Richard Lloyd

Earlier this week we held our inaugural Patent Law and Policy event in Washington DC. As the name suggests the majority of the day was focused on how debates over patent reform, recent case law and the popularity of the new post-issuance review procedures are affecting the patent market.

The last session of the day – called The investor view – took a slightly different tack and analysed how the shifting jurisprudence and discussions on Capitol Hill are affecting those who invest in IP. There were several interesting messages from the three panelists – Erich Spangenberg founder of IPNav and now at nXn, Ocean Tomo’s Michael Friedman and David Kennedy of Berkeley Research Group – but one that stuck out was the amount of “smart money” that was either busy investing or seeking investment opportunities in the sector.

According to Friedman, “more money is looking to come into this space than ever before”, but, as he pointed out, “street money is smart – it’s not going to chase after the 97% of bad IP that’s out there”. Plus, he stressed, some investors are willing to make big, nine-figure bets.

He predicted that more companies would take out IP backed loans along the lines of the $2 billion fundraising done by Alcatel Lucent in late 2012. Other major patent owners, Friedman stressed, were looking to spin off large portfolios into special purpose vehicles backed by investment capital in what sounded a lot like a slightly different take on the privateering model. Even at the end of a day spent debating patent eligible subject matter case law and the appropriate way of determining FRAND royalty rates, it was certainly a message that caught delegates’ attention.

The evolution of IP investment has not exactly gone how some people envisaged. In 2011 the auction of the Nortel assets for $4.5 billion and then Google’s $12.5 billion acquisition of Motorola Mobility catapulted IP-driven transactions into the minds of Wall Street bankers. That, however, was always going to be a limited play with both of those deals very much of their time and symptomatic of what was happening in the smartphone litigation wars.

Since then, no one would deny that patents as an asset have taken a battering. The Supreme Court’s decision in Alice and the rise of IPRs have meant that the validity of more and more rights is being challenged successfully. When you’re not sure that the asset you’re investing in is still going to exist next year that may not convince you to part with your cash. Large, institutional Wall Street money has therefore stayed away. 

But if you fundamentally believe in the inherent value of the small chunk of patents that are actually worth anything, then the climate may look pretty good to you right now. Any investment is about pricing risk and with enough capital there are, as all three panelists pointed out, some very attractive opportunities. Plus, any bear run on the stock market will make IP, as a non-correlated asset, look even more enticing.

But this era of clever money also means that scale has never been more important. The time of an inventor asserting a couple of patents and making some decent money is long gone. As Friedman pointed out this is about Goliath v Goliath – investors and operating companies that have the wherewithal to fight large global assertion campaigns or who can structure innovative IP-backed deals. He noted that with John Veschi he had twice managed to structure $1.6 billion deals last year to acquire the Rockstar patent portfolio from the NPE’s five owners, but both times the transactions did not go ahead because the sellers decided against it. Ultimately, the portfolio was purchased by an RPX-led consortium in December 2014.   

Spangenberg agreed, saying he would never consider buying just one patent these days – it would have to be a minimum of 80 to 90 to interest him. And even with that number it would probably be a question of aggregating these as part of a larger portfolio. Spangenberg also implied that he thought that the market was at or close to the bottom and revealed that he had recently bought his first portfolio in three years.

Earlier this year he claimed that some public companies were over-valuing the IP assets on their books and predicted that they could be forced into major write downs of their patent portfolios. He conceded that that prediction was yet to come true but stressed that for many senior executives in major companies and their advisers, IP remains something of a mystery. “If you knew how auditors valued IP you’d laugh,” he stressed before adding, “someone’s going to get caught”.

His view was that finance teams need to develop their understanding of IP so he recommended that patent portfolios should come under the purview of CFOs rather than legal departments. “The legal guys see patents like baseball cards - they get them, shove them in the drawer and take them out from time to time to look at them,” he said. The message from Spangenberg was clear – more Fortune 500 companies need to get a lot smarter when it comes to IP: if they do not then at some stage investors are going to come back to bite them – quite possibly with regard to write-downs. As Friedman had already pointed out, parts of Wall Street are already well ahead of the curve.