Asia’s patent brokers pick up the pace

Not so long ago, the Asia-Pacific region was seen as a backwater for patent transactions. Japanese, Korean and Taiwanese firms appeared focused on amassing patents in order to secure freedom to operate and stockpile assets for cross-licensing negotiations. For a variety of reasons, buying and selling patents did not feature prominently in their IP strategies, while the idea of generating income from licensing to third parties was low on the agenda – if it appeared at all.

In China, meanwhile, most companies did not even bother applying for patents; their commercial objectives rarely extended beyond their own country’s borders. With no patent law on the statute books until 1984, filing was seen as an unnecessary cost – and so it was a given that buying and selling patents was barely on the radar of most companies. Any of the tiny number of patent transactions that did take place – and were not carried out privately between buyer and seller – would have been handled by brokers, most likely based in the United States or perhaps Europe.

How times have changed. Asia now has its own nascent patent brokerage industry, which had a busy year in 2016 despite a global slowdown in patent deals.

New trends

Issue 81 of IAM, published at the end of 2016, featured our annual appraisal of the past year’s brokered patent market, put together by Kent Richardson, Erik Oliver and Michael Costa of Californian patent advisory and law firm ROL Group. The bottom line, according to the authors, was that while the marketplace for patent assets remained “robust and viable” in 2016, it hit a low ebb – with overall market value estimated at $165 million, around one-third less than the previous year. Prices were as low as they have ever been, while the US Supreme Court’s Alice decision continued to have a destructive effect on demand for certain types of software-related patent – and those covering financial technology innovations in particular.

This situation is mostly unsurprising for those working in the IP world. However, some interesting new trends do appear to be emerging in 2017 – not least with regard to Asia.

For one thing, US Supreme Court jurisprudence and the inter partes review regime are having a palpable impact on non-practising entities (NPEs), which are generally scaling back their activities, with some looking to exit the business altogether. For the first time since ROL Group compiled its annual analysis, operating companies have made more purchases of brokered patent packages than NPEs. Intellectual Ventures – until last year the top buyer of brokered packages – was overtaken by defensive aggregation and patent risk management firm RPX.

Similarly, Asian operating companies appear to be increasingly active participants in the brokered market, especially on the buy side. In its analysis, ROL Group listed NEC and Panasonic of Japan among 2016’s repeat sellers of patents via intermediaries; while Huawei and Xiaomi from China, Japan’s Rakuten and TSMC from Taiwan each purchased at least two or more brokered packages over the course of the year.

Another sign of Asia’s increasingly fluid secondary market is broker activity. Each year, Richardson, Oliver and Costa include a listing of all the brokers known to have offered more than a certain number of packages for sale during the examined 12-month period (for the past three editions, that threshold has been set at five or more packages) with their analysis. This provides an indication of which brokers have been the busiest over the past year.

In 2016, 29 brokers offered five or more packages for sale, with 15 of these offering at least 10. Four of these 29 brokers are headquartered in Asia – the highest number of Asian brokers to appear on the annual list since ROL Group began conducting this research back in 2012:

• IP Pioneer Group (Seoul, Korea);
• MiiCs & Partners (Taipei, Taiwan);
• PJ Parker & Co (Tokyo, Japan); and
• Rui Zhi Ventures (Shanghai, China)

Except for Rui Zhi Ventures, which also made the 2015 list, this marks the first time that any of these providers have been known to offer at least five packages for sale. (Other Asia-based brokers to have appeared in the past are Transpacific IP on the 2013 list and Intellectual Property Trade in 2015. Both are headquartered in Singapore.)

Of course, these figures can only tell us so much about the secondary market in Asia. As the ROL Group team itself makes clear, the dataset it works from is based only on packages which it can track. It does not represent the whole universe of packages being made available by brokers; nor does it include the potentially much vaster number of private deals taking place without the involvement of third-party intermediaries.

Chan Ho Kim, managing partner at Seoul-based brokers IP Pioneer Group, also points out that the larger workload of his firm and the handful of others from Asia may have as much to do with a paring down of the wider market. “It is difficult to estimate the scale of packages being offered by other brokers,” he says. “But I assume that the depressed patent market has influenced Asian brokers’ deal flow more generally, and that some of them have shifted their business into other IP consulting areas, at least partially.” This may have led to more work for those, like IP Pioneer Group, which have persisted with the brokerage game, he adds.

Nevertheless, Kim and other brokers based in the region report that Asian corporates are giving far more consideration to buying patents as a strategic option than they have done previously. “I can’t say that Asian companies are buying many patents yet, as the acquisition scale in the Asian market is still not big enough to evaluate,” he admits. “But when they do purchase, in most cases it is to strengthen their existing patent portfolios and prepare for competitive or defensive positions, or customer immunities. In general, they still take a very conservative view towards privateering or litigation-purposed deals.”

Asia-based patent brokers that have featured in IAM/ROL Group market analysis, 2012-present

China’s second tier

Roger Tu is vice president at MiiCs & Partners, a Taipei-based firm affiliated with Hon Hai-Foxconn Group which additionally works with a range of Taiwanese and Chinese companies, helping them to buy and sell patents. Last year, MiiCs also took on the mammoth task of monetising Sharp’s patents, after the Japanese giant was acquired by Foxconn in a headline-grabbing deal worth $3.8 billion.

According to Tu, the vast majority of packages currently being sold in these markets relate to telecommunications, semiconductors and other technologies relevant to consumer electronics. “We specialise in patent monetisation and put a lot of focus on patent sales brokerage,” he explains. “More and more Asian clients are interested in the patent sales discussion – on both the buy and sell sides. The major reasons are expanding business operations and a need to monetise IP assets.” For fast-growing Asian companies, patent protection is a must as they extend their footprint beyond their home market and consequently increase their exposure to IP disputes. If the relevant patents already exist and their owner is open to selling them, then purchases can prove far quicker and more cost effective than trying to solve coverage by filing applications.

“We’ve seen a move from buyers being predominantly North American to predominantly Asian,” says Philip Parker, founder and president at Tokyo-based PJ Parker & Co. Much of the enthusiasm on the buy side is emanating from China. “As far as we can tell, it is still relatively concentrated among maybe 10 or so companies in China and I think assignment databases would accord with that,” he says. “Obviously, there’s wider interest beyond those players. But many companies, while expressing interest and looking at portfolios, are not quite ready to make commitments to buy at this stage. To really justify the substantial budget required to senior management, you have to have a lot of confidence in the target portfolio. And that requires a certain amount of technical and business expertise to in order to understand the strategic relevance of that portfolio.” This is something that most Chinese high-tech companies are still in the process of building – though, as with so much in the Middle Kingdom, the pace of change is rapid and the sophistication of corporate patent teams and the strategies they use is evolving fast.

Shanghai-based Gustavo Aray, founder and managing partner at Rui Zhi Ventures, agrees that there is massive potential for selling patents to these up-and-coming businesses. “For the most part, Chinese buyers – and Chinese sellers, for that matter – are the highly recognised, international brands: Huawei, ZTE, Xiaomi and so on,” he argues. “They want evidence of use, claim charts and forward citations, and they want a good life remaining on the assets. But there is also an emerging second tier of buyers that may be big names in Asia and in China in particular, but don’t have that worldwide presence.”

These prospective purchasers share their larger counterparts’ appetite for telecommunications-related patents – although Aray reports increased interest in more specific areas such as display technology, light-emitting diodes, biometrics, unmanned aerial vehicles, content streaming and internet security and authentication.

From buyers to sellers

While buying activity is heating up in China, it would appear to be heading in the opposite direction in South Korea. Kim explains that deals involving Korean parties account for only a small portion of IP Pioneer Group’s business and estimates that around 80% of the packages that he and his team handle are being sold by Japanese, Taiwanese and US vendors. “The reason for this is that very few companies in Korea have internal programmes in place to buy or sell patents,” he suggests. “But we are getting more requests from Korean companies to sell their US patents on the worldwide market. So I believe that more sell-side opportunities will arise out of Korean companies. On the buy side, Samsung is still the biggest buyer in Korea, while LG, Hynix and Intellectual Discovery are becoming less active.”

Figure 1. Patent sophistication in East Asian industry

Source: PJ Parker & Co

NB: Not to scale – for figurative purposes

Another element at play is the Korean government’s efforts to create an innovation-driven economy. These have included substantial investment aimed at encouraging a value-centric appraisal of IP assets, the launch of aforementioned sovereign patent fund Intellectual Discovery in 2010 and assistance for the domestic venture capital industry.

However, beyond these state-backed initiatives, the Korean economy continues to be driven by chaebols – the (usually) family-run mega-conglomerates such as Samsung, LG and Hyundai. “There are so many suppliers to the big conglomerates in each market’s vertical, but their patent-related concerns are diminished because they mainly sell their products to these much larger customers, which are the ones that will face patent issues,” Kim explains. “Within such an environment, with a few exceptions, companies have been reluctant to purchase another’s patents. Instead, they tried to develop and supply products that were competitive on quality more quickly.” However, dependency on these giants in Korea is falling and those in senior management are looking to sell more of their products outside of the country in territories such as China and Europe. “So we are witnessing slow, but increasing changes of the executive’s mindset in Korean companies,” says Kim. “Which will lead to more patent buying activities.”

Restructuring, withdrawal

Across the Korea Strait, broker activity has seen an uptick too – though in Japan, this is more on the sell side. For Parker, the ROL Group findings chime with his on-the-ground experience over the past year. “We are handling more packages,” he points out. “I think that this is due to companies in the more advanced economies – Japan, Korea and Taiwan – being more willing to sell patents, and emerging market companies in Asia becoming interested in buying in preparation for entering developed markets.”

The factors that are driving this increased level of deal making in Japan are somewhat different from those elsewhere in Asia and the wider world. One is the trend towards corporate reshuffling and downsizing, which continues as companies seek to maintain their relevance in the fast-changing and expanding high-tech sector. “Restructuring within Japanese companies and their withdrawal from certain business activities often means they are more open to selling patents,” explains Parker.

In many cases, this has involved divestitures of whole business units, as well as mergers and acquisitions in order to enter more promising new markets. Straight patent purchases and sales have also been taking place on the sidelines of all this upheaval in order to secure freedom to operate or add bottom-line revenue.

Another dynamic which is causing Japanese companies to participate in the secondary market with more frequency is an NPE sector that – thanks mainly to legislative, administrative and jurisprudential developments in the United States – is much less active compared to just a few years ago.

Table 1. East Asia and US secondary patent market heatmap 2016

Source: “IP climate change in Asia”, IAM 78

NPEs quiet

While reduced interest from NPEs is making it harder to sell patents in North America and Europe, it may be sparking greater willingness to buy among Japanese corporates. “There has always been a high level of conservatism here, but that has lessened in reaction to the decline of the NPE business model,” argues Parker. “NPEs were seen as a threat to Japanese companies. The implication for rights holders here was that if you were out there selling patents, they could potentially fall into NPE hands, and they could end up becoming a nuisance to the whole industry.” As that threat has declined, selling patents is now more often viewed as a benign activity in Japan.

Until recently, most North American buyers active in Asia were NPEs which were responsible for driving most of the significant deal volume in the region. However, that is not the case with Asian buyers, which – with a few exceptions, such as IP Bridge and Intellectual Discovery – are predominantly operating companies. “All deals we do are practising entity to practising entity-based,” Parker points out. “There, you’re really seeing a drive to shore up an operating company’s IP position. It may be driven by a specific cross-licence or litigation, or by a more general aim to enter a particular market or technology area. As a device manufacturer, you can’t seek to control all the patents relevant to your product; you are just seeking a balance of weaponry.”

Likewise, the evaporation of NPE activity from the secondary market has meant a drop-off in interest in patents regarded as typical NPE fare. “In general, Asian buyers are more interested in hardware-related and materials science-related technologies than North American buyers, which are often interested in software-related technologies,” Parker explains. “Given the relative decline in the value of software-related patents post-Alice, I think that this means that buyer interest in Asia has held up relatively better than in North America.”

Characteristically, the Asian technology industry has concentrated on manufacturing hardware (in a general sense), rather than software development. It therefore makes sense that patents covering such tangible aspects of high-tech products are attracting more interest from Asian buyers, says Kim. “I think it is due to the economic structure of Asian countries which have been focused on selling and exporting their products to their foreign customers. The end products on the foreign customer side may incorporate their customised solutions and related software. But more Asian companies are becoming dominant players in each value chain and this trend is expected to change significantly in the coming years.”

Figure 2. US patent applications 2012-2015, select Asian companies

Source: IAM, MDB Capital Group

*2012-2013 data unavailable for ZTE.

Beyond US patents

Despite this, Kim maintains that US patents are still seen by Asian operating companies to hold the most strategic value in general terms, as compared to rights issued elsewhere. “So far, the US patent is still the dominant asset driving almost all of the patent transaction deals,” he explains. “US assets that come in a package with other coverage in China and the European Union can have a higher value, though as many anticipate, operating companies and NPEs will increasingly look for Chinese-only assets in their patent strategies in coming years.”

Parker agrees, pointing out that while US patents may have lost some of their lustre for NPEs or operating companies seeking licensing revenue, they remain key for typical Asian corporate buyers. “Obviously for NPEs, US patents have become less important,” he says. “But I still strongly believe that US patents are the most important because of the market coverage they give you.” While European patents, and German patents in particular, have become more prominent in terms of litigation value, US patents still trump them overall. “You may have used a German patent as a weapon to bring someone to court,” he continues. “But when it comes down to negotiating a settlement or a licence, the royalty base is going to be based on market size. The royalty base you can drive from the US patent is going to be much bigger.”

Parker is unsure whether this same rule of thumb can be applied to Chinese patents, which also cover a huge market, but one where damages awards for infringement remain low and a question mark hangs over the rule of law. “Chinese companies have a very strong interest in buying packages with Chinese equivalents, for obvious reasons,” he argues. “Beyond that, in areas like smartphones and TVs ‒ consumer electronics products targeting the middle class ‒ market penetration is up there with United States; probably almost as high now.”

Not so long ago, the typical view of Chinese-issued patents was that they were little more than junk. As a jurisdiction, China was viewed as having a desperately poor enforcement record, with a protectionist bent which meant that the odds were always heavily stacked against non-Chinese litigants. However, the situation has changed dramatically. “The two geographies with the most interest are US and Chinese patents,” says Tu. “It is case by case, but the buyer will want those patents ‒ whether for defensive purposes, litigation, risk management or some other reason.”

The past year has seen some landmarks in the Chinese patent monetisation landscape, with Huawei clearly adopting a more aggressive approach towards extracting value from its portfolio and Canada’s WiLAN launching a standard-essential patent lawsuit – an event which would have been considered a highly unusual step for an NPE in previous years. According to Aray, it is now often the case that Chinese patents prove critical to a package’s saleability: “The presence of a Chinese asset definitely makes a tremendous difference. I have reviewed portfolios that would probably be a very easy sell, if not for the fact that they don’t have Chinese counterparts. The worst of all is when you learn that they used to have Chinese counterparts, but they were abandoned.”

As for Japanese and Korean assets, buyer interest is notably less significant. In both jurisdictions, available damages for infringement remain low; Parker maintains that this is due, at least in part, to a deliberate and longstanding economic policy in both countries. “Japan doesn’t have the same market size as China and the United States, and few foreigners litigate here – both of which lead to some devaluation,” he points out. “Another factor is the difficulty of evaluating Japanese patents – you really need Japanese lawyers, with their language capabilities and local legal knowledge, to be able to do that.”

Job for life?

As patent transactions activity picks up in Asia-Pacific, the region’s brokers are likewise getting busier. “We are at a certain advantage over brokers based in North America or Europe, because we are closer to potential clients in the region,” explains Tu. “We can have regular meetings and visits, which helps with engagement.”

Parker agrees that being based on the ground in Asia offers distinct benefits: “Proximity makes it easier to build closer relationships with buyers and sellers. Of course, Asia is huge and there are great divides in language and business culture between Asian countries. A company like ours, based in Japan, has to work just as hard to build relations in China as a company from the United States would have to.”

Culture and language are indeed important issues for those looking to sell their patents in Asian jurisdictions. “Asian corporate culture is quite different from that in western countries,” explains Kim. “Therefore, a different approach to communications is required throughout the transactions process.”

While one need not be based in Asia in order to broker patents there, many of the potential hurdles that Asia-Pacific can present are much more easily overcome with a permanent presence. “It shows commitment to the region,” Aray points out. “It gives the ability to communicate in real time. I can speak by phone, meet in person, WeChat, all in pretty much the same time zone.” Being located just a short-haul flight away from prospective clients – or even a taxi or metro ride, if they are in the same city – can make all the difference. The capacity to forge a face-to-face relationship with a business partner is all-important in Asia – and actually being there and speaking the same language puts the region’s brokers at a clear advantage over others situated elsewhere in the world. With Asian corporate and investor interest in patent assets on the rise, any edge over the competition could prove crucial.