of targets (a so-called ‘white list’). company’s objectives. Failing to do this can There is no guarantee that the NPE will respect have some significant negative side effects, this list and often the seller may try to enforce including failure to monetise, restrictive covenants around its intellectual reputational/brand damage and tainting of property or retain conferrable licences that other intellectual property. allow it to protect strategic counterparties. Hewlett-Packard was one company noted for Be comfortable with the this approach. Obviously, any limitation in monetisation strategy terms of applicability for a patent portfolio Most patent licensing and assertion reduces its value and, more importantly, may conversations are settled out of court and the result in a denial of enforcement in the United quantum of damages/royalties claimed often States, as noted in the recent International drives the appropriate strategy for an NPE. Trade Commission enforcement action Where the NPE believes that it has a wide between Apple and HTC. universe of counterparties to approach, its policy may be to file a modest settlement claim Critically assess the NPE’s with each potential infringer and start the clock value proposition ticking. Its hope in this strategy is that the Each NPE has its own value proposition. For settlement amount is so far below the cost of example, Acacia Technologies is vocal in its defending litigation that the aggregate out-of- belief that a long operating history and broad- court settlement generates a significant sum. based IP portfolio provide it with a unique edge. Multiple aggressive parallel lawsuits, contingent Its belief is that its experience curve of execution legal support and a great deal of publicity are – specifically, its knowledge of how certain used to create negative PR to pressure a infringers will react – combined with the www.iam-magazine.com IP Monetisation 29 Fraserburgh richness of prior art data that it has accumulated company, the size, brand quality and technical over time gives it an edge. A reverse argument, strength of the portfolio and the negotiating however, favours a specialist NPE with a specific skills of the participants. technical focus (eg, process patents) or legal jurisdiction expertise (eg, Germany or Korea). In Understand the NPE’s model determining which approach to take, a company NPE business models include defensive should understand which factors are most licensing (eg, RPX), patent litigation (eg, Acacia relevant to the niche product/market in question Technologies) and outsourced licensing as a (eg, whether relationships with the infringer are service (eg, Mosaid). Other companies that critical or whether other factors, such as size and acquire and assert third-party patents may be resources, weigh more heavily in securing the operating companies (eg, GE’s former licensing desired result). and trading division) or unique business models, such as Intellectual Ventures. Given this Seek a deal to maximise revenue generation diversity, the selection process for companies The ‘tradable value’ of patent portfolios can be a complex one and is often driven by a approximates to 5% of their predicted confluence of factors. These may include: assertion value. Notwithstanding this rule, • Personal relationships with key people. certain patent and technology portfolios, such • Revenue targets. as those of Motorola Mobility or Nortel, have • Time horizon. generated sale prices far in excess of expected • Market impact. tradable values. This illustrates a simple point: • Wider strategic business relationships with an asset is worth what someone is prepared to infringers. pay for it, particularly when it has strategic value for the buyer. It has also led to a trend of Alcatel-Lucent’s decision to shift its entire patent inflation as patent owners benchmark IP portfolio to RPX in May 2012 is a good case against market prices. study to evaluate in this respect. The decision The bid/offer gap between what a company to outsource may limit or preclude litigation believes its patents are worth and what an NPE since RPX statutes forbid it. is willing to pay has rarely been wider. One way to address this mismatch is to agree profit share Understand the NPE’s investor base arrangements between the company and the An NPE has shareholders. The risk appetite NPE. Workable arrangements recognise the need and industry norms of these investors will for an NPE to generate a base case internal rate influence the manner in which the NPE of return of between 25% and 30%.