Back in the old routine

Back in the old routine

After several years of decline, the indications are that the patent transactions marketplace is getting more active again in 2014, with big corporates in the United States and Asia leading the way

In the last 10 years, the sale of patent assets has become an important way to monetise portfolios and balance IP positions due to converging industries. As computing has moved from the server to the desktop to the mobile device to the wearable device, the landscape of IP rights has changed dramatically. Web services and cloud computing are another example of how technology convergence has profoundly altered the landscape of industry leaders. There are many new players in the market, while other companies have lost the influence that they once commanded. Corporate patent monetisation efforts amid constant budget pressure and active portfolio management are fuelling the transactions market. At the same time, funding from the sale of IP assets has improved capital access for small entities, inventors and universities.

Market trends can be difficult to access and understand because most patent deals are confidential, numerous assignments are recorded under shell entities and many transactions involve mergers, acquisitions and security transactions, or are otherwise distinct from a transaction that purely involves the transfer a set of assets from one entity to another.

USPTO assignments

To better understand the patent marketplace, AST has studied the 1,419,268 patent assignments that were recorded at the US Patent and Trademark Office between January 2010 and June 2014. Not all transactions are recorded, so the actual number of transactions is likely larger than our study. Each assignment is analysed by a team of researchers to eliminate those related to M&A, business unit sales, inventor to company, security, liens and name corrections, leaving those that reflect a pure patent transaction. The next step was for assignments to be consolidated into a single transaction and then for assignee/assignor names to be unified to parent entities. The data was then further analysed by classifying entities by type of business, revenue and locations of the companies involved, as well as the technology of the patents transacted.

Figure 1. Number of transactions and US patents by year

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Since 2010, more than 3,709 patent transactions have been identified involving 68,430 US assets, 2,476 sellers and 1,517 buyers. With this volume of data, AST has identified several interesting trends.

The year 2011 had the highest number of transactions in the analysed period, with 1,128 transactions, including the famous Nortel transaction (Figure 1). Since then, the number of transactions per year decreased significantly until 2014, when transactions spiked sharply upwards, with 10,831 assets transacted in 372 deals through June. We estimate that 2014 may see a rise of more than 50% in the number of assets transacted as compared to 2013.

Figure 2 shows the number of patent transactions by industry category based on US and international patent classification class codes. Each transaction was assigned an industry category based on the technical subject matter of the patents involved.

Figure 2. Number of transactions by category*

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*One category per transaction

High-tech dominates

The high-tech industry accounts for the majority (78%) of patent transactions since 2010. Over 60% of 2014 transactions contained assets related to communication and software technologies. Seventy percent of communication transactions were purchased by ‘patent holding companies’ – which we define as companies that make no products or services, such as non-practising entities and patent aggregators. Patent holding companies are also active in the semiconductor and software industries. More than 1,000 transactions relate to software technologies, with Intellectual Ventures a buyer in 33% of these purchases. Over 30% of assets in the ‘other’ category pertained to transactions related to the automotive industry.

When we look at the same data analysing the number of assets for each industry category (Figure 3), it reveals that communication assets are the most transacted assets. Several large operating companies are major sellers of these assets, such as Nortel, Hewlett-Packard, Panasonic, Ericsson, Kodak, IBM and Micron.

The Nortel Networks sale of 3,741 patents to Rockstar Consortium for $4.5 billion in 2011 is the largest patent sale in our study, in terms of both price and number of assets. The second largest patent transfer occurred in 2010, when 3,434 patents were transferred from Micron to Round Rock.

Some of the notable transfers of the first half of 2014 include:

  • 1,408 communication patents from HP to Qualcomm (fourth largest since 2010);
  • software patents from IBM to Twitter (sixth largest since 2010);
  • electronics patents from Panasonic to IP Bridge;
  • communication patents from Ericsson to Optis; and
  • software patents from American Express to Intellectual Ventures.

Figure 3. Number of assets by transaction level category*

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*One category per transaction

The sellers

When we take a further look at who is selling assets, it becomes clear that practising entities are the biggest sellers of patents (Figure 4). Over the last several years, the ratio of practising entities compared to patent holding companies as sellers and buyers has remained steady. Practising entities have contributed over 80% of the assets sold, while patent holding companies are the major buyers, purchasing 46% of the transacted assets. In recent years, more patent-holding companies have been trying to sell patents acquired over time, so we can expect to see an increased percentage of patent holding companies as sellers in transactions in the future. However, overall, patent holding companies acquire more than twice as many assets as they divest. Defensive consortia such as AST, RPX, OIN and CPTN represent 12% of the buyers in the market. Because defensive consortia ultimately represent practising entities, this means that over 54% of total transactions are purchased by practising entities. R&D institutes, universities and individual inventors are the sellers in 4% of all transacted assets.

Figure 4. Transacted assets by types of party

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Large companies most active

Further, upon classifying practising entities by revenue (Figure 5), it becomes apparent that large companies – with over $500 million in revenue – are especially active sellers, accounting for 45% of practising entity transactions or 27% of all transactions. When looking at the number of assets transacted, the numbers are even higher: 78% of assets divested by practising entities or 62% of all transacted assets were divested by large companies. Large practising entities lead the buyer side as well, with 59% of transactions and 80% of assets purchased by practising entities. Smaller sized companies, with less than $100 million in revenue, are also active sellers, with 39% of practising entity transactions or 21% of all transactions, but only 12% of practising entity transacted assets. This is likely due to their smaller IP portfolios.

Figure 5. Practising entity companies by revenue since 2010

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US patents most valuable

Generally, the fact that US patents are considered more valuable compared to other geographic counterparts is probably due to the litigious nature of the market, but the companies involved in the transactions are located worldwide. As shown in Figure 6, North American practising entities are the most active sellers and buyers with over 65% of transactions. Asian companies are now responsible for more than half of the patent filings worldwide, but historically they have not monetised their portfolios. However, our study indicates that the year-on-year ratio of divested assets by Asian practising entities is growing at a steady rate. Asian companies sold four times more assets in just the first half of 2014 than they did in all of 2010. The number of sale transactions has also doubled in recent years; and with the rising number of patent offerings from Asian companies on the market, we expect the ratio to increase further.

Figure 6. Practising entity companies’ location

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Table 1 shows that 10 of the top 15 sellers are practising entities. IBM is the biggest seller, with over 6,111 assets or 11% of all transacted assets in 57 transactions since 2010. Eleven IBM transactions have involved more than 100 assets, including a transfer of 2,379 patents to Google. Sellers such as AT&T and Nokia are involved in smaller transactions. Twenty-four of 35 AT&T transactions involved under 10 assets. Allied Security Trust, with its ‘catch and release’ model, has been involved in 29 sales, including many of the assets purchased by the firm since 2007.

Table 1. Top 15 sellers since 2010 by number of transactions

No

Seller

1st half of 2014

2010 – June 2014

Trans #

Assets

Trans #

Assets

1

IBM

12

1,066

57

6,111

2

AT&T

4

69

35

405

3

Nokia

3

22

30

940

4

Allied Security Trust

4

349

29

704

5

Cypress Semiconductor

2

207

29

441

6

Intellectual Ventures

5

115

27

673

7

Hewlett-Packard

3

1,430

25

2,742

8

IPG Healthcare/Electronics

0

0

21

850

9

Panasonic

10

1,903

20

2,112

10

Delphi Corp

3

25

20

266

11

NXP

4

141

19

843

12

Innovation Management Sciences

0

0

19

64

13

Verizon Communication

1

14

18

298

14

Acacia Technologies

2

6

18

194

15

Xerox Corp

1

1

16

252

 

Other sellers (2,461)

318

5,483

3,326

51,535

Table 2 shows the top 15 sellers of 2014. Panasonic, Hewlett-Packard and IBM are the leaders, with over 1,000 patents sold in the first half of 2014. Over 90% of all assets sold by Panasonic since 2010 were transacted in the first half of 2014, so it is gearing up its sales efforts. Panasonic continues to push many portfolios on the market, leading us to believe that it may become the biggest seller of the year. Hewlett-Packard has been divesting patents for several years, but 2014 has seen the highest number of assets transferred, with 1,430 US assets in three transactions. In the period being examined, Intel and Dongbu HiTek have had their first transactions as sellers in 2014.

Table 2. Top 15 sellers of 2014 by number of sold assets

No

Seller

1st half of 2014

2013

Trans #

Assets

Trans #

Assets

1

Panasonic

10

1,903

3

59

2

Hewlett-Packard

3

1,430

4

52

3

IBM

12

1,066

15

827

4

Ericsson

1

777

1

822

5

American Express

1

685

2

27

6

Allied Security Trust

4

349

3

14

7

Alcatel-Lucent

3

295

2

54

8

Renesas Electronic

1

226

0

0

9

Partners for Corporate Research International

1

211

1

1

10

NXP

4

141

1

3

11

Cypress Semiconductor

2

207

4

21

12

Pendrell

5

138

3

45

13

Intel

1

129

0

0

14

Rambus

4

127

2

53

15

Dongbu HiTek Co Ltd

2

125

0

0

 

Other sellers (2,461)

318

3,022

541

9,455

Over 90% of all assets sold by Panasonic since 2010 were transacted in the first half of 2014, so it is gearing up its sales efforts

Unsurprisingly, most of the leading practising entity sellers in the list have a large patent portfolio on which they have based their sales efforts. With a changing market landscape and financial constraints, these large portfolios have provided surplus assets which have become a potential revenue source. Paring off unneeded assets can also help IP departments to reduce portfolio maintenance costs. In recent years Asian companies such as Panasonic and Renesas have become more aggressive in divesting assets. We expect other Asian companies to join them, resulting in even more patent transactions in the coming years.

The buyers

Table 3 shows the top 15 buyers since 2010. Of the top 15 buyers, nine are patent holding companies, which acquired 37% of all transacted assets. Leading the patent holding companies, Intellectual Ventures is by far the biggest buyer, with over 10,743 assets acquired in 941 transactions since 2010. Patent aggregators such as RPX, AST and OIN – which purchase assets on behalf of practising entities – are also significant buyers, with 168 transactions involving over 2,700 assets. Other active patent holding companies include Acacia, Conversant, Intellectual Discovery, Tessera and Wi-Lan. Korean patent aggregator Intellectual Discovery – which is one-third funded by the Korean government and two-thirds by the private sector – had its most active year in 2013, when it made 25 of its 36 purchases since 2010.

Table 3. Top 15 buyers since 2010 by number of transactions

No

Buyer

1st half of 2014

2010 – June 2014

Trans #

Assets

Trans #

Assets

1

Intellectual Ventures

62

1,061

941

10,743

2

RPX Corp

18

377

108

1,973

3

Google Inc

3

173

96

4,680

4

Samsung

10

120

72

1,922

5

Acacia Technologies

9

46

66

1,600

6

Apple Inc

2

8

49

1,890

7

Conversant (Mosaid)

0

0

36

957

8

Intellectual Discovery Co Ltd

6

131

36

729

9

Tessera Technologies Inc

5

266

33

652

10

Wi-Lan

4

522

29

1,224

11

Allied Security Trust

3

125

31

503

12

Open Invention Network

2

22

29

212

13

Rakuten Inc

2

113

27

659

14

Microsoft

4

77

23

538

15

Intel Corp

1

20

22

831

 

Other buyers (1,502)

241

7,770

2,111

39,317

Among practising entities, Google has been the biggest buyer, with 4,680 assets acquired in 96 transactions. The Motorola transaction is excluded from the analysis because it was a company acquisition. Samsung and Apple have also purchased many assets, mostly related to communications and consumer electronics. It is easy to imagine that their ongoing litigation has fuelled many of these purchases. Japanese company Rakuten went on a buying spree, with 25 patent transactions in 2012 and 2013. Rakuten is rapidly expanding worldwide and appears to be aggressively filling IP gaps in its portfolio, making purchases from sellers such as AT&T, NEC, Panasonic, JVC Kenwood, universities and others.

Table 4 lists the top 15 buyers with the most transacted assets in the first half of 2014. Six of the 15 are first-time buyers – Optis, Twitter, IP Bridge, Sound View Innovations, Future Link Systems and Intelligent Energy. There were 145 new buyers in 2014, purchasing 4,814 total assets. Intellectual Ventures has had more transactions (62) in the first half of 2014 than it did in all of 2013. Optis, a patent holding company, has acquired portfolios from Ericsson (777 assets), Panasonic (169 assets) and LG Electronics (83 assets). The true identity of Optis is unclear, but it is a New York-based limited liability company at the same address as Highbridge Capital Management, a $2.5 billion hedge fund.

Table 4. Top 15 buyers of 2014 by number of purchased assets

No

Buyer

1st half of 2014

2013

Trans #

Assets

Trans #

Assets

1

Qualcomm Inc

2

1,418

6

126

2

Intellectual Ventures

62

1,061

57

1,656

3

Optis

3

1,029

0

0

4

Twitter Inc

1

943

0

0

5

IP Bridge

1

857

0

0

6

Wi-Lan

4

522

4

96

7

RPX Corp

18

377

22

403

8

ARM Holdings

2

300

0

0

9

Tessera Technologies

5

266

4

15

10

Future Link Systems

1

211

0

0

11

Sound View Innovations

1

258

0

0

12

Google Inc

3

173

21

837

13

Intellectual Energy

2

143

0

0

14

Sony

3

140

1

2

15

Intellectual Discovery

6

131

25

441

 

Other buyers (1,502)

258

3,002

442

7,857

Small deals rule

In news and discussions, large patent transactions are usually highlighted, but the reality is that 78% of all patent transactions have fewer than 10 assets. In 2010, 71% of transactions involved five assets or fewer. This stands at 60% in 2014. At the other end of the spectrum, 10% of all 2014 transactions had over 50 assets, this compares to 3% of the transactions in 2010. So there is a noticeable increase in the number of large transactions in recent years. As shown in Table 5, five of the top 15 transactions (as measured by number of assets) in our study occurred in the first half of 2014. By comparison, two were in 2010, three in 2011, three in 2012 and two in 2013.

Table 5. Top 15 transactions by number of transacted assets since 2010

No

Seller

Buyer

US assets

Recording year

1

Nortel Networks

Rockstar Consortium LLC

3,786

2011

2

Micron Technology Inc

Round Rock Research

3,681

2010

3

IBM

Google Inc

2,379

2011

4

Hewlett-Packard Company

Qualcomm Inc

1,408

2014

5

Eastman Kodak Company

Intellectual Ventures

1,198

2013

6

IBM

Twitter Inc

943

2014

7

Rockstar Consortium LLC

Apple Inc

902

2012

8

Panasonic

IP Bridge

857

2014

9

Ericsson

Unwired Planet Inc

822

2013

10

Hewlett-Packard Company

Samsung

820

2011

11

East Kodak Company

Global OLED Technology LLC

778

2010

12

Ericsson

Optis

777

2014

13

IBM

Facebook Inc

696

2012

14

American Express Company

Intellectual Ventures

685

2014

15

Altitude Capital Partners

RPX Corp

572

2012

The sale of an asset is not the final step in its life. What happens next is also worthy of study. Some buyers are likely acquiring for defensive reasons – whether an organisation such as AST, OIN, Intellectual Discovery or RPX, or a similarly minded practising entity acquiring for its own defensive needs. However, others acquire to monetise the assets. Of all transacted assets in our study, 1,570 US patents were involved in 4,393 unique patent litigation cases. Eighty-seven percent of these litigations or 75% of the litigated patents were acquired by a new entity prior to suing. Litigations involved 541 unique plaintiffs, the majority of which were non-practising entities litigating against 2,329 defendants where most were practising entities. Table 6 shows the list of top 15 plaintiffs and defendants in litigations involving assets acquired prior to suing.

Some names that appear in the list are also on the list of most active sellers (eg, AT&T and Hewlett-Packard). It is worth any practising entity that plans to sell IP assets considering to whom it is selling and for what purpose. Are large practising entities contributing to the number of litigations that their industry ultimately faces?

Table 6. Top 15 parties by number of US litigations using transacted assets

Rank

Defendant

Number of cases

1

Apple

65

2

AT&T

65

3

Samsung

52

4

Verizon

51

5

Hewlett-Packard

48

6

LG

44

7

Amazon.com

43

8

Sony Corp

42

9

Toshiba Corp

41

10

Dell

40

11

HTC Corp

39

12

Sprint Corp

37

13

T-Mobile

33

14

Nokia Corp

33

15

Blackberry

33

Rank

Plaintiff

Number of cases

1

Acacia Technologies

148

2

NovelPoint

135

3

Wyncomm LLC

129

4

The Pacid Group LLC

109

5

Eclipse IP LLC

95

6

Brandywine Communications Technologies

85

7

The Tawnsaura Group LLC

77

8

Marathon Patent Group

76

9

Beacon Navigation Gmbh

74

10

Intellectual Ventures

73

11

Uniloc

66

12

Innovative Wireless Solutions LLC

64

13

Olivistar LLC

60

14

Ubicomm LLC

60

15

Sonic Industry

45

Opportunities and challenges

In summary, several conclusions can be drawn from our study. First is that after several years’ decline, 2014 has the potential to be the most active year in history in terms of both the number of transactions and the number of transacted assets. Second is that most sellers are practising entities, with larger companies being especially active. The most active buyers are patent holding companies, with some buying to fuel their own licensing and litigation activities. Third, after many years of being quiet, Asian sellers are becoming significantly more active. The Asian market deserves further study.

Any practising entity faces both an opportunity and a challenge. If it has underutilised assets, it has an opportunity to monetise these through a sale. However, as a potential target of assets sold by other practising entities, it also faces a challenge. The sheer volume of potential transactions means that monitoring the market is a herculean task. However, as many litigations by non-practising entities against practising entities involve assets purchased on the market, it is vital for practising entities to have a strategy – both for monetising their own assets (if that aligns with the corporate strategy) and for considering assets available for sale.

Action plan

The secondary market remains a popular way to unlock value from under-utilised IP assets and there are a few key points about its operation that are well worth remembering:

  • Understand that most assets that are sold to patent holding companies come from operating companies.
  • To avoid assertions on transacted assets, operating companies should have a strategy for monitoring the secondary patent market.
  • Special attention should be paid to Asian sellers as they become increasingly active.
  • While many buying entities are well-known names, new ones emerge each year.

Mihir Patel is vice president of technology and Linda Biel is senior vice president of business development at Allied Security Trust

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