Alice in Patent Land: investment strategy in a post-Alice world

IAM editor Joff Wild’s September 27 2014 blog about the final decision in Alice v CLS Bank and the subsequent analysis of potential impact from ktMINE got me thinking about the impact of this on investors, business models and company valuations.

Neither the mainstream financial press nor Wall Street has picked up on the potential price impact of having the vast majority of your patents extinguished overnight, but the unintended consequences of this decision should perhaps now register as a significant risk factor for investors.

In kicking this idea around with my friend and collaborator Francis Rushford, he pointed out that Alice and subsequent trial court decisions have the likely and probably unintended consequence of potentially invalidating any software-implemented inventions. As Wild implied in his blog, this means that entire portfolios of telecommunications patents dealing with, for example, interoperability standards, software in CODECs for transmitting audio and video and imaging software of all types are open to challenge.

The impact extends far beyond telecommunications: to paraphrase Forbes, “in the 21st century every business is a software business”.  Thus in assessing the market impact of Alice, you have to look at every industry, from automotive to logistics, where the reliance on software for R&D and operations is ubiquitous. The patent portfolios of financial services and insurance companies are particularly vulnerable (since fintech and telematics are the fastest-growing industry value drivers).

The market impact of Alice is in my opinion tens or even hundreds of billions of dollars, but the fall-out may be counterintuitive – and not necessarily through the prophesied destruction of value for existing technology behemoths such as Google or Cisco, whose size, reach and market share provide them with shelter from the storm.

If Alice is applied as it has been, then investors may well take a step back and wonder what the point is of investing in new software innovations. The greatest impact therefore could be on smaller developers whose tangible value lies in the value of their intangible assets and in the application programming interface model of innovation distribution. Without the ability to patent their inventions, such developers will necessarily retreat to trade secret protection. The end result will be a dramatic reduction in information sharing, publication and cooperation. Funding sources will also dry up as investors who already struggle with patents will find valuing a trade secret portfolio (discounted by the problems in protecting and scaling such businesses) impossible to sell to their investment committees.

If the ktMINE study is any guide at all, a great many readers of this blog will also be looking for work.

So who are the winners and the losers in a post-Alice world?

A cursory analysis of business models provides some guidance. Beneficiaries will most likely be the established tech companies with powerful market positions, which ultimately will face less patent-protected disruptive competition (eg, Google and Cisco), technology followers and re-engineering specialists (eg, Huawei, ZTE, HTC and LGE) and those businesses that manufacture products (eg, chip makers or drug companies). Losers will be those companies that innovate around broad patent-protected areas of expertise (eg, Qualcomm and ARM) and high-tech manufacturers such as medical device companies whose design and prototyping processes rely heavily on software and software innovations. 

Irrespective of whether my analysis is correct at the granular level, at the very least Alice is a wake-up call to investors to review their investment analysis and weight intellectual property more strongly as a risk factor. 

The law of unintended consequences in the trial courts is in full throttle and much depends on what the Federal Circuit does now.  Eventually the dust will settle, but my view is that the end result will be that innovation just got harder and the risks for investors in software heavy companies just got bigger. 

This is an Insight article, written by a selected partner as part of IAM's co-published content. Read more on Insight

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