It’s a downturn Jim, but not as we know it
Intellectual property is often cited as a non-correlated asset that attracts investment in a downturn – but big changes to the global patent system since the last economic crisis have radically reshaped the market
As the global economic picture continues to get gloomier, some IP experts like to reassure themselves that, typically, patents prove their worth during or in the aftermath of a slump. This is particularly true if you are in the business of monetising them. Times of crisis tend to encourage patent owners, investors, their advisers and other intermediaries to boldly go where they have not gone before.
Consider, for instance, the two most recent economic shocks. The years following the bursting of the dotcom bubble gave us the modern NPE industry, while the recession following the 2008 banking crash, coupled with the advent of the smartphone industry, gave us the sky-high bids of the Nortel auction and a rush of patents onto the secondary market.
Much of that flood comprised assets sold by large operating companies and, as in-house teams are now likely to come under greater budgetary pressures, the smart money seems to be on a stream of rights once again becoming available at cut-price rates.
But it may not be as straightforward as that. Think about how today’s market looks compared to the darkest days of 2008 and 2009. The pace of change has been staggering.
In the United States alone, over the past 12 years, stakeholders have had to cope with four case-law defining 101 decisions from the Supreme Court in Bilski, Mayo, Myriad and Alice. Not content with patentable subject matter, the country’s highest court has also stepped in to rewrite the law on venue and to tweak the ground rules on attorney fees, among other matters.
The America Invents Act has given us the PTAB and a rocket-fuelled industry for challenging patents. A litigation equation that once pivoted around infringement has now become dominated by validity and the patent vaporising black hole that is the concept of an ‘abstract idea’.
Twelve years ago the litigation finance industry was in its infancy; now, we have a mature sector that is awash with cash and increasingly interested in backing patent fights.
What is more, there has been a flood of capital and technical savvy into the data analytics industry, handing IP owners a far greater suite of more sophisticated products with which to perform a range of tasks – from simple portfolio management to more complex valuations.
That is enough change to last a lifetime and we have not yet even talked about Europe’s increasing pull as a litigation venue and the rise of China as a market-defining force in the global IP system.
While China’s ascent seemed almost inevitable in 2008, the speed with which it has established a world-class patent system has still been staggering. To pick out just two of the biggest developments: the country now boasts a legion of increasingly sophisticated domestic patent owners, as well as a specialist court system that has prompted a number of overseas rights holders to bring infringement cases in a jurisdiction they had long eschewed.
Yes, intellectual property has a track record of doing well in a downturn, but the global patent market now looks totally different to the one that confronted rights holders in 2008 and 2009. What does all of this mean in practical terms? I do not have enough space to go into all the possible ramifications (and my prediction-making ability could hardly be described as other-worldly), but a few things stand out.
First off, in the short term, it will probably be tough for some licensors, particularly those at the smaller, more thinly capitalised end of the spectrum. For recalcitrant licensees the current crisis has – to put it bluntly – become the ultimate hold-out excuse. In other words, time to money will get longer for some.
For those licensors, particularly smaller NPEs, that find their coffers running low, there is always the option of tapping into the plentiful supply of capital currently in the hands of litigation financiers. This is going to be litigation finance’s downturn, opening up an even broader range of cases to back.
For corporate rights holders, particularly for the vast majority that operate as cost centres, any further cuts to IP budgets will accelerate the trend of focusing portfolios on fewer, higher quality assets. Many will let grants lapse rather than bear the costs of maintenance fees, while others will no doubt look to sell assets on the secondary market.
Identifying the real value in a portfolio has become far easier thanks to the revolution in analytics. This means that rights holders can more easily determine which assets to let lapse or to put up for sale. And on the buy side, operating companies, NPEs and other investors can now assess far more quickly which parts of a portfolio they really need thanks to advances in data analysis.
That is one reason why a big Nortel-style auction is probably not on the cards this time round, even if a big player goes bust. After all, why pursue a deal for thousands of assets when you can target the few hundred that you really need and that are most likely to stand up to the inevitable validity challenges?
These are just a few trends to keep an eye out for; no doubt more will emerge as the full extent of this crisis becomes clear. In a radically different patent world, what comes next will in many ways be a journey into the unknown.