Perception is reality for more patent holders

Recent battles over patent eligibility and validity have been as much about defining innovation and calculating return on investment as quality.

For some, the quality key is the US Patent and Trademark Office; for others, post-grant tribunals, such as the Patent Trial and Appeal Board or the Court of Appeals for the Federal Circuit. Large companies fearful of disruptive innovation may have other thoughts about quality, as do those businesses that spend massively on R&D. Patent value has always been a moving target, subject to negotiation, compromise and, to a relatively minor extent, the marketplace. The courts were generally effective at sorting things out when angry parties could not. That is no longer the case.

The fact is that in all but a handful of instances, no one gives a hoot about what a patent is worth or even whether it is valid. That is because in the high-tech world, typically fewer than about 3% of patents have meaning and maybe one-tenth of those have significant licensing/enforcement value. In only a few disputed matters where there is a great deal at stake do businesses whip out their calculators, call their respective experts and summon the lawyers – an exercise that is both painful and frustrating.

With licensing revenue down and patent sale prices 30% or more lower, there is little motivation for an alleged infringer to take a licence or settle a dispute. In areas such as medical technology that may not be exactly the case, but it is true for e-commerce and a host of patent classes. As a result, the search is on for rights holders to identify alternative methods of profiting from their rights. In so doing, it may make sense to draw more on a portfolio’s implied meaning than its actual value.

This is a good time to review how various patent holders expect to generate return on investment (ROI). It is also a good time to revisit who is an IP investor – specifically, those with a direct or indirect stake in patents – and what their expectations are. I have long contended that those with a financial stake in patents comprise a much larger cross-section of stakeholders than imagined. The following is a short list:

• large operating companies (via R&D, filing and maintenance fees);
• small and medium-sized enterprises (private or public);
• non-patenting entities (private or public);
• universities (through out-licensing or equity participation);
• R&D businesses that out-license;
• litigation funding businesses;
• lenders (through debt);
• Wall Street (via shareholders);
• initial public offerings, start-ups and venture funds;
• law firms (especially contingency players);
• charities (patent licensing and securitisation, such as for the Cystic Fibrosis Trust); and
• inventors.

Some of the above investors rely on direct licensing revenue or damages awards from enforcement; others hope to use their patents defensively or as a tool for cross or carrot licensing, better customer or vendor relationships, or to maintain market share and profit margins. Major operating companies do themselves and their shareholders a disservice by failing to explain the degree of risk mitigation provided by their patent portfolio. It can be worth tens of billions of dollars. Would their company’s market share go from, say, 23% to 17% without certain patents? Would their margins shrink to 21% from almost 30%? No one expects precise figures, but IP strategies are worthy of sharing if they play a role in protecting billions in revenues or market value.

As a technology investor, I for one would like to know what ABC Corp’s formidable investment in R&D, patent filing and maintenance fees, and legal costs is yielding and whether its IP strategy is generating a measurable return in risk avoidance, if not revenue. If IP managers cannot help investors to understand the number and nature of their patents, and intended use, someone should. Astute IP executives will do this pre-emptively, before activist shareholders or regulators require them to.

Litigation, market or perceived value

‘Literal’ patent value, as determined by a court-mandated damages award or pre-trial settlement, is less reliable than ever. Cases take longer to conclude and cost more, and awards – when they are paid – are lower than in the past. In addition, patent quality is subject to higher, sometimes unreasonable standards. This leaves us with market value, what a willing buyer is willing to pay; and perceived value, which is more important to large portfolio holders.

With brand recognition easier to establish than patent value, a patent portfolio or family in conjunction with a recognisable brand can constitute a formidable pairing. Ironically, perceived patent value holders may be in a better position to profit today than those with valid and infringed patents. Good patents need to hold up at the PTAB and in court, and require capital to monetise them. That IBM, among others, can sell unproven patents for tens of millions of dollars to the likes of Alibaba, Twitter, Facebook and Google attests to the power of brand in the current IP environment (Intel Inside®, you may recall, drew on the brand to generate patent licensing).

If issued patents are even less reliable than in the past, then invention rights that appear to be good by implication are the biggest winners. It is no coincidence that the most significant R&D spenders also happen to be among the world’s most valuable brands and significant patent holders. VW, Samsung, Intel, Microsoft and Roche spent $10 billion or more each on R&D last year; Novartis, Toyota, J&J and Google were close behind.