The timing is perfect for IP3’s patent buyers; for sellers the picture is far less rosy 20 May 16
In many ways IP3, the new patent selling platform backed by the likes of Google, Apple, Ford, Microsoft and IBM that was announced on Wednesday, is a product of its time. It’s hard to imagine, say five years ago, Google and Apple jumping into bed together on anything patent-related – or for companies in very different industries pooling resources in the way they have for IP3. But today is different: with the smartphone wars almost at an end and everyone talking about convergence, IP3 reflects the more cooperative, partnership-based approach to IP strategy that a growing number of operating companies insist is their new ethos.
The patent market is very different, too. There was a time when a seller with a decent invention that it was hoping to make some money from might expect an Acacia, an Erich Spangenberg or, as was most likely, an Intellectual Ventures to step in and buy. Alternatively, licensing deals were far less complicated to do. Today, there aren’t exactly a lot of buyers out there, while those that are active are taking advantage of exceedingly low prices.
To begin with, let’s look at the bright side of this. One of the things that IP3 promises to deliver – as Google’s Patent Purchase Promotion did before it – is far greater speed and efficiency in the deal-making market. Sellers will have two weeks starting in late May to contact AST, who will be administering the new initiative, about the patents they are interested in selling and the price they’d like. AST will evaluate those assets, determine which ones it likes best, notify the seller and then do another round of due diligence before agreeing to buy. In all, it will take around three months from IP3 receiving an initial approach to an owner seeing cash in the bank. Considering that patent transactions are usually a laborious process, most would probably welcome IP3's shortened timeframe. “One of the hardest problems about buying patents is the lack of education, on the part of vendors, on how buyers buy,” commented Kent Richardson of the Richardson Oliver Law Group. “There’s a lack of operational efficiency on the part of buyers which often means the process drags on for months.”
The process may also add more transparency, though AST says it has not yet determined how much information it will be making available to the wider market. IP3 members, though, don’t need to worry about that – they’re going to benefit from a huge amount of data on potential sellers and the kind of assets that are available. They will then have the opportunity to license-in patents that they see as helpful, all for a fraction of the cost and time that it would normally take an in-house deal team to work through an acquisition.
What's more, the biggest contributors to the acquisition fund will get a chance to share in the proceeds of the patents that the defensive aggregator goes on to divest. As things stand, according to AST CEO Russell Binns, there are no limits on who can buy them. If the firm wishes to maxmise returns there’s every chance that further down the line they might well be owned by the next budding Acacia or IV; or even those entities themselves. It's worth noting that the likes of Google and Cisco have been very vocal about the importance of not selling patents to NPEs. Would they want their IP3 membership money to be spent on acquiring rights that ultimately ended up in the hands of entities that would then seek to assert them in order to secure licensing royalties? It’s hard to believe so. But that’s what they may have signed up to. To prevent such a situation arising, perhaps they may end up buying some of the patents themselves.
The rationale for IP3 from the buy side perspective is strong enough to suggest that more companies will join the programme and that it is unlikely to be a one-off. “If this is repeated it’s a whole new way for people to make money from their patents and that’s exciting for the market,” Richardson enthused.
That said, from the sell-side the picture looks a lot more mixed. As this blog pointed out when the platform was announced, a group of major patent owners with huge buying power is not exactly the recipe for resuscitating a lagging deals market in which volumes are currently OK but values are way off the highs of a few years ago. Without more acquirers on the scene competing for assets, IP3 is not about to give a shot in the arm to patent valuations.
There is a range of issues that could ultimately keep some sellers out of the action. Here’s what Orin Herskowitz, head of tech transfer at Columbia University, had to say about IP3: “Whether or not this will end up being appealing to university intellectual property managers will likely depend on a number of factors specific to each university: their concern about their patents ultimately ending up in ‘the wrong hands’; their ability to outright sell versus license their assets; the institution’s need for near-term cash versus waiting to employ the patent for a startup, a patent pool or a more traditional industry patent licence; the degree to which the prices offered via this new mechanism reflect something close to the perceived value of the asset; and the impulse to ‘do something’ with their assets even at reduced prices.”
But, such is the state of the market, that many patent owners will probably view some return on their IP as better than no return at all, so we can be very confident that there will be considerable interest in IP3. After the Patent Purchase Promotion, Google made the wonderfully unrevealing disclosure that it bought 28% of the patents that it had deemed relevant to its business. So we don’t know how many patents IP3 is about to acquire, but it’s probably safe to assume that it will be a relatively low proportion of those that come through its doors.
For some feedback on IP3 from a small patent owner I got in touch with Paul Morinville of the advocacy group the US Inventor and the owner of nine US patents himself. He has been a loud voice against overly broad patent reform and the perceived inequities of the US patent system for the lone inventor. Not surprisingly, he didn’t view the initiative in particularly glowing terms. Here’s what he wrote in an email:
I think this would be a great idea in a normal market. However, the market is not normal. In fact, for most inventors it doesn’t exist because there are no longer contingent fee attorneys or investors. What is really messed up is that these are the same companies who, by spending hundreds of millions of dollars in Washington lobbying and public relations, crashed the patent system to the point that most inventors cannot defend their patent rights. It is a pathetically disingenuous attempt to buy at the bottom and play it off like they are helping the poor little inventors they just killed.
I view it as the school yard bully gang beating the hell out of the little smart kid and then telling him, since he’s got too many broken bones to make it to class, he might as well just give the gang his homework.
Unfortunately comments like Morinville’s are as much a product of our time as a bunch of once rival operating companies coming together to try to remedy the inefficiencies of the patent deals market.
Additional reporting by Joff Wild
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