(You only get to make that joke once, so I just could not pass on the opportunity 😊)
Hello all and Happy New Year/New Decade to you, whether it is the one that just started or, for our Asian friends, the one about to start.
First the good news: we closed another transaction a few weeks ago, when a large operating company previously given the opportunity to acquire one of our brokered portfolios opted instead to taking a voluntary license to the patents on offer. We are now closing a related transaction with a different acquirer for the same patents. See the announcement here for more details. This type of deal structure has become increasingly common for us this past year as a result of our constructive and long-term relationships with many technology companies. While this approach to monetization requires a lot more work than closing a one off sale, the obvious benefit to our clients is that they receive some concrete validation (and cash) for their patents early on, and we can then continue to offer the patents to others for a sale or additional licenses. With 6 more transactions in various stages of closing, we were off to a great start for 2020!
I am also very proud to share that we start this new year with an even deeper and stronger management team with the recent addition of two stellar individuals to our group with deep technical expertise in their respective areas; Seattle-based Dr. Joon Maeng, a regular collaborator, joins us officially as VP Technology for Telecommunication Protocols & Standards, while Ottawa-based veteran Mr. Richard Moses joins as VP Technology for Semiconductors. With these additions, there are very few brokerage or advisory projects that we cannot tackle. We actually almost doubled our advisory practice in 2019. Finally, we may have some exciting news to share in the near future regarding the expansion of our activities internationally.
While I am personally very excited about the next 12 months – and beyond – for our own business, the more important question is: how is the IP market actually behaving? To answer this, and as I do from time to time, let’s look at our key indicators that tend to explain current and future market trends:
- Noticeable change in the supply & demand chain;
- New case law that may have a long-lasting impact;
- Change in the regulatory environment;
- Recent large damage awards against infringers;
- Stock performance of publicly traded IP companies (PIPCOs);
All the above are susceptible, especially when taken together, to shifting the market one way or another. Therefore, this is more about trying to paint a macro picture of the marketplace than react to any single event. Still, for those who need their daily dose of news, once again you can follow us on either LinkedIn or Twitter, where we post regularly.
Happy Reading!
Louis
Supply/Demand:
The second half of 2019 saw a continuation of a trend that actually started in 2018 where we saw several large patent owners start to divest large chunks of their own portfolios. The goal is not necessarily to leverage the privateer model through direct or indirect assertion, but rather to prune vast families of non-core, nonperforming assets through the brokered market. Many of these are now our clients and we know several more considering the same move. In the meantime, Intellectual Ventures, one of the largest patent aggregators, shows no sign of slowing their offload of patents, selling large swaths to well-known NPEs who will then monetize them through licensing and assertion activities.
On the other hand, we saw two related announcements in 2019 that substantially impeded the future marketability of very large portfolios, portfolios historically used actively by their owners to either assert or divest. Indeed, both Microsoft and, just a few weeks ago, IBM joined the LOT Network, which means that each company’s entire portfolio is now encumbered by the LOT license. This indicates that well north of 100,000 patents in aggregate are now off limits for traditional monetization to anyone who is not an operating company. To oversimplify a bit, let’s simply say that these patents will never be sold to a third party, or at least not for their full market value, as the LOT encumbrance is not one that current patent buyers are interested in.
Another phenomenon that appears to be gaining traction is the specialized patent pool, such as Avanci (IoT space), whose success means more licensing and less litigation. We also saw a new entrant in the defensive aggregator space with VideoLabs a few months ago. Those patents are not going to hit the market for sale, so in that sense, they tend to decrease supply. In short, I would venture to say that overall patent supply should probably continue to slowly decrease in 2020, although not in a very significant way.
On the demand side, most large technology companies that used to acquire patents have continued to pare down that activity and, in some instances, dismantled their teams altogether. While those young unicorns (e.g. Uber), who were very active in acquiring patent assets pre- IPO, are now relying primarily on in house innovations to grow their portfolio organically and happy to rely on a few defensive aggregators (RPX, AST, OIN, etc.) to act as a clearing house on their behalf.
Also, the modus operandi of most large companies remains to rely on the “efficient infringement” model which does not require them to acquire patents as a way to diminish their risk upfront. It is only efficient if you pay nothing after all… Plus, one needs only short exposure to a large corporate IP law department (I was part of Microsoft’s for 15 years) to appreciate that pre-litigation offers do not easily garner the same attention as a formal complaint generates. Remember, the way budgets are handled internally actually disincentivizes a business unit from spending money on licensing or acquiring patent rights (as it would hit their own P&L) as opposed to letting the litigators take care of the risk as part of the general corporate budget dedicated to fending off lawsuits.
So, while it may be completely rational and more economical for an infringer to buy a patent or take an early license before litigation raises the asking price, it just does not happen very often. Ironically, the fact that most large patent holders actually filed about 15% more patents in 2019 than the previous year indicates that they still consider patents (theirs, at least!) to be a valuable asset to own.
Finally, as we discussed several months ago, a number of new NPEs entered the market in 2019, many of whom are willing (at least this is their pitch) to pay cash for good portfolios, which is a pattern we have not seen since 2012. It is also worth noting, there is more liquidity available to finance NPE-driven patent litigation and at more competitive rates than before. Since I often say that NPEs are the canaries in the coal mine, this by itself tips the balance in my mind as to where things are actually heading, and the latest valuation data suggests an uptick in the market.
Net: Slight positive
Case Law:
2019 saw a busy first half year on the judicial front and we discussed the most important decisions in previous columns. Again, this year, some cases were favorable to patentees, others not so much. Sadly, we still have the same uncertainty over validity of US patents that we had entering 2019, just more case law to digest. With decisions going in all directions, there is no consistent pattern emerging and your case is more likely to be determined by the district you sue in, or ultimately by the appeal panel you get, which is usually the realm of a much less developed legal systems…
While the Federal Circuit has begged the Supreme Court to bring forth clarity post-Alice (much of which is of its own creation), SCOTUS has systemically (close to 50 times and counting) refused to takes cases that would have allowed it to revisit its ubiquitous Alice doctrine, now that it can clearly see the mess it made. With nowhere else to turn to, responsibility sits squarely with Congress to take up the mantel and fix this situation permanently for patent holders. More on this below. In the meantime, with some judicious venue shopping (e.g. Western or Eastern District of Texas), most 101 issues can be relegated to trial instead of being subject to a summary disposition, which gives a slight edge to patent holders in those jurisdictions.
Finally, the Federal Circuit issued a momentous ruling a few month ago in Arthrex that still has everyone scratching their heads, when a panel ruled that the PTBA appointment process of administrative judges is unconstitutional, but failed short of telling lower courts (and the USPTO) how to deal with it and what it means concretely for past decisions. In a rather unprecedented gesture illustrating the uncertainty and confusion the ruling has created, both parties in the case are demanding the full court takes the case en banc and issues a better decision.
So, the US court system remains in shambles, but at least the number of Inter Partes reviews that are instituted by the PTAB appears to be down by a decent rate from last year and that patent owners are given a fairer shot at amending their claims. So, the two-headed monster of IPRs and Alice is not as potent as it once was. And let’s not forget that Europe (UK and Germany) are still very appealing for patent owners. Also positive, China has recently changed rules to allow for greater damages, which was, to this day, the main shortcoming of asserting patents in the PRC.
Net: Slight positive
Regulatory Environment:
Fall of 2019 also witnessed the introduction of the “Inventor Rights Act”, which goes further than any previous bill project in pushing the pro-inventor narrative. We also witnessed the re-introduction (for the 5th time!) of the same old “STRONGER Patent Act” sponsored by Senators Tillis (R) and Coons (D). While these are encouraging if someone is trying to read the tea leaves as to who has Congress’ ear these days, they are simply feel good measures since no one “in the know” has any realistic hope that either bill will pass in this ever-divided Congress during a presidential election year. On a positive note however, we saw the Trump administration strengthened its position on enforcement of standard essential patents and the recent Phase 1 of the China Trade Agreement is apparently addressing the perennial US complaint of trade secrets misappropriation by Chinese companies (or the government itself).
Net: Slight positive
Damage Awards:
As we reported a few months ago, unlike 2018 which had few damages awards in excess of $100M, many of which were overturned, 2019 saw a steadier flow of lower, but still significant damages, and a smaller standard deviation between decisions, pointing to a more established approach in calculating actual damages. This is a welcome improvement over the past years where it was very hard to predict the recoupable damages amounts, as the perennial “rule of thumb” for calculating a reasonable royalty on infringing devices was turned on its head. Having said that, most large infringers are still taking a “scorched earth” approach to fending off patent assertions.
Net: Neutral
PIPCOs:
Publicly traded patent licensing companies are NPEs that chose the public offering financing path. For most, it has historically been a disaster, especially the smaller ones whose balance sheets are forced open for all to see and enables any opponent to know when it will likely run out of cash. It is a model that has proved to be a failure (the latest example being Inventergy) except for the largest ones where reporting a strong cash flow can actually have a positive effect. Ip Close Up used to track an index of the main PIPCOs, but we have not seen any update since March of 2019 and I suspect the main reason is that there are too few left now and there are a number of new entrants that fund their activities with private money, thus not subject to this kind of transparency.
Additionally, even the larger ones have not fared well in 2019, especially compared to the main indexes and the stocks of Finjan, InterDigital, Acacia Research and Virxnet were all down year to year. This suggests that the public is not sold on their story going forward, although I am not sure institutional investors who do not dabble in patent monetization on a daily basis can fully appreciate this industry.
Net: Slight negative
Net-Net:
Many of the factors above have a direct impact on business decisions made when confronted with a request to take a patent license and point overall to a slowly but surely improving environment. Remember, the easier it is for patent owners to access funding to assert against infringers, the more appealing pre-litigation settlements and licenses should become over time, which in turn will continue to push valuations up for patents offered on the market.
Therefore, in view of the above, we renew our previous guidance from last Fall that patent valuations continue to inch their way up, pending any significant changes coming from Congress or the higher courts on 101 doctrine, in which case a favorable outcome could create an immediate surge. We should soon find out whether our views are supported by the latest market reports that should be released in the near future. Stay tuned!