By John Pryor
IP Sales and Licensing – A Mainstream Strategy
2011 was a seminal year for sales and licensing of IP, and for the first time IP deals featured on a regular basis in the mainstream business press.
Some recent headlines include:
- Microsoft and Apple purchase 880 Novell patents for $450 million.
- Google acquires Motorola Mobility (and its 17,000 patents) for $12.5 Billion.
- The next era of IP monetisation – the sale of a freestanding covenant not to sue may signal a popular new strategy for monetising patent assets.
- Google buys 1000 patents from IBM.
- Digimarc share price doubles following IP deal
- Apple, Microsoft, RIM et al, buy Nortel’s patents for $4.5 Billion.
- Oracle sues Google for $6 Billion over alleged Android infringement.
- Microsoft signs patent agreement with LG, now covers 70 percent of US Android smartphone market
- IPXI – Unit Licence Rights receives start-up funding
Whether or not we just witnessed “the great patent bubble of 2011” does not really matter; since ‘2011’ helped socialise the concept of patent management and monetisation into most boardrooms!
In support of this, the world’s number one IPO destination is now introducing new rules requiring qualitative detail on IP information for all listing companies. The Hong Kong Stock Exchange, (5th
largest in the world) has issued new rules that require companies seeking a listing to disclose much greater information about their intellectual property. In future issuers must “include in their listing
documents particulars of any intellectual property rights … which are material in relation to the group’s business…” We should not delude ourselves that all executives in all businesses are yet at the stage where they embrace IP management and monetisation as an integral part of their corporate governance requirements. That is ultimately managing all the corporate assets for optimum value,
understanding what IP they have and developing strategies to best manage this IP to realize full value; even if it means selling what was previously considered to be the ‘crown jewels’ as Procter &
However I believe that the world has moved on to the extent that activist shareholders have recently forced boards to consider selling their patents for example at Motorola Mobility and Yahoo.
Note: This article will primarily focus on patents since they are the most actively traded and licensed of all forms of IP.
An IP Audit
It is clear that companies can’t afford to downscale their IP protection efforts if they are to survive the current economic climate intact, but how should that protection work be funded when cash is
scarce and shareholders nervous? By increasing understanding of IP within the business, companies can explore the full range of techniques available to maximise the potential of these assets, such as sale or licensing, comarketing and joint venturing.
The question is where and how to start?
An audit of the portfolio is probably a good starting point, as this will help determine what assets the business holds and start to categorise the IP into core and non-core, high strength vs low strength
etc. Probably about 50% of EU companies have audited their IP and a similar percentage has a current plan for their IP .
In good times when cash is plentiful it is easy to understand why a busy IP department might choose simply to renew existing rights rather than conduct a thorough and often time-consuming audit.
Many IP departments have spent decades building up and protecting their patent portfolios – and many IP department heads have inherited most of their existing IP Rights from their predecessors or
from acquired companies. In such an environment, it can be difficult to assess what is actually of value or could be of future use. In the current climate, however, every penny counts. This means
that IP departments are coming under increasing pressure to justify what they spend, to cut costs at every available opportunity and, increasingly, to generate revenue from the IP Rights the company
owns. But cost-cutting and revenue-generating decisions are not to be taken lightly. Without thorough planning, they could result in the sacrifice of IP Rights that are potentially of future use to
the company or missed opportunities for out-licensing or cross-licensing with appropriate companies.
The goal is to protect key products and future products, while reducing the costs associated with maintaining IP Rights that are of no future use and to achieve revenue/profit from sale or license of
Companies need to ask themselves: which rights in my portfolio should be pruned? Am I paying unnecessarily high rates to licence-in technologies? Which patents can I sell or license for profit?
Could merger or acquisition (M&A) fill a technology gap?
They should also be comparing themselves to their competitors by asking: what are the innovation trends in my industry? Who are the emerging and fading organisations and inventors in my industry?
How does my portfolio compare?
However, these questions can’t be answered if they don’t have a thorough understanding of the rights that already exist in their portfolio and their relative value to the organisation. We advise
companies to split their portfolios into core and non-core rights via a thorough IP audit. Core rights are those that are of high value to the organisation because they relate to products or services in
use. Non-core rights, on the other hand, relate to registered IP that is of lower value to the company, but could be useful to someone else’s products or services.
But patent auditing doesn’t just result in reduced maintenance fees for unused IP, it also strengthens IP portfolios by consolidating a company’s rights and improving its understanding of how its rights compare to those of its key competitors It can also uncover new business opportunities, build additional revenue through core or non-core sales and licensing, and enhance business-wide
awareness by providing a tangible link between IP and business outcomes.
In the case of patent rights in particular, a portfolio audit enables clients to assess the patent rights they own and to create an effective plan of action for their enrichment. After all, only when you
have a clean, relevant and well-protected portfolio, will you be able to look at ways of maximising and enriching your patent assets. In the current economic climate, obtaining that ideal has become
more important than ever.
Our rule of thumb is that in a typical portfolio 10-20% of the patents could be abandoned without impact, 10-20% are integrated in products protecting key revenues in the business and 60% sit in the
middle and in the future could go either way. See the diagram below.
When Procter & Gamble discovered that only 10% of their 33,000 strong patent portfolio was connected to key business lines it set about selling and licensing the remainder of the portfolio. The outcome of this exercise has been a net reduction in R&D expenditure, an increased percentage of external IP in new products and a continued growth and success of the business.
In 2007 Thomson CSF (now Technicolor) embarked on a portfolio audit. It was not an easy undertaking as it took several months to collate, clean and understand what they had in their
portfolio and a similar period to score and segment the portfolio. One of the outcomes was a 15% reduction in their patent numbers and a subsequent estimated saving of €2.3m per annum in patent
renewal fees; but all without impacting on their €480m of annual patent licensing revenues!
Sales and Licensing
Whilst licensing has been the more traditional route for monetising patent assets, selling patents is now growing at a much faster rate (20-30% per annum). As we saw in 2011, selling patents has its
attractions to some of the world’s major corporations as it enables full realisation of the value of the asset immediately and in one transaction.
In the current economic climate businesses are increasingly unwilling to pay for licenses that effectively increase their cost of good sold, unless there is a very good reason to do so. Hence those
companies seeking to monetise their assets via this licensing strategy route are finding that it can be a much more protracted exercise, unless they have clear evidence of infringement and they are
willing and able to commit human and financial resources to a legal process. Litigation can be a time consuming and even risky process with many patents being found invalid when challenged in court.
To sell patent assets has traditionally been a challenge for many executives to conceptualise and accept, since they have long pursued a strategy of hold and renew, irrespective of the strategic importance of these assets to the business. Interestingly enough, most businesses are familiar with the concept of sale and lease back when it comes to buildings and other tangible assets and this
strategy has been practiced successfully many times e.g. by the InterContinental Hotels Group.
Increasingly businesses are now starting to accept that this same concept can be applied to intangible assets and in particular IP. Furthermore most sales transactions now include a grant back
licence to vendors, enabling them practice the IP, maintain any existing business streams connected to the IP and protect against any potential future litigation.
Some companies are concerned that licensing will place them into conflict with suppliers and customers, or even start a fight amongst competitors they would rather avoid. In this case sale to a
third party who may or may not subsequently pursue a licensing / litigation route is an increasingly attractive option, as this avoids direct conflict with such ‘stakeholders’.
Sale of patent assets can also be an attractive option when business strategies change and assets are moved into the non-core and high strength segment. Sale of patent assets can also be an attractive
option in the distressed business situation, when it is preferable to realise the monetary value of the assets quickly, and all assets (core and non-core, weak and strong) are available for sale e.g. in the
Nortel bankruptcy situation.
An Oliver Wyman Study on the IP Secondary Market in 2009 found that high technology patents (e.g. telecommunications, photonics, aerospace, electrical, life sciences, nanotechnology, green tech,
power, software, artificial intelligence, robotics etc.) are the most likely to sell and that these patents constitute 39% of all US active granted US patents. The same study determined that 90% of high
technology patents are worth less than $50k; 9% between $200k and $500k and 1% worth more than $1m. There is little market for patents outside of high technology and therefore the majority of
patents are worth very little.
In deciding which assets to market, many businesses find it easiest to identify the non-core weak assets, since these are also the assets they would consider abandoning; essentially their ‘garbage’!
Not surprisingly it is quite rare for one businesses’ non-core, weak assets to be another businesses’ treasure!
However it is my experience that the strongest patents (whether core or non core to the owner) are the most marketable and in this economic climate, if there is evidence of infringement then there
will be even more demand.
Licensing or sale of IP assets should be an integral part of any IP strategy and should be actively considered on a regular basis as part of the ‘annual’ IP audit process. It is possible that licensing or
sale could release cash from assets that otherwise would just be a cost to the business. To some observers patents are no more than a ‘$10,000 per square foot wall hanging’ unless they are actively
used in defence or offence to protect business lines and / or they are exercised to realise value in the open market. More and more businesses are opening up to the Procter and Gamble approach to IP asset management of ‘being open for business’ in trading these assets in and out, both from a licensing and sale perspective.
Licensing is a more traditional route to monetisation, however outright sale (often with a grant back licence) is increasingly popular as shown by the significant and highly valuable deals in 2011.
It is likely that high technology patents will be more marketable than others, but it is incumbent on all businesses to regularly review what they own from a market value perspective. To assist with this
process consult a well qualified and experienced IP strategist who will be able to guide you through the various options and hopefully help you conclude a successful and value adding transaction.
[This post originally appeared as an INTIPSA TIP.]