We are prepared to litigate if people will not pay up for patents, says IV licensing chief 05 Oct 10
Last Wednesday I met up with Joe Chernesky, who heads the hardware licensing business at Intellectual Ventures. Aside from telling me about the establishment of IV's first office in Europe, we talked through a number of other things that the firm is currently doing and discussed how the market in general is developing. A lot of it was background stuff, but there were some nuggets of new information (at least to me). Here are a few bullet points on what we talked about:
• There are now over 700 people employed at IV undertaking a wide range of functions. Inventing, acquiring, investing and financing are the main activities; teams within these will work together on a variety of projects.
• The overall licensing operation is run by Trevor Williams, formerly COO of Global Markets, Asia Pacific, at Barclays Bank. Chernesky oversees the hardware side of the operation and Peter Meechan has responsibility for software, e-commerce and related areas. The licensing operation works mainly by approaching companies and, in Chernesky's words, "talking about the customer’s needs and the value proposition that IV offers in response to that need". This is based on its substantial patent portfolio and the commitment the firm has to continuing to build that. "We help people to understand who we are and that we are passionate about investing in innovation," Chernesky explained. One of the ways in which he likes to work is to demonstrate to firms how much IV has already saved them by buying patents that were in litigation or were likely to be asserted at some stage in the future. Typical agreements are structured for five years, though IV is aiming to have relationships that last longer than that.
• The vast majority of engagements are "good and healthy". However, there are some companies that hold out on paying nothing. In such situations, if a deal cannot be done then litigation is an option. This is the first time I have heard an IV person talk so clearly in these terms. "If we can't reach an agreement, we are prepared to litigate," Chernesky said.
• IV has a "fiduciary responsibility and a desire" to exploit its patent portfolio thoroughly. In some situations this will mean divestments to either customers or third parties. It is a small part of the firm's business and it is always done at arm's length. We talked about a couple of deals that have recently come to light in which IV sold portfolios to third party NPEs, which are now seeking to assert them through the courts. Once patents are sold, it is up to the new owner to decide what to do with them, Chernesky explained. Sales can either be outright or IV is open to exploring any structures the purchaser might suggest. When I asked him about what had happened with the reported sales, Chernesky told me that the details were confidential, but that IV is happy to reduce the price and the new owner's risk exposure by taking a stake in any revenue that the patents generate. IV has also sold patents to its customers to help customers defend themselves from corporate assertions.
• A separate acquisitions groups handles the buying side of the IV operation. However, the licensing teams work very closely with this group in order to identify which patents should be targeted for purchase. The two licensing units evaluate what is out there based on the needs of existing and potential customers, and will say how much the patents are worth from that perspective. The deals are then done by the acquisitions team. "We will value on what is needed by our customers. We have the ability never to be outbid," Chernesky said.
• Typically, the firm will make its approaches via the boardroom rather than through a company's IP department. The level of IP sophistication among corporations and understanding of the need to develop an effective IP strategy has improved, though progress is slow. "IP is the most under-used asset on the balance sheet, but also the most under-appreciated risk," Chernesky said. What will help here, though, is that after a frenetic few years of highs and lows, the patent market is stabilising and beginning to function in a relatively "normal" way. Intermediaries are getting better and the big consulting groups are starting to get involved in providing strategic advice.
• IV is pushing its investors and customers to be more open about the relationship they have with the firm. Most of the agreements are confidential and so the names of companies involved cannot be announced (though we do know a few of them), but with a view to greater transparency in the market in general, IV would like them to go public. Moving forwards, IV will request that all new customers announce the relationship publicly.
• Companies are beginning to accept that they cannot get away with using other people's patents without paying them to do so. The focus now is on minimising payment, rather than avoiding it completely, and working out the ways in which to do that: licensing, cross-licensing, using aggregators, doing deals direct and so on.
• Overall, Intellectual Ventures is doing "very well". It is close to finalising "some important transactions". In the very near future, we can expect to see "very significant announcements".
Compared to a few years ago, IV is remarkably open about what it is doing these days. What was once a firm that said as little as possible about most of its activities is now one which is as transparent as any other organisation operating in the market, if not more so. It is good to see such a big player set the standard here. And I do believe that IV is genuine in its desire for much greater openness about licensing deals: how they are done; what they involve; the pricing structures; and so on. The problem the firm has though is that it takes two to tango. If one side wants to hide behind confidentiality then there is little the other side can do about it except walk away from the deal - and that is not a realistic option for any organisation that is seeking to generate a return for its investors.
But the fact is that the more transparent a market is, the easier it is to understand. When you get understanding, you get acceptance. And when you get acceptance, then you can start doing really big and exciting things. Therefore, transparency is the key to IP's development as an asset class. The people at IV understand this. However, I think that the vast majority of traditional IP owners may struggle with the concept for quite a while, perhaps because they do not see IP as their main line of business. And that takes us back to education ...
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