IP Market Updates
As we are about to close calendar year 2016, I thought this would be a good time to reflect upon the state of affairs for the IP market in general. If I step back a moment and look at the last 12 months, I can essentially distill it in two words: It sucks!... But there is hope, keep reading.
December 23, 2016
Before I delve into more details, I need to remind our readers a few usual caveats and assumptions:
- the patent market is very illiquid, with few reported transactions and a small universe of data to establish reliable statistics. Furthermore, in M&A transactions which are more often reported, it is usually impossible to know how much value (if any) was attributed to the patent portfolio of the company being acquired. So not much help there either;
- each patent is unique by nature (as it represents an invention that must be “novel” in the first place) and there are NO comparable transactions that really make sense, even in the same technical area;
- in many cases, we don’t even know what the asking price for transacted patents is, as many sellers do not want to publicize their “ask” in the context of a sale to avoid that a smaller price tag might come back to haunt them later should they need to assert their patents;
- since most of the patents being offered for sale are deemed to be infringed by someone in the industry, a decent portion of what is not sold eventually ends up being litigated. In other words, offering a patent for sale initially has somehow replaced what used to be an offer to take a license, but without the risks -in the US- for a potential infringer to file a preemptive lawsuit to have the patent(s) in question declared invalided and/or not infringed (aka a “DJ”);
Having laid this background, and based on both empirical data made public throughout the year and many private discussions we have with buyers, sellers and intermediaries alike, there is a clear consensus that patentvalues in general have decreased significantly in 2016 compared to 2015. Many go as far as stating that such a downturn approaches 50% from where values were about 2 years ago (compare this to the “great recession” where major stock indexes were down less than 40%). I tend to agree with these numbers based on our own experience. With a new deal closing almost every single month these past 2 years, we have enough private information to support this conclusion (although we still tend to do much better than the industry average ).
In 2016, we noticed that operating companies are not only willing to present “low ball” offers in what they feel is a buyers’ market; they are often ready to remain on the sidelines indefinitely and simply play the waiting game, knowing full well that the deck is stacked in their favor. This has been made possible in large part because Non-Practicing Entities (NPEs) are no longer willing to disburse much (if any) cash upfront to acquire patents, as they need to keep their powder dry for the inevitable challenge (generally via an Inter Partes Review) that will come the minute they want to monetize these new assets. This means that operating companies, who rarely fight among themselves for the same assets, no longer feel the threat of a competitive offer from an NPE. This in turn removes the pressure to make a reasonable offer and has wrecked the equilibrium between supply and demand that we had enjoyed historically.
Nevertheless, we suddenly are starting to see increased activity from some operating companies and the defensive aggregators who represent them. Why, might you say? The causes for this are rather simple: first, values cannot go much lower as there is a feeling they hit rock bottom a few months ago - and prices will only go up; second, the US Supreme Court last summer relaxed the test for proving willful infringement, which has already led to awards for enhanced damages against infringers. I know from my years in the patent leadership team at a Fortune 50 company that the threat of having to pay up to 3 times the amount that the other side is asking for has a way to make it to the boardrooms… and open checkbooks. Third, patent owners who have foreign assets, especially in Germany and China, have been able to recreate the pressure (risk of injunctive relief) that no longer exists in the US and leverage those patents to force global settlements they could not have achieved with US patents only.
Now, what we really need to return to a more balanced IP market are essentially two things: i) a very large award that will make the headlines and instill some fear in the boardrooms that the “efficient infringer” model is not without risks and ii) some large technology companies flexing their patent muscles the way Apple and Samsung were doing it a few years back, and which forced everyone else to pay attention to avoid getting caught empty ended.
Guess what: last week we saw a judge order generic drug company GILEAD to pay $2.54 billion in damages for infringing upon MERCK’s Hepatitis C patents. Furthermore, that gigantic award could technically be increased further if GILEAD is deemed to have willfully infringed MERCK’s patents. And just two days ago, in a surprising development, NOKIA filed a slew of lawsuits against APPLE alleging infringement of no fewer than 32 of its patents.
Therefore, 2017 has in stock to be a lot more exciting for patent owners than last year was. Time only will tell. In the meantime, on behalf of the whole team at Tangible IP, I wish our 12,000 readers a Merry Christmas and Happy Holiday Season.
We will see you again in 2017.
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