Happy Holidays to each of you. We have now survived Thanksgiving travel and Black Friday and we are gearing up for the final push to Christmas. Never a dull moment. In other parts of the world, China and Iran are (perhaps) realizing what happens when people have had enough while, others pretend all is well in Qatar so that they can watch the World Cup guilt free. And last but not least, the French finally reached their long-standing goal of having their beloved “baguette” enter the upper crust and are being added to the U.N.’s list of intangible cultural heritage as a cherished tradition to be preserved by humanity. So, all is apparently well then, which makes this newsletter a possible downer as we tackle the delicate issue of monetizing IP during a recession!
This will thus be our last newsletter of 2022 and we’ll be back in early 2023 with our year in review. But I would be remiss to finish the year without addressing the elephant in the room, i.e., what happens to the IP market, and more particularly to patent valuations and transactions, once the economy enters into a recession. I will address this 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.
Happy reading and happy holidays to everyone. My dearest wish is for all to stay healthy and do their modest part to help this beautiful planet get a respite from our aggressions.
Tangible IP News
Both Erika Warner and I head to NYC to participate at the 9th edition of IP Dealmakers next week (I’ll report more on the event through LinkedIn and Twitter). We are also pleased to announce the successful brokering of a small portfolio in the Control/Assurance technology area with several large companies taking a voluntary license pursuant to our signature PRELIT™ Licensing Program.
In terms of new assets for sale, we also just made available to the market a great portfolio in the DRM space, with very high relevance to several industries. We are also finalizing another portfolio in the HVAC area which should go out in a couple of weeks at most.
We still have the following portfolios for sale: High Frequency Trading owned by SpectraNet, the AST IP3 2021 Lots and a Floating Shutter Camera Technology owned by RollCall. For more details, please email us at firstname.lastname@example.org.
If you’d like to be added to our distribution list, please email us at email@example.com.
Calling for high quality portfolios!
For a short window this year, we are entertaining new prospective portfolios across a variety of sectors. You can review our criteria here but if you own a patent portfolio with at least two issued US patents and have knowledge of others using your technology (infringement), we are happy to review for potential brokerage. We will also look at larger portfolios where evidence of use is uncertain.
Some of the areas of particular interest include:
- Medical device technology – wearables and IOT health monitoring also of interest
- Autonomous driving systems
- Hardware such as cameras and displays
- Streaming media
- Semiconductor assets such as packaging and processing
We have a buyer with interest in LTE patents.
We also have a buyer with interest in acquiring battery-related assets – specifically rechargeable assets applicable to either (or both) consumer devices and electric vehicles.
Please reach out to Erika Warner with any assets that may match this request at firstname.lastname@example.org.
Patent Monetization in a Recession
I am often asked to comment on how the economy affects the valuation of patents and the IP market in general. This is important for us since we not only broker patents for buyers and sellers, but we also do a fair amount of patent valuation work for clients in our advisory services practice.
It is often said that the patent market is somewhat contrarian to the general economy. This would suggest that when the economy declines, patent transactions and valuations improve, and vice versa. This is a rather simplistic world view and, although it may be true from time to time, factors that impact patent valuations are much more diverse and react differently in response to economic changes. For those of you familiar with this column feel free to skip directly to the next paragraph. For new readers, I will repeat once more the main factors at play, based on a few decades of transactions and observations.
These main factors are:
- Noticeable changes in the supply & demand;
- New case law that may have a long-lasting impacts;
- Changes in the regulatory environment;
- Recent large damage awards against infringers;
- Broad availability of funding to support assertion activities.
As one can readily observe, an economic downturn should have no impact on several of factors listed above such as new case law, changes in regulation and damages awards which are directly tied to changes in the judiciary, regulatory or legal areas respectively. However, a recession will absolutely impact supply and demand as well as cash flowing to fund assertion-based activities, our first and last factors above.
A recession generally means that sales slowdown, hiring budgets are frozen, layoffs abound, wages stagnate, and many promising startups have to close their doors. We are already witnessing this on a large scale, with massive layoffs and hiring freezes at most Fortune 500 companies. In the technology arena, the value of yesterday’s unicorns has vanished into thin air and we are starting to see an uptick in bankruptcy proceedings, etc. Further planned rate increases from the Federal Reserve to rein in inflation almost certainly mean that this trend is here to stay for the foreseeable future.
Companies who own patents are not exempt from the impact of this downturn; for large patent owners, there is renewed pressure to find ways to cut costs and create new revenue streams. Historically, this has been accomplished by a combination of patent portfolio pruning, either by selling assets or letting them lapse to save the maintenance costs, and by increasing homegrown or outsourced assertion-based activities to extract value from a portfolio that is often too limited to play a meaningful defensive role. For smaller patent owners, this also means that the doors to a licensing deal are closing, funding is harder to raise, and IP assets must also contribute to bringing in precious – especially if non-dilutive – cash.
In both cases, this tends to flood the market with more patents for sale which, if we apply the simple rule of supply and demand, should normally depress the price of patents overall unless there is a corresponding uptick in buyers’ demand.
However, this is not what we have witnessed historically when the economy takes a dive in years past. Why is that?
Well, there are a few reasons for this:
First, one needs to remember that significant shifts with some of the other factors that more directly pertain to the IP marketplace (see factors 2, 3 and 4 above) will more than offset an economic trend in the opposite direction. For instance, a decision from the US Supreme Court affecting patent rights will have a much more immediate and long-lasting impact on patent valuations than a series of interest rate hikes from the Federal Reserve, like the ones we have seen lately.
Second, one must also remember that the price of acquiring rights to a patent, whether via a sale or license, must always be considered in the context of the price of the alternative. For instance, before Inter Partes Reviews (IPRs) were available at the PTAB, challenging the validity of a given patent in the US had to be done exclusively via the court system and the legal fees required to do so were generally in the millions of dollars given that this issue is generally adjudicated upon only at trial. Therefore, the incentive for a defendant in a patent lawsuit to take a license for, say, $500,000 with a 100% certainty that the problem would go away permanently, was indeed, very compelling. Enter the IPR where the same challenge can be made for less than $250,000 with a statistical success rate of close to 80%. No one in their right mind would even entertain that $500,000 license, unless they want to be part of the next wave of layoffs…
Third, we need to look not just at the quantity of new patents entering the market, but also at their inherent quality. Remember, we live in a world where all patents are definitely NOT created equal. For instance, we at Tangible IP review 3-4 new portfolios every day that patent owners want us to sell or license and we only put under brokerage an infinitesimal percentage of those. We are very selective and only broker the highest quality portfolios as the market commands. But most of the patents we unfortunately have to reject have no objective price tag whatsoever in the secondary market for the simple reason that they carry no assertion value, i.e., no one is infringing upon them. Now what if I were to tell you that the best quality patents, the ones that generally get asserted and may lead to substantial awards or settlements downstream, often come primarily from startups and SMEs and when those companies go bust may suddenly flood the market?
This is often what happens in a recession. Many of the pioneering companies that created great technologies and secured IP rights to go along will not make it; but the US economy is based on a small number of very large enablers who will happily gobble up all these technologies and incorporate them into their product lines. While it is a good thing that suddenly orphan technologies find a new home and benefit consumers, these large implementers have a paying problem, and valuable patents tend to gravitate to new owners who will then ask the entities practicing these patents for free to pay their fair share. This in turn creates a spike in litigation, which still costs several millions of dollars to defend if the patentee can survive the PTAB. And we are back to our “cost of the alternative” scenario. This is also why, historically, out of court settlements tend to follow along a progressive curve as they move along a timeline; the more expensive the legal steps to defend and the closer a defendant is to an adverse judgement, the more willing it is to pay to settle a case.
Fourth, we have already witnessed these past years the growing influx of cash entering the litigation funding arena, including in the patent sector. This is our last factor above. Each time there is a recession and stock markets stumble, money managers look for new avenues to invest that promise higher returns (it also contains a lot more risks, but this rarely fazes professionals who invest other people’s money…). Thus, with the wild swing that we are seeing lately with the various indexes (and I am not talking about the FTX), this phenomenon is bound to accelerate.
At the end this means we will see more patents entering the market, including more “good” ones that are marketable. So, unless large corporations suddenly grow a conscience, we will see more free riding on others’ IP, which in turn will lead to more litigation, more settlements and a few large awards that will then capture everyone’s attention (even if later overturned) and ultimately bring more money to fund those cases.
As you can see, we have created a perfect circular economy of sorts, fueled by a mix of innovation (the inventors), corporate sociopathy (the implementers) and greed (the funders). Only in the US can you take a broken system and turn this into a nice cottage industry that sustains thousands of people, including yours truly. Someone has to pay for all those Christmas presents after all, especially during a recession!