First, on behalf of the whole Tangible IP team, I’d like to thank our clients for a great 2013. We continued to broker several patent portfolios
(and have many more in closing) and significantly grew our advisory practice
. Since most of our business comes from word of mouth, we are pleased to announce that we will maintain our generous 15/15 referral program
You may have noticed that we don’t send our Pointers as often as before; first, this has been an extremely busy year for us. Second, we decided to communicate newsworthy events pertaining to intellectual property strategies and the patent marketplace as they happen through the magic of social media. You can therefore follow us up daily on Twitter. We also share those through both our LinkedIn and Facebook accounts.
Unless you were living on another planet this past year, you have been inundated by a flurry of IP-related news. Three years ago, headlines talking about IP were still a novelty; today they are come to be expected. This is what happens when a new asset class (intellectual capital) becomes mainstream and a whole cottage industry emerges to support it. Nevertheless, the whole IP marketplace is still a relatively young phenomenon and it hasn’t avoided the growing pains associated with any disruptive movement as it slowly matures as reflected below.
- The Patent Market:
On the transaction side, 2013 was certainly a more tepid reflection of 2012 when the IP market was red hot. Although the volume of reported deals is still too small to generalize, when combined with our own experience as one of the largest patent brokerage firm (over 2000 patents sold), there is no doubt that the IP market took a breather in 2013. Overall, there were fewer large transactions than in the previous year (there was only one reported 9 figures patent sale –Kodak- and it was actually done in 2012 but closed in 2013). More importantly, the median price per patent appears to have declined by about one third compared to a year before and now hovers at about USD $200,000/issued patent. Patents are unique by nature and this figure should be taken with a certain grain of salt given the very small number of public information and the large swings in value between assets. Nonetheless, most players in the industry seem to have observed a softening. Portfolios are harder to sell and they tend to sell for less than the previous record year.
What caused this downward swing? Does this mean the whole patent market was a fad or simply that we are back to the market norm?
First, the years leading to 2013 saw large companies struggling to catch up on building their patent portfolio as they realized that Patent Assertion Entities (aka as NPEs, aka Patent Trolls) and competitors were flexing their IP muscles in a way that left them exposed. We witnessed an arms race toward large portfolio acquisitions starting with the famous Nortel deal (USD $4,5B for 6000 patents), followed quickly by large transactions where Google acquired hundreds of IBM patents and paid a whopping USD $12.5B for Motorola Mobility (which is just resold to Lenovo for USD $3B, but kept most of the patents). Then other newcomers such as Facebook and Twitter (who had only a handful of patents) followed suit and quickly amassed a war chest of patents though acquisitions that would have taken decades to obtain through organic portfolio growth. This provided them with room to innovate and better fend off threats from more entrenched players. At some point, these firms found themselves busy trying to understand what they had bought and how to use it. They also likely faced “patent fatigue” with management, who wanted to see the ROI on the previous large deals before opening the checkbooks again. This is not to say that these companies stopped buying new patents they saw on the secondary market; they just became more surgical in their approach and took advantage of a larger supply of patents fueled by the previous years in order to drive the prices down. The good news is that current prices are roughly in line with where they were 2 years ago and do not show further signs of decline.
One other factor that contributed to putting a lid on the market was Intellectual Venture (IV)- the largest patent aggregator in the world with reportedly over 55,000 patents- coming to a relative halt in their purchase of new assets. IV’s second acquisition fund had dried up and their third one took a lot longer (more than one year) than expected. Those in the market know that IV brings a lot of liquidity to the market and their reduced activity in 2013 impacted the whole industry. The good news is that they apparently closed on their USD $3B new fund! These developments should contribute to a more active market and a rebalancing of supply and demand in 2014.
- The Politics Behind Patent Trolls:
2013 also saw a full frontal attack on so called Patent Trolls on the political and legislative scenes, which in turn caused uncertainty in the IP market as to what rules would govern IP transactions. Lobbying firms on K Street in Washington D.C. must be rubbing their hands in delight as players on both sides of the debate have been burying them with money to make their case. So far, the Anti Trolls team seems to have the leg up on the Pro-Trolls team and we have seen a slew of new federal as well as state bills proposing to curb the perceived abuse of PAEs. Some have referred to this as a new Whack-a-Troll game. As in most battles fought in D.C., facts and reason don’t receive their fair share of attention; indeed it is a lot easier to conjure images of ugly trolls lurking under a bridge to justify legislative activism, especially when it is financed by wealthy interests groups (mostly large operating companies) that stand to lose big if small inventors are able to continue to sell or otherwise assert their inventions through the only entities who have the means to take on the big guys. In fact, despite all the accusations against unsavory practices by a handful of patent trolls (many of which are deserved), the fact is that 80% of patent litigation this past year was initiated by operating companies, not trolls. Therefore, all this anti-troll legislation, should it come to pass, could fall subject to the law of unintended consequences (as far as legislators are concerned) and penalize primarily the small inventors who had finally found a way to monetize their innovations by leveraging specialized firms in the secondary market.
Ultimately, we believe some amount of reason will prevail once the most abusive practices (e.g. sending 5000 cease and desist letters to retailers) have been curbed and more transparency established, both aspects that all sides seem to agree on. Otherwise, overreaching laws will be contested – successfully we think- on the very strong constitutional grounds that patent owners have been granted a monopoly to exclude others from practicing their inventions, or earn a reasonable royalty if they do by taking a license. The US Constitution says nothing about the obligation for the person enforcing the patent to be the original inventor, the same way laws don’t require that you must have built the house you currently live in order to make your property boundaries respected by your neighbors. Let’s not forget that a patent is no more than a federal property title granting a time limited monopoly in exchange for the inventor eventually contributing an invention to the public domain. If one side of the bargain is lost and patents cannot be licensed or traded freely as the law intended, we will have come full circle and go back to a world of secrecy, which was the very impetus in the middle age behind the first “letters patent”.
- Judicial Activism:
Granted, it would be nice to know from time to time what a patent exactly means! Which brings us to our last point. 2013 saw a flurry of decisions by courts around the world dealing with IP matters, many of them by high federal courts in the US. Many judges are not happy (rightly so) with patent quality and have taken unto themselves to raise the bar. Some judges such as US Court of Appeals for the Federal Circuit Chief Justice Randall Rader even took to the public by penning an op-ed in the New York Times arguing for “fee shifting” provisions to punish aggressive litigants who lose their patent assertion suits. This is one of the key provisions in the current Innovation Act that passed by the US House or Representatives and which is presently on the Senate Floor. While well intended, this provision and several others create the risk of granting judges or juries who do not agree with a plaintiff’s arguments to succumb to the temptation of further punishing the unsuccessful Plaintiff as a slight against PAEs in general. Once again, this may force a lot of firms who provide useful and necessary services to small inventors to fold their bags and move on to another businesses, leaving those inventors with few alternatives to reap the just rewards of their innovations.
Therefore, we believe 2014 will be a fascinating year as we should have more clarity on the new legislative framework that will emerge from these efforts. We are also scheduled before June to see the US Supreme Court decide the fate of perennially controversial software patents. An adverse decision would send a shock wave to the market (there are millions of software patents in circulation) of a magnitude that one can’t even start to comprehend. We’ll follow these closely and report back.
In the meantime, we’ll continue to service companies and their investors by providing strategic IP advisory
and other patent related services
to help IP owners monetize their innovation through patent sales
and licensing programs