Judging by the sheer volume of feedback, our last column entitled, “What Makes a Patent Valuable (or Not)” apparently struck a chord. For those who missed it, here is the link. We often forget the unique nature of this asset class and the specialized skill set required to monetize it. Which brings me to the announcement last week of yet another online marketplace for patent transactions that aims to eliminate the necessity for brokers… More on this below.
We also saw two major appointments in the last week: first, the historic Senate vote that will bring judge Ketanji Brown Jackson to the Supreme Court when Justice Breyer (for whom she clerked) retires in June, and second the confirmation of Kathy Vidal as the new USPTO director. She will replace former Director Iancu who had been a champion for inventors’ rights during his tenure. I will elaborate on both appointments below.
As usual, as I focus on the macro picture in this newsletter, I want to remind everyone that we track everything that is going on in this world and for those who need their regular dose of news, once again you can follow me on either LinkedIn or Twitter where I post almost daily about some of the most newsworthy events..
Tangible IP News
While we have no formal deal to announce in this issue, we have at least 4 in various stages of closing and we are definitely feeling a more pronounced enthusiasm from buyers. As most of us recognize, NPEs continue to be a large buying segment but newer to the fray are the litigation funding entities who are starting to acquire patents directly. This continues a trend in the market where patents are essentially transacted for their assertion value and most operating companies are content to let the legal system play in their favor as they wait for the fights to be fought on their turf.
We have received strong interest on a portfolio we sent out a couple of weeks ago and which applies to foldable displays (a very hot area). Feel free to reach out to Erika Warner, VP Brokerage Services at firstname.lastname@example.org if you would like to receive the portfolio.
In the next few weeks, we will be sharing another exciting new portfolio that covers those handy floating camera buttons on your phones. It has both US and international coverage. Let us know if you’d like to review it when it is ready for primetime.
We have a buyer interested in acquiring US assets in the following technology sectors:
- HVAC (air- and water-cooled chillers, condensing units, air handlers/distribution, sensors, controls, automation, etc.)
- Commercial and residential security systems (access control, video management, cameras, sensors, etc.)
- Fire detection and suppression (controls, sensors, notification devices, water sprinklers/distribution, etc.)
Please reach out to Erika Warner with any assets that may match this request.
Vidal and Jackson Appointments; What Do They Mean to Us?
Let’s start with judge Jackson. First, let’s pause and celebrate the first black female judge being appointed to the highest tribunal, especially as she recalled growing up in a segregated world! Much has happened in one generation, and there is still much more to achieve so that perhaps one day we no longer mention this appointment as historical.
While she is replacing justice Breyer and therefore not expected to break the current 6-3 advantage held by the conservative justices on the SCOTUS bench, intellectual property cases are rarely divided along traditional “left” vs “right” lines and she could have significant impact there. Those who have read Justice Breyer’s opinions over the years (and especially his numerous off the cuff comments during oral arguments), more than likely do not miss his input. He clearly adopted the “patent troll” narrative pushed by Big Tech and it showed. And he was not the only one. In this regard, there was a very telling comment made by the US Court of Appeals for the Federal Circuit, Judge Kathleen O’Malley, in her first public speaking appearance since stepping down in March after 20 years on the bench. She essentially confirmed what many observers – including yours truly – have written for years; SCOTUS has essentially bought into the patent troll myth. “It was such an unhealthy dialogue, but you had Supreme Court cases where you could see the Supreme Court buying into it and they had no idea why they were buying into it, it was just so loud. There was nothing to really support it”.
So things can hardly get worse than they already are.
In her responses to the Senate Judiciary Committee’s questionnaire, judge Jackson noted that during her tenure on the district court she wrote 578 opinions, three of which involved pharmaceutical patent disputes. Looking at those, one can barely glimpse her predilection, and much is speculation at this point. On those 3 occasions, she navigated pharmaceutical cases centered around the power of administrative agencies, such as the FDA. This is interesting given that the Supreme Court has adjudicated on the constitutionality of another agency, the USPTO’s PTAB, in recent months, and there are likely to be more appeals surrounding the PTAB in the months/years to come.
She also addressed several questions Senator Tillis (R) asked on patent matters and she carefully threaded the needle, as would be expected, namely on 101, the Fintiv rule, etc.
She will also participate when the court hears the American Axle case that asks the court to clarify the “abstract idea” (s.101) doctrine it created almost a decade ago with Alice. Apparently, soon-to-be-Justice Jackson is not repelled by complex concepts. Great! We need decisions from the highest tribunal that show it at least understands the issues at stake and is willing to do the work so that the lower courts are not left with some legal jumble to decipher. Much has been left to desire in this regard in the last number of years…
As to the appointment of Kathy Vidal, albeit not as historic from a glass ceiling standpoint (Michelle Lee preceded her), it will be a lot more relevant to the IP world in the next four years. Indeed, Vidal will have more power over patent decisions than previous PTO heads, following a U.S. Supreme Court ruling last year that gave the director authority to review patent-eligibility rulings from the office’s Patent Trial and Appeal Board. In reality, she will already have a full load of matters to address, and my prediction is that she will very rarely step in. I just can’t picture an afterhours pow-wow slogging through a slew of appeals from PTAB decisions. On 101, she has argued both for and against patent eligibility in cases at the U.S. Court of Appeals for the Federal Circuit and said during a Senate hearing that there should be “more clarity” on the issue.
More importantly, and while she is certainly entitled to the benefit of the doubt as to her neutrality, it has been hard for many who advocate on behalf of inventors to see that she has represented many of the same large tech companies that have been at the forefront of dismantling the US patent system that she is now asked to oversee.
We Still Need Brokers, Whether We Like It or Not!
Last week, the LOT Network (technically the “License on Transfer” Network) announced the creation of an online patent exchange so that their roughly 2000 members can start buying and selling patents directly without the need to resort to these pesky brokers! They vow to be the Craig’s List of patents for operating companies: “We are simply your college bulletin board. When somebody has their couch they want to sell, they just post it on our website, and other members can join us and participate,” their CEO Ken Seddon said to IAM when asked about the new initiative.
Which begs the question, is the brokered patent market dead? To answer this, some historical context is useful. Since the dawn of patent transactions, there have been attempts to build an online marketplace similar to the MLS listings where sellers can easily find buyers and the latter can conveniently shop online for the patents they need or want, akin to Amazon. This would eliminate the need for brokers to act as matchmakers and by extension, the market becomes more liquid. At least, that is the theory.
In May 2000, IBM and Internet Capital Group (“ICG”) were the first to jointly announce the creation of the first online patent marketplace, including promised legal support, insurance and escrow accounts, etc. ICG invested $35M in the venture (IBM’s investment was not reported) and it took them almost 3 years to officially launch. While I am sure a few transactions occurred, if only because IBM put its own portfolio for sale through that tool they controlled, it never really picked up speed and was later abandoned, to the best of my knowledge.
A few years later, Ocean Tomo pioneered their famous IP Auctions where people would attend black tie events, eat fancy food, schmooze and, of course, raise their paddle for patent lots like you would do at your local high school fundraiser. It worked for a few years because it was all well scripted. Buyers would spend a ton of time before the auction completing due diligence on assets of interest and Intellectual Ventures ended up buying over 95% of all lots anyway according to some research that came a few years later… Then the law changed and the well dried. In parallel, Ocean Tomo sold its brokerage business to ICAP.
A decade ago, Tynax attempted to revive the concept of a patent exchange by listing thousands of patents that sellers could offer for free and buyers could peruse. They also had a team of brokers (this is how I started in this business) and most transactions that I was privy to at that time originated from the work the various brokers did. I don’t recall much happening on the exchange and it has been retired for a few years.
In 2015, IAM launched the IAM Market with great fanfare in the IP community and were able to attract a few large operating companies early on who agreed to post some patent portfolios for sale. Later, they extended the postings to brokers, and Tangible IP participated for close to two years posting several portfolios with the IAM Market. During that period, we received ONE inquiry from a prospect via that platform which didn’t progress. The online exchange still exists (it currently boasts 26 vendors and 235 listings), but unless our own experience was completely uncharacteristic, I would venture to say that this has not replaced the traditional brokered market. And finally, a few years ago, Ocean Tomo (which was just acquired by JS Held) took a second bite at the apple by creating their patent bid/ask market. Our understanding from conversations picked up at conferences, is that it has so far generated only a handful of transactions.
The point is, a lot of people have tried this formula. GreyB, an IP service provider, inventoried all online patent marketplaces and found 18 of them. Some of them are no longer in operation, but the sheer number shows that many have attempted to create the holy grail of an MLS for patents, and no one seems to have developed the magic recipe yet.
So, the question now becomes, why is that? Let’s look at real estate property as a comparison point, since this is the ideal everyone hopes to achieve. When it comes to selling and buying a house, there are few contextual attributes that no one will challenge: i) the asset class is well understood in that lay people can transact on it without the need to resort to experts (although most still use realtors and I would never personally forego an inspection); ii) the title’s validity is rarely debated and fully insured; iii) there is a standardized and consistent way to appraise the value of a given property and to borrow against it; iv) there are a great number of comparable transactions that are both relevant and publicly available; v) there is a large pool of prospective buyers and sellers and; vi) the closing process is relatively smooth.
Now compare this to the world of patents: Can it even be done? First, we have an asset class whose very validity – which should normally be presumed according to the law – is turned on its head and where 3 out of 4 challenged patents are invalidated and with no insurance product to protect the buyer. Completing an in-depth due diligence requires a team of technical and legal patent experts. Not to mention that there is no accepted method for valuing patents and most valuation reports are not grounded in reality with no regard for what the market will actually pay for those assets. It is also very difficult to collateralize patents and only a few firms offer that service at rates that are multiples higher than securing a mortgage with a bank. As all patents are inherently unique, there are no relevant comparable transactions and most of those are kept secret anyway. And finally, the pool of sellers and, especially of buyers, is extremely small.
Thus, it’s no wonder that just putting a list of patent numbers on a website will not suddenly resolve these underlying challenges and create this happy place where people can trade patents like they do stocks.
While we would love to simply list our portfolios on some exchange and see the marketplace do the rest, even for a small token, that is simply not realistic. First, we receive about 3-5 portfolios everyday that people want us to take under brokerage. Many of those can be discarded rapidly, but we will still invest time and money in about 20% of those in order to assess their monetization potential. Of that 20%, maybe one will be retained at the end, at best, meaning we spent time and resources on 19 out of 20 that we will have to decline taking.
And once we take a rare portfolio under brokerage, we will easily invest hundreds of hours collectively (and north of $50K per portfolio) to scrub the patents in depth for any potential flaws, review the whole prosecution history, conduct a prior art search, evidence of use search, market research, draft technical materials like a detailed executive summary and, more importantly, litigation grade claim charts. This means we do most of the prescreening for buyers, and at no cost to them, and by extension they only review the cream of the crop. Furthermore, we deliver those portfolios to them fully curated with a red bow and minimal remaining diligence work compared to what has already been done. Obviously, there are plenty of brokers who do none of that (we sometimes receive a plain list of patent numbers from those), but I can only compare the alternative to what we do ourselves.
This process by itself can take a few months and we haven’t even started sending the portfolio out to buyers. Then the real work starts in earnest and the sale cycle can take up to a year, including reaching out to hundreds of buyers in our network, fielding technical calls, regularly reporting to the owners, explaining the value proposition to several prospects, justifying pricing guidance, entertaining offers (when we are lucky to receive one), negotiating terms with both the client and the prospective buyer, reviewing and revising legal documents, and doing the hundred little things that make the difference between closing a transaction or not. In many cases, the deal structure will be a hybrid with a large portion of the proceeds tied in a back-end revenue sharing model, meaning the seller (and we as well) only get paid if and when the buyer is able to monetize the patents, often after investing considerable sums and time in asserting those against infringers, which means further dilution.
So as much as I would love to work myself out of my job, there is still no replacement in this market for the hard work reputable brokers must do. And while I wish the LOT network folks my best, I will be curious to see the volume of transactions that result over time from their Craig’s List approach to transacting patents.