Industry report - Protecting and enhancing IP value in technology licensing partnerships 19 Apr 17
Adapt IP Ventures LLC - IP valuations
Intellectual property serves as a critical and valuable cornerstone for partnerships between suppliers and producers. The underlying intellectual property transferred in these partnerships often provides producers with the ability to:
- enter markets more quickly;
- leverage the talents of external resources;
- expand market protections and freedom to operate; and
- often defer significant financial obligations until products are commercialised.
However, an IP partnership unravelling can have significant consequences not only to the value of the licensor or supplier of the intellectual property, but also to the perceived value of the underlying intellectual property. Entities supplying technology and other intellectual property should assess their IP partnerships to ensure that they are adequately protecting and enhancing both the IP value and the enterprise value.
In April 2017 two notable commercial announcements illustrated the potential challenges and financial strain surrounding the supplier-producer relationship and the underlying importance of the IP rights central to the partnership. The IP transaction announcements referenced below highlight the financial impacts of the value of intellectual property to technology companies and the suppliers of innovative technologies.
Imagination Technologies Group plc
According to a Financial Times profile, Imagination Technologies Group plc is a UK-based global technology company engaged in IP licensing activities. Imagination is involved in the creation and licensing of semiconductor processor intellectual property for graphics, video and vision processing, general purpose and embedded processing (central processing unit and microcontroller), and multi-standard communications to enable connectivity. Its technology is present in various markets (eg, mobile phones, computing, home electronics, handheld multimedia, automotive and networking). Further, Imagination holds over 1,400 active patent assets in fields related to graphic processing and image processing.
On April 3 2017 Imagination and Apple gained attention when it was learned that Apple would cease using Imagination’s technology to process graphics. Apple historically contributed approximately 50% to 60% of Imagination’s annual revenue through licensing its technology (and is one of Imagination's largest shareholders). Shares of Imagination dropped by up to 70%, implying a market value loss of an estimated £500 million (approximately $625 million). According to recent articles, Apple decided to work on a “separate, independent” design.
Imagination responded to the shift in technology direction by indicating potential challenges that Apple may have with designing around its patents. A recent Bloomberg article provides support for assessing and potentially monetising the potential of the underlying Imagination intellectual property. "Apple has not presented any evidence to substantiate its assertion that it will no longer require Imagination’s technology, without violating Imagination’s patents, intellectual property and confidential information," Imagination Technologies said in the statement.
University of Michigan v Sakti3
Throughout 2015, UK-based Dyson, most notably known for its innovative vacuum products, invested in and ultimately acquired the University of Michigan spin-out battery company Sitki3. The ultimate purchase price for the acquisition was $90 million. According to a report on Autoblog, Dyson appears to have had licensing obligations back to the University of Michigan as part of the transaction that reportedly cost $200,000 a year (increasing annually) to maintain the patent licence.
Dyson addressed aspects of the intellectual property in a statement published on Autoblog:
"Dyson is more focused than ever on energy storage solutions, which includes developing new intellectual property with the Sakti3 team. We currently own 94 Sakti3 patents and patents pending protecting those developments. The three patents in question pre-date Dyson's purchase of Satki3 and are therefore owned by the University of Michigan. The related IP has been superseded with better technology and is no longer important to our aims, so we are not renewing the license. We remain committed to investing £1bn in battery technology over the coming years, and Sakti3 is an essential and exciting part of that program."
In both the licensing cases above, technology and intellectual property presumably delivered substantial value to its partners or licenees. In the case of the University of Michigan and Dyson, Dyson decided to acquire the early-stage company that developed the underlying technology which allowed it to take more control over the IP development to fit its technology road map. In the case of Imagination and Apple, the assumed licensing structure between the parties provided Apple enough room to work around the agreement and choose other development options. Imagination’s diversification of its customer base (although historically driven substantially by Apple) and product mix at least illustrate an effort to find multiple end markets and uses for core intellectual property.
Innovative companies and IP licensors must develop programmes across product, technology, engineering, financial and legal functions to maximise IP value across numerous product development scenarios. If companies fail in this planning, significant financial impairment to the value of the intellectual property is likely through the loss of financial value through licensing or perceived loss of importance and relevancy of the underlying intellectual property.
Licensees or acquirers can often bridge engineering and product development gaps through external innovation partnerships. Licensing executives have interesting opportunities to structure transactions in such a way that competitive product and technology goals are met, but not at the expense of committing to a new technology indefinitely. If a company is developing competing technology around a licensor, that company must be aware of potential patent pitfalls if the licensing relationship ends so that patent infringement risk is diminished.
Below are suggested actions to consider and implement to protect and enhance enterprise IP value when structuring IP strategy and transaction programmes.
- Create IP development programmes to capture and protect core technology capabilities and relationships.
- Align incentives with all parties to encourage ongoing partnerships focused on expanding existing innovations and jointly developing new technologies.
- Structure agreements to protect the targeted duration of the partnership, key geographic territories or fields of use.
- Diversify supplier relationships and technology programmes.
- Monitor relevancy of the patent portfolio to customer product offerings if retaliatory defensive positioning is needed.
- Ensure protection from IP leakage to the customer for intellectual property that falls outside of scope of partnership.
- Develop IP contingency plans for key customer loss, including IP audits for prior payments.
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