Of medieval marauders, tulips and the sale of patent portfolios

By Neil Wilkof

This Kat has been away from the blogosphere for ten days or so, having been privileged to participate in IP Week held in Singapore, here, under the primary auspices of the Intellectual Property Office of Singapore (IPOS), here. The vigor and commitment to strengthening IP and making Singapore an IP hub is indeed impressive. However, this Kat took issue with one point that recurred in the presentations of various speakers, namely, the increasing number of acquisitions of large patent portfolios for previously unimaginable amounts. Whether referring to auctions of the Nortel porfolio for $4.5 billion here, the purchase by Google of Motorola patents for over $12 billion dollars, or the valuation of the Kodak patents at over $2 billion dollars (the auction will apparently take place next month here), the message was the same–the sales of patent portfolio at such Croesus-like amounts show just how valuable patents can be.

To which this Kat replied — not really. Don’t get me wrong, I don’t deny that these acquisitions represent real arm’s length transactions between a willing buyer and a willing seller. Rather, my claim is that these transactions are largely or wholly irrelevant to most patent activities and practice. True, they make great theatre, especially when brought to bear in support of a claim about the importance of IP in our time. However, in determining whether we now live in an age where IP, in general, and patents, in particular, are the new “currency”, such transactions are of little, or no, generalizable significance. These deals may be proven headline grabbers, but they are a poor proxy for the current commercial state of IP.

Consider the circumstances in which these transactions are taking place. First, these mega-patent acquisitions are characterized by a large (or once large) but struggling seller that owns a large number of patents. Despite this, none of these portfolios seems to have enabled the company to exploit the protected inventions in a manner that has materially determined the long-term viability of the company. Secondly, there exists a small number of relatively patent-poor hi-tech companies with huge amounts of free cash. Thirdly, companies in this space appear to now view patents as a potential weapon to be employed against competitors. As such, in order to arm properly your skilled patent litigator trained to parry any claim of infringement, you must be able to brandish patent weaponry of your own. When one is patent-poor but cash rich, the easiest way to do so, no matter how blunderbuss the acquisition, is to acquire hundreds, if not thousands of patents from a company desperate to raise cash.

Fourthly, even if you have not had an opportunity to evaluate properly more than a handful of presumably “core” patents, you now have a potential huge patent arsenal to bring to bear against your competitor. As the IPKat’s friend Ron Laurie graphically described at the conference in Singapore, we are in a “back to the future” moment, where patents are viewed quantitatively as much as, or even more, than being evaluated qualitatively. While the company may not make any direct commercial use of the portfolio (what has happened to “Rembrandts in the Attic”? here), it can rely on them in litigation. At the least, you can keep the patent portfolio out of the hands of your competitors. Viewed in such a manner, the acquisition of these mega-patent portfolios is taking place in unique, idiosyncratic settings that are simply inapplicable to most circumstances in which patent portfolios are found.

But still, you might ask, does not the very fact that these mega-acquisitions are taking place show how important patents have become? To which this Kat replies once again — not really. I would propose three considerations. First, borrowing a concept from insolvency law, can we view the acquisition of these patent portfolios from struggling companies as an instance of the transfer of an asset to a party better able to make commercial use of it? The problem is that I am not convinced that the aggregation of patent portfolios in the hands of a small number of leading companies in certain hi-tech industries for litigation or patent exclusion purposes constitutes a better commercial use of such inventions. Again, perhaps in my naivete, we are a long way from a “Rembrandts in the Attic” moment in the exploitation of patents.

Secondly, to make the case that these mega-patent portfolio transactions are an indicator of the value of patents, one would like to be able to hold out the promise that such acquisitions are possible across a broad swathe of industries. But that is clearly not the case. Rather, these transactions are taking place in a special setting with no generalizable value. In such a situation, I can imagine someone with Pirate Party sympathies saying something like: “you see, all that has happened is that patents are being concentrated in the hands of a number of mega-companies, the better to fight their patent wars in the court. The public, however, fails to benefit from these court actions and the patent acquisitions that helped give rise to them.”

Thirdly, these transactions, and the media attention that they have attracted, send a distorted, misleading message to those contemplating entry in the patent world. Patents are not ultimately a legal tool to enhance your innovative activity, nor a means to monetize your invention through licensing. Patents are most valuable when they can be sold in bulk to the leading actors in your industry. This Kat is not sure that this is the IP message that we wish to be sending.
Permit me to end my thoughts with two bits of historically-tinged rhetorical flourish. The first is taken from a fascinating book about the second half of the 14th-century, Hawkwood: Diabolical Englishman, by Frances Stoner Saunders. Despite the title, the book is really about the marauding role played by bands of mercenaries, primarily in Italy, in light of the breakdown of both regal and papal authority due to the Black Death and The Hundred Years War. Stoner writes on p. 85:

“The mere existence of a supply of mercenaries created a demand for their services. Governments employed them simply because they were there, and because, if they didn’t, rival governments would. It had become a ‘ruinously expensive game of see-saw’, in which the value of the [mercenary] companies was the purely negative one of maintaining the balance of military power between the [Italian] cities.”

Replace “cities” with the hi-tech company of your choice, and “mercenaries” with “patent portfolios”, and we find a graphic parallelism between events in the late 1300s and patent portfolio acquisitions of the present moment.
The second historical instance is the well-known “tulip mania” that took place in

Holland in the 1630s. As observed in Wikipedia,

“Tulip mania … was a period in the Dutch Golden Age during which contract prices for bulbs of the recently introduced tulip reached extraordinarily high levels and then suddenly collapsed. At the peak of tulip mania, in February 1637, some single tulip bulbs sold for more than 10 times the annual income of a skilled craftsman.”

Consider that just like in Holland, where parties purchased rights in tulips sight unseen and even while the bulbs were presumably still in the ground, patent portfolios are being purchased in bulk with only scant evaluation or examination. Consider that the acquisition (or estimated) price of the patent portfolios seems disproportionate to the presumed overall value of the entire company. Consider that valuation experts at the conference in Singapore observed how surprised they were at the amounts that were paid in auction for the patents, well beyond what their analysis would have predicted. When markets cease to function normally, bubbles and unreasonable valuations occur. Whether we should be looking at such market distortions as the best example of how we wish to view the commercial potential of patents is doubtful in this Kat’s eyes.

[This post originally appeared at IPKat.]

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