If the health of the IP market is directly correlated to the number of offers received on patent portfolios available for sale then, I would say our patient is doing much better than 6-12 months ago. We have, in recent months, received numerous offers on various portfolios that we have had available for up to a year in some cases. Furthermore and to bolster our own view of the world, the latest sales data released by ROI is showing a definitive increase in asking price that is starting to solidify in 2019 and which presages of higher valuations to come. Their data show that in 2019, “the average asking price per asset rebounded significantly, shooting up 56% from $124,000 per asset to $194,000. The asking price per US-issued patent also increased sharply by 58% from $177,000 to $280,000. The asking prices have returned to 2015 and 2016 prices.” In short; it is not going to be a buyers’ market for much longer. So, hurry up!
In this regard, I have often written about the multitude of reasons why it makes little sense for patent owners to sit on patent assets (while paying expensive maintenance fees) with no thought to long term strategy. Whether the goal is to monetize non-core assets, let someone else assert the patents without any of the risks of retaliation or bring some non-dilutive capital while avoiding the long and expensive march that litigation brings forth, the reasons to sell one’s patent abound.
But when you flip the narrative and look to why someone is looking to acquire, the answer is not always as clear and the reasons will differ from one buyer to another. Here are a few to consider:
- Avoid a lawsuit: an obvious motivation to acquire a patent portfolio is for an infringing (or soon to be infringing) company to avoid the costs, risks and reputational damages of being sued for patent infringement. This strategy allows the company to obtain a valuable corporate asset (rather than a mere license to practice), which can in turn be monetized if it is also infringed by others. The cost for buying a given portfolio is usually less than it would cost to defend a lawsuit and challenge the validity of the patent(s) in question, without any of the uncertainty built into litigation. In most cases, this is preferable to other alternatives and yet, I am always surprised that so few companies avail themselves of this opportunity. The assets are most always offered at a much lower price than a patent owner will later require taking a license in the context of a lawsuit and don’t forget about the potential for significant damages should it make it all the right to trial.
- Monetize Assets Directly: This is the classic NPE play. An entity, preferably a well-funded one will essentially become a proxy for the inventor who does not have the appetite and resources to take on large companies that may be infringing its patents. The NPE takes all the risk, invests millions it may take to drive a successful campaign and, assuming it is successful, shares in the net proceeds with the inventor. On the other end of that spectrum, we see defensive aggregators buy patents to then license their members and prevent them from being on the receiving end of an assertion claim. Both types of entity play a valid and necessary role in this ecosystem.
- Acquire Freedom to Operate: Another solid reason to acquire patents is to dredge a path that will allow an operating company to innovate and bring new products in a given space. This strategy provides piece of mind to the acquiring company, knowing that it can build on a solid IP foundation that will leave it substantially risk free for the foreseeable future. This is particularly well suited for someone acquiring a portfolio of a certain size that is related to a specific area that the company is entering.
- Build a solid portfolio overnight: It takes well over a decade to organically build a decent patent portfolio. I remember when I joined Microsoft in 1995; despite its size and market dominance at that time, the company was still filing a hundred or so patents a year and only a few of the ones filed in the previous years had already issued. This left the company quite ill equipped when the likes of IBM came knocking at its door to discuss cross patent licensing terms. One way to speed this lengthy process and “bulk-up” rapidly is to acquire strategic patents on the open market, with an eye to portfolios that comprise key assets reading on the most likely competitors or applicable products.
- Secure International Coverage: Many companies make the same mistake of filing most if not all of their patents in only one main jurisdiction – usually where they are usually located (e.g. US, Germany, etc.). The companies that make it overtime irremediably want to enter new markets and find that their relative IP protection in their domestic market does not extend globally and other patent owners are waiting for them… Acquiring strategic global patent portfolios can provide cover in foreign markets where the company wants to enter. This is why we have witnessed many Chinese companies lately, such as Didi or Oppo, splurge on patent acquisitions with strong international coverage.
- Diminish The IPO Target: Most fast growing startups (think of all those unicorns) will reach the milestone of going public years before any patent strategy they may have (assuming they even do) has time to materialize. Yet, the moment they announce their upcoming IPO, some smell blood and start asserting their patents while it has some perceived artificial leverage. However, the smart ones make sure they acquire a core foundation of patents before making any such announcement. A good example of this strategy is Uber, which had virtually no patents a few years ago and then embarked on a rather aggressive acquisition program before lifting their foot from the gas pedal about 2 years ago after they had amassed a critical mass of assets in combination with their internal portfolio which was starting to contribute as well. They did this all before they went public.
- Buy and Hold: Finally, many buyers acquire patents for defensive reasons, meaning they do not really need those rights, but the assets read on some of their direct competitors and they want to have some ammunition should they later face a patent assertion claim from one of them. Sometimes, they also make the speculative bet that these patents will become quite strategic over time (e.g. Standard Essential Patents) and they may want to have some leverage in the industry.
Regardless of why companies acquire patents, there is a need for a more liquid market and more certainty over the asset class. Based on our own discussions with several buyers on a weekly basis and some recent trends (such as fewer IPRs, more favorable rulings in courts, a clear push in Congress to resolve the 101 issue), we predict that transactions will start accelerating again while valuation will continue their upward path. This should be good news, not only for sellers, but also for buyers who should be happy to trade a few more dollars for a more valuable and certain asset.