Top players of the global game

Michael Friedman
CEO, Hilco IP Merchant Banking

Barbarians not quite at the gate

Six years ago it seemed to be a question of when not if large financial institutions would descend on the patent sector, establishing specialist groups to pick up deal-making fees from what many saw as a rapidly emerging asset class. In Summer 2011, the auction of assets formerly owned by Nortel raised $4.5 billion as the Rockstar consortium comprising Apple, Blackberry, EMC, Ericsson, Microsoft and Sony emerged victorious from a multi-round bidding war. Google – which had missed out in the bitterly contested auction – turned its attention to Motorola Mobility, handing over $12.5 billion for the US mobile company whose 14,000 patents made it such an appealing target.

It was not just the giants of the smartphone market that were competing for rights. Pre-initial public offering Facebook was also scouting around for assets and would eventually pick up a batch of former AOL grants from Microsoft for $550 million and a portfolio of just under 700 patents from IBM for $83 million. Meanwhile, in the non-practising entity (NPE) sector a handful of public IP companies – including Acacia and VirnetX – were enjoying sky-high valuations as investors waited for the next district court victory to provide a stock market bump.

In short, the patent sector was booming and so the titans of Wall Street might have been expected to dominate the investment and advisory market in the years to come. But, of course, that did not happen. Instead, legislative and legal changes in the United States took their toll on patent values, deal flow slowed and transactions such as Nortel came to be regarded more and more as curious anomalies.

Instead of an explosion of big Wall Street names, the patent market has seen the emergence of a number of smaller, opportunistic players who match IP expertise with deep pockets. Fortress, for instance, has carved out a very profitable niche initially as a debt provider to NPEs such as Inventergy and Marathon Patent Group and, more recently, as a more full-service IP investor.

In the last 12 months the ranks of specialist IP investors and advisers have grown thanks to the entrance of Houlihan Lokey and Hilco Global, two mid-market financial players with global reach and broad investment expertise. Hilco made its move into the space first with the hire of Michael Friedman, formerly of Ocean Tomo and before that with a multi-strategy hedge fund. In November 2016, Friedman added significantly to the platform with the hire of John Veschi and his team at Marquis Technologies, and officially launched Hilco IP Merchant Banking. That was followed at the start of 2017 by Houlihan Lokey snapping up Blackstone IP, the advisory business headed by Elvir Causevic and Edmund Fish which has been working on the disposal of Yahoo!’s portfolio (at the time of going to press this remained unsold).

The new IP groups at both do some similar things in helping patent owners value and monetise their assets, advising on IP-rich M&A and restructuring. Hilco also has significant capital to source its own investments or to back deals alongside its clients.

“From my experience there’s enormous reticence to make bets in intellectual property,” claims Friedman. Institutions, he said, are instead looking for an “Indian guide” to help them understand the underlying assets and the market in general. “I continue to believe that one of the biggest barriers to entry is the enormous gulf between Wall Street’s ability to understand intellectual property and technologists’ and engineers’ ability to explain it to investors,” Friedman adds.

According to Causevic, new opportunities are emerging for the likes of Houlihan as chief IP officers (CIPOs) at major patent-owning operating companies are seeing less of a litigation threat from NPEs and so now have more bandwidth to turn their attention to monetisation. “CIPOs are coming back up for air after years of fighting NPE suits,” he argues. He adds that the improving market conditions have helped his team at Houlihan hit its 2017 target in the first six months of the year. But will others follow? According to Causevic he spoke to other interested investors before settling on his team’s current home, which suggests that there are still interested players out there. “I think people will wait to see how we go,” he says.

Shigeharu Yoshii
CEO, IP Bridge

A banner year for a changing sovereign patent fund

If IP Bridge manages to make the transition from sovereign patent fund to private entity – a shift that CEO Shigeharu Yoshii claims has been part of the plan all along – then the past year might be recalled as a major turning point. When the fund was established in 2013, making it the last of the major state-sponsored patent entities to emerge, little in the way of proof of concept had been produced by counterparts in France and South Korea. However, the deals inked in this, IP Bridge’s fourth year, look like important validation for the business.

When IP Bridge started asserting patents in late 2015, it was hardly wading into a friendly enforcement environment. What cases we knew about were all in the United States and, unsurprisingly, the fund was hit by a slew of inter partes reviews – with the identity of the petitioners revealing that many of the biggest names in semiconductors were extremely keen to eliminate certain rights in its portfolio.

So it was a big deal in June, when the company announced a global settlement and licence agreement with Broadcom for its semiconductor portfolio. What made the deal stand out was that at the time of the announcement, there were more than 20 pending inter partes reviews on the patents-in-suit. Around the same time, Patent Trial and Appeal Board records indicated that the Japanese fund had probably reached an agreement with ARM as well (the two sides settled an inter partes review dispute), not long after the UK chip designer came under Japanese management. While terms were not disclosed in either case, IP Bridge executives were clearly excited about the news.

Perhaps more significant was the announcement of the first licence to IP Bridge’s wireless standard-essential patent (SEP) portfolio. Yoshii describes the counterparty in the agreement as a major US multinational, which makes it the first publicised deal the fund has made in the absence of some kind of litigation. “That particular company realised it’s better to do an agreement as soon as possible,” remarks Yoshii. The fund’s fair, reasonable, and non-discriminatory negotiating strategy is very balanced, he suggests: “We were not seeking extraordinary damages; at the same time, we secured enough profit distribution back to the original patent holder.”

Taken together, the deals demonstrate that there is a place for entities like IP Bridge in Japan’s patent market, Yoshii explains: “We have a strong belief that there is a business necessity for firms like ours. Some companies hold good patents, but cannot monetise them themselves for various reasons.” Even as its licensing efforts pick up, he points out that the fund is still in growth mode and looking to add assets to a stock of around 700 semiconductor patents and 800 wireless SEPs.

Deals announced this June have already resulted in approaches from new potential partners, according to Yoshii. Intriguingly, not all of these are Japanese corporates. The fund’s client list is currently composed of domestic blue-chips including Panasonic, NEC, Fujitsu and Hitachi. But as IP Bridge contemplates a future in which it is more than a sovereign fund, Yoshii says that it is open to diversifying the kind of organisation it works with. “Not only Japanese companies but companies outside of Japan are interested in our business, and we believe patents should be utilised regardless of nationality,” he declares.

In addition, IP Bridge’s experience in China could be a selling point for prospective partners. Yoshii confirms that it litigated against Broadcom not only in the United States, as was previously known, but also in China. That may have been decisive in the US company agreeing to settle even as a large number of inter partes reviews were in motion. “Though litigation is our last resort, we don’t limit the jurisdiction to the United States,” confirms Yoshii. “If we have a good case in China, we will choose China.” However, while he acknowledges that US litigation can be costly and time consuming, he maintains that the strength of IP Bridge’s US portfolio means that it cannot ignore enforcement options there.

Yoshii is quick to say that patent licensing is only one of two core offerings at IP Bridge, alongside the company’s innovation business. It has announced several new initiatives focused on the Association of Southeast Asian Nations region – convinced that Japanese start-ups with quality intellectual property and technology can generate significant returns by tapping into business opportunities. There are also lessons to be learned from dynamic markets such as Singapore and Malaysia, Yoshii adds: “Already they have a good innovation ecosystem compared with Tokyo.”

The upcoming year will be pivotal for IP Bridge’s licensing efforts. If it can build on the momentum it has picked up this summer, it will have established an Asian non-practising entity model which may well generate imitators across the region.

Jury is still out on China as a life raft for NPEs

In the non-practising entity (NPE) world, China remains a source of both great hope and great uncertainty. It seems that 2017 is the year that several well-known foreign licensing companies have decided to bring cases in venues such as the Beijing IP Court; but while virtually everyone agrees that this is a crucial jurisdiction to watch, NPE executives are split on whether China will ultimately be a hospitable or profitable place to operate.

Erich Spangenberg
Founder, IPNav

The most high-profile recent assertions have been WiLAN’s November 2016 standard-essential patent (SEP) infringement case against Sony and an IP Bridge suit against Broadcom that resulted in a negotiated settlement. The granting of the country’s first-ever SEP-based injunction in a suit filed by Chinese operating company Iwncomm further piqued the interest of major licensors in the telecoms space.

Jim Skippen
Chairman, Quarterhill

However, a few headline cases do not mean that the floodgates are about to open, says IP Nav founder Erich Spangenberg: “The volume isn’t there and I don’t think it will be.” But he does believe that China will produce innovation in terms of how intellectual property is thought about and managed.

Spencer Shen
Chief IP officer, ZTE

Others in the sector point out that interest in China may be driven more by a hostile US environment than by underlying factors in the country itself. “We think the current rise of China is a footnote on the condition of US patent law,” argues Quarterhill chairman Jim Skippen. “It is sad that US IP owners increasingly must look to other jurisdictions to enforce their patent rights. Unlike the United States, which we believe has adopted an increasingly anti-patent stance, at this particular juncture China still seems to have a neutral or balanced position on patents.” He adds that patent owners need to understand that the jury is still out on whether China will be a great jurisdiction for patent cases.

David Pridham, CEO of Dominion Harbor Group, calls China an “exciting jurisdiction for litigation”, and says the contrasts to the United States are hard to ignore. Dominion Harbor recently launched a joint venture with a local Chinese firm, so Pridham and his team have been studying the situation there carefully. “They’re actually trying to streamline a lot of the process and to make it more efficient and more predictable and at the end of the day, like any market, having more predictability is a really good thing,” he observes.

Skippen agrees: “The system seems to be trending towards valuing inventions and patents. Some of the blatant unfairness towards patent holders evident in the US system is missing.” But there were more concrete factors that went into WiLAN’s decision to file a case against Sony in Nanjing, he notes. Among these were very reasonable litigation costs, the size of the market, the ability to get injunctions on exports and the possibility of full contingency arrangements.

Chinese companies are not waiting to see whether foreign NPEs get more prominent in China – they are actively preparing for it. ZTE sees not only that foreign entities are becoming more active, but also that local Chinese ones are beginning to take root. Chief IP officer Spencer Shen points to the government’s efforts to strengthen enforcement and the growing wealth of Chinese companies as two important pull factors. He says that conventional wisdom on the ground is that “there is a firm foundation for NPEs’ successful licensing business in China”.

However, questions remain over how the Chinese government and judicial authorities might react to an influx of cases filed by foreign NPEs. The view in some Chinese companies is that they will be insulated from much of the risk by their nationality, believing that it is highly unlikely that a foreign NPE would seek to enforce against a Chinese business. Many NPE executives seem to agree. Yet when asked about potential policy responses, Shen notes that the Chinese government has left no doubt about its intention to continue strengthening the IP system: “Companies will never invest more to create intellectual property and protect their IP assets without a well-developed IP litigation system and licensing market.”

Indeed, Skippen notes that he has not come across any blatant anti-NPE sentiment in the market: “We are hopeful on balance that the essential issue will be the property right rather than the identity of the party owning the IP right.” Still, he advises NPE executives that there are some unique considerations to be made in this market: “First, it is important to try and gauge the political climate, since that can be a factor in Chinese cases; second, it is important to try to find ways for your company to be a friend to China. Finally, make sure you line up competent, experience counsel and over-prepare at the beginning.”

While Pridham notes that Dominion Harbor has always viewed litigation as an expensive and risky prospect, it may not be long before it follows WiLAN in bringing a China case. The firm has retained Beijing East IP Group in connection with the monetisation of the Kodak portfolio it acquired from Intellectual Ventures in February. “I’d be very surprised if we didn’t have a number of active cases in 12 months if trend lines continue as they’re going right now,” Pridham remarks.

Spangenberg is singing a different tune. “I’ve had an office in Shanghai since 2007,” he notes. “I still don’t understand the market and I don’t think I want to stand out as the leading troll – in fact I know I wouldn’t want to.” But you can be sure that he and many other NPE heads will be carefully observing what becomes of plaintiffs like WiLAN. “Expect the unexpected,” counsels Skippen. “China is still the Wild West.” Or should that be East?

Deirdre Leane
Chief IP Officer, Technicolor

Getting creative with patents

Speak to anyone in the licensing business and they will tell you how hard it is to close large patent deals. That is true in any legal climate, but when things are as tough as current conditions in the United States then getting over the line is particularly tricky. Patent owners and accused infringers both know that even if a plaintiff is successful at district court level, that decision stands every chance of being reversed by the Court of Appeals for the Federal Circuit (CAFC). What is more, any patent owner in possession of a potentially monetisable asset faces a swarm of inter partes reviews as potential deep-pocket targets look to invalidate rights even before they are asserted or to drag out proceedings in order to exhaust a licensor’s finances.

Although there are some indications that conditions are improving, licensing is not for the faint-hearted. However, in the last couple of years some companies have begun to change their strategies, moving from generating value through a simple, royalty-driven approach to structuring deals which include collaborations around specific technologies or which make them part of much broader business relationships.

Among recent trailblazers is InterDigital, which in January 2013 finalised an agreement with Sony to set up a joint venture called Convida Wireless focused on communications in the Internet of Things and other connectivity areas. This was then expanded in 2015 to include fifth-generation wireless technology. In one of its most recent licensing deals with Huawei, which was announced in 2016, the company also revealed that it was looking at joint R&D efforts with the Chinese tech giant.

“A straight, plain patent licensing deal is hard to do,” admits InterDigital CEO and top 40 Market Maker Bill Merritt. “It’s harder to do compared with a licence that has other things in it such as research or access to other patents. I love to do more customised deals because they are stickier and you get to know the customer better so when the renewal comes up you’ve actually found things in the market that’re going to be of interest to them.”

Microsoft has also sought ways of using its stockpile of intellectual property more collaboratively and as a way of ensuring that its products are on as many devices as possible. In May 2016, for instance, it announced a broad-based deal with Xiaomi in which the two agreed a cross-licence and the Chinese smartphone maker acquired patents from the Windows giant and agreed to pre-load a suite of Microsoft applications onto several of its devices. This year, the company launched its Azure IP Advantage programme, using its patents to attract customers to its Azure cloud-based services; and in March its new auto licensing programme kicked-off with the announcement of a deal with Toyota which saw the Japanese company license-in parent underpinning ley aspects of connected car technology.

However, these collaborative approaches do not work in every case and can run into problems as a result of corporate bureaucracies. “We’ve always seen less interest in this than I thought we would,” admits Intellectual Ventures CEO and co-founder Nathan Myhrvold. “We do deals like that in other parts of our business such as global health where we make them a lot, and with some of our own inventions, but many companies are just not set up to bring in outside technology.” Instead, he says, they prefer outside products. “There are exceptions, but a typical scenario is that we’ll show a company something and they’ll say, ‘well that’s great but we need it to be much further along’,” Myhrvold explains.

Currently, then, the emphasis for many remains on closing traditional royalty-bearing licences. According to Technicolor chief IP officer Deirdre Leane, deals are possible without resorting to the courtroom. “They are still very achievable from a soft campaign, but you need to have done your homework,” she insists. But despite a more collaborative mood among some, according to Phil Hartstein, CEO of cybersecurity business Finjan, an in-built reluctance on the part of many businesses to take a licence persists. “For all we’ve gone through I thought there would have been an inflection point where the nuisance rebuttal arguments would have gone away, but we’re still hearing the same things as we did four years ago,” he comments. Licensing’s entente cordiale still has some way to go.

Joo Sup Kim
Vice president and head, IP Centre, LG Electronics

Asian corporates cast a wary eye over major US legal developments

East Asian tech companies are among the most frequent users of the US patent system. As traditionally high-volume defendants, they have been among the biggest beneficiaries of patent reforms. However, of late, some big court decisions have had a mixed impact on their strategies.

Toshimoto Mitomo
Corporate executive, Sony

Non-practising entity (NPE) assertion has always been one of the top US risk factors for Asian corporates and there seems to be agreement that the threat has abated significantly in recent years. “We are seeing a decline in NPE litigation, but it hasn’t disappeared,” explains Toshimoto Mitomo, corporate executive at Sony. He credits inter partes reviews and Alice with making it more difficult for certain entities to assert. LG Electronics vice president and IP centre head Joo Sup Kim agrees and adds another factor to the NPE decline: “The manufacturing industry has changed its attitude regarding litigation,” he observes, saying that such companies “will not hesitate to litigate very aggressively in defending their products and business from plaintiffs”.

When it comes to the latest setback for the NPE sector – the Supreme Court decision in TC Heartland v Kraft Food Group – it is something of a question mark for foreign companies. “It is not clear what impact TC Heartland will have as to filings against foreign defendants,” notes Mitomo, as the new venue rules apply to suits against domestic companies only. Based on early trends, observes Kim, there may be some indirect impact on Asian companies tied to the location of their subsidiaries. Since local entities have the right to have cases transferred to their own state, some plaintiffs are filing cases against the parent company there too, in order to simplify things.

The question of whether the Supreme Court might strike down the inter partes review process in the upcoming Oil States Energy Services case is a significant one for companies that have been big users – and targets – of the system. “Sony has been very successful in the Patent Trial and Appeal Board by invalidating claims of those asserting invalid patents against Sony and so inter partes reviews have been an important component of our IP strategy,” Mitomo explains. He argues that if that tool is taken away by the nation’s top court, Sony will just have to adjust its strategy, just as it has done many times before in response to events. Kim does not hazard a guess as to the outcome of Oil States, but he sees the pendulum swinging back in favour of patent owners regardless: “In the next five years, I absolutely think the IP litigation trend will go back to a pro-patent era again.”

The Trump administration’s trade agenda has raised some eyebrows in the IP community as well. That is certainly true in China, which is the target of a US Trade Representative Section 301 investigation for various IP policies which are alleged to have created trade barriers. However, wariness is not limited to Chinese corporates. Noting the administration’s desire to raise trade issues, Kim notes that the International Trade Commission and other IP-related tools may come into play, which “could create some pressure on foreign countries”.

But perhaps the biggest recent US development in terms of day-to-day impact has been the ruling in Impression Products Inc v Lexmark International Inc. Kim says that it is already creating a lot of work re-negotiating licences in light of the new exhaustion doctrine. “Most licensors have to at minimum amend or correct relevant clauses or else lose a lot of income,” he observes. “For foreign companies, this case has been much bigger than TC Heartland.”

Looking outside the United States at the global risk balance, Mitomo ranks Chinese litigation as one of the top trends to watch, alongside European issues including the possible development of the Unified Patent Court regime, how standard-essential patents are valued in the United Kingdom post-Unwired Planet, as well as in other jurisdictions, and the continued prominence of Germany. Kim believes that as a result of Brexit “Europe will become a much smaller IP market”. The one to watch, he says, is in Asia: “I think the next IP market is India, it’s growing very fast, so overall the importance of Asia will grow much bigger.”

Kurt Brasch
Patent Transactions Lead, Uber

Slowly but surely — a patent deals market in transition

For the last several years it has undoubtedly been a buyer’s market out there. Patent transactions have been deeply affected by legal and legislative changes in the United States (still by far the largest market for deals), such as the advent of inter partes reviews and the lack of clarity around Section 101 of the US patent statute concerning patent-eligible subject matter. While rights holders have seen the value of their assets plummet as a result of this uncertainty, it does mean that there are potential bargains to be had for canny buyers.

“It’s sort of like the real estate market in 2008/2009,” Dominion Harbor CEO David Pridham comments. “It’s incredibly undervalued right now and there are huge portfolios that people won’t even touch because of 101 concerns or other risks. Our view is if you cut through all that stuff there’s a lot out there to invest in.” Dominion Harbor, a non-practising entity (NPE) which was formed by a breakaway of former IPNav executives in 2013, is among those spying opportunities in the market.

In early 2017 it was behind one of headline deals of the year when it picked up a portfolio of around 4,000 former Kodak patents from Intellectual Ventures (IV). That deal was notable not only for the number of assets that changed hands but also because it highlighted IV’s switch from being one of the most active acquirers on the secondary market to one of the most prominent sellers as it looked to slim down its huge portfolio. The transaction was also typical of many others in the market in that IV retained an interest in the assets: it is set to receive a portion of future profits from Dominion’s monetisation efforts in the kind of privateering-style deal that has become increasingly popular in the last five years as buyers have grown reluctant to part with a lot of cash upfront.

Dominion followed up its Kodak purchase by announcing in July that it was partnering with Hawkeye Ventures to invest $50 million in patent portfolios worldwide, suggesting that investors with little experience of patents are now following the sector closely.

However, it is not just opportunistic investors and NPEs who are seeing the upside in a sluggish deals market. Conversations with senior in-house IP executives and advisers suggest, anecdotally at least, that more operating companies are actively looking for opportunities.

No one in an operating company has a better view of this than Uber’s Kurt Brasch. The former Google and Motorola executive was hired in September 2016 and since then his track record of building the ride-sharing company’s embryonic portfolio has earned him a place in our top 40. Deals with HP Enterprise and AT&T have added around 100 patents alone, while Brasch has also taken a concept he helped develop at Google to launch UP3, a platform designed to give patent owners a quick and efficient way of selling assets to the company.

Brasch admits that it is still a buyers’ market, but believes that things are starting to turn. “You can feel it’s changing a little, I believe the market bottomed out in 2016,” he explains. He points to some judicial decisions as being more pro-patent owner, but concedes that the signs of a change are part of a general sense that he has, rather than hard evidence.

It should be stressed that any signs of an uptick in patent values and general optimism in the market are particularly fragile and that there is still a lot of caution. “What people don’t understand is that whenever you’re in a cyclical decline it feels like a secular decline,” comments IPNav founder Erich Spangenberg, now head of Hermes Patents and SK14 Advisors. Like many experienced patent monetisers, Spangenberg is increasingly looking to new deal opportunities in Europe and Asia, particularly China, where there is a thirst for assets and interest in new methods of IP value creation. “Can you imagine if there wasn’t Europe or Asia right now?” he asks. “We’d all be on Xanax.”

A big moment in the global FRAND environment as China moves centre stage

There are few professionals among this year’s Market Makers who remain unaffected by the pressing policy and legal questions posed by standard-essential patents (SEPs) and fair, reasonable and non-discriminatory (FRAND) licensing terms. Whether major implementers or key contributors towards standards (or both), corporate executives need to be more careful than ever in how they conduct negotiations over SEPs. For those in the transactions market, court rulings and regulatory pronouncements in a range of jurisdictions can significantly affect the value of FRAND-encumbered assets.

However, at a recent symposium on FRAND matters hosted by China’s Ministry of Commerce in Beijing, it was clear that there are some emerging elements of consensus across global competition regimes on issues such as injunctions. Key differences on patent policy remain when it comes to the major standards development organisations (SDOs), yet standards development is carrying on apace. Looking to the year ahead, many of the most significant issues appear to be concentrated in major Asian jurisdictions, including China.

When it comes to SDOs themselves, the most significant recent change was the Institute of Electrical and Electronics Engineers Standards Association’s (IEEE-SA’s) 2015 patent policy update. The revisions – which addressed issues including reasonable royalties, injunction availability and reciprocal licensing – generated pushback from a vocal segment of the industry; companies including Qualcomm, Ericsson and Nokia all said they would not license their SEPs under the new guidelines.

While there were concerns about whether the dispute would slow the development of standards, IEEE-SA director Dave Ringle claims that two years on, there is no evidence that this has happened. The organisation has received 150 letters of assurance accepting the revised guidelines, as well as 16 which declined to do so. Nevertheless, Ringle says that an increase in new work items in 2015 and 2016 shows that predictions of major disruption and delay to standards-setting activity were unfounded. “SDOs cannot avoid their own responsibilities and shift the burden to the courts,” Ringle argues. “It is much better to have clear, upfront rules.”

So far, other major standards-setting bodies have not followed IEEE-SA’s lead. For example, Bardo Schettini Gherardini, the director for legal affairs for the European Committee for Standardisation (CEN) and the European Committee for Electrotechnical Standardisation (CENELEC), observes that while patent density in standards has certainly increased, his organisation sees no major problems that would call for a complete overhaul of patent policies. One area where Schettini Gerardini acknowledged that CEN and CENELEC are willing to take additional steps is in increasing the organisations’ transparency. The European Commission is due to publish a communication on “SEPs for Europe’s digitalized economy” by the end of 2017, in which SEP declaration transparency will be a key theme. The document will also seek to clarify issues surrounding FRAND valuation and SEP enforcement.

As for courts and regulators, there does seem to be some international convergence. According to Microsoft’s general manager of standards strategy and policy Amy Marasco: “We are seeing a consensus emerge that seeking an injunction against a willing licensee over a FRAND-encumbered patent can violate competition law.” Regulators are concerned about the seeking, rather than mere obtaining, of injunctive relief, Marsaco explains, because they believe that it tilts the balance of power in negotiations. In addition to major court cases in the United States and Europe, Marasco points to guidelines issued by competition watchdogs in Japan, Korea and Canada, all of which essentially hold that bringing action for injunction against a party willing to take a truly FRAND licence can violate the law.

Of course, serious disagreement persists among large corporates at different ends of the developer-implementer spectrum. As Apple’s senior legal counsel for China Steve Wang explains, the company has major reservations about the way that SEP portfolios are currently licensed. One of the sharpest differences with major licensors is over the proper royalty base. “To use end product price will lead to royalty inflation and discrimination, a violation of the FRAND principle,” he argues. On the other side of the debate – one that is playing out now in venues including the Beijing IP Court – Qualcomm senior vice president Mark Snyder points to the explosion of Chinese smartphone makers onto the global stage, most of which are licensed by Qualcomm. It’s clear, maintains Snyder, that “there’s no holdup in our industry; it’s flourishing”.

It is fitting that many of these debates, including Apple’s current dispute with Qualcomm, are playing out, at least in part, in China. Yonghua Zhang, director of the Department of Treaty and Law at the State IP Office (SIPO), notes that companies are engaged in fierce public argument over FRAND issues. “SEP holders and implementers need to work together to make money, but now they’re fighting,” Zhang remarks. “Both sides’ unhappiness stems from systemic issues,” he says.

SIPO, along with China’s major regulators – the National Development and Reform Commission, the State Administration for Industry and Commerce and the Ministry of Commerce – is currently developing a final version of new antitrust and IP guidelines that could have a significant global impact. Zhang believes that future efforts should strive to balance the interests not just of standards developers and implementers, but also of consumers and seek to create a “common community of interests”. Interestingly, Zhang describes the reformed IEEE-SA policy as “a step in the right direction” and also says that he will be watching with interest to see whether Avanci can successfully bring the patent pool model to the Internet of Things.

Chinese litigation has become a key flashpoint in global SEP disputes. This is especially true after the Beijing IP Court issued the country’s first SEP-based injunction in March. That case featured Chinese standards developer Iwncomm, which sought to halt sales of Sony mobile devices. However, other companies including Dutch telecom Royal KPN are lining up to enforce their patents in this venue, too.

Beijing IP Court presiding judge Ying Jiang argues that one clear message from the court is that “FRAND does not equal free”. In weighing the appropriateness of an injunction, parties’ behaviour in negotiations is the top factor. “Our major concern is to protect the companies that have not engaged in misconduct,” Ying says. She states that the Beijing IP Court’s recent SEP rulings should be “a way to encourage people to have good and willing negotiations”. It is clear from speaking to companies in China that very high-level FRAND negotiations are playing out in the country right now. Whether they produce deals or disputes, the effects will be global.

Nathan Myhrvold
Co-founder and CEO, Intellectual Ventures

The reinvention of Intellectual Ventures

As one of the trailblazers in the modern IP value creation market, Intellectual Ventures (IV) has long been the subject of fascination. For the first 15 years of its life the Bellevue, Washington state-based pioneer has amassed cash for three patent-buying funds and a stockpile of rights more typically associated with multinational operating companies (according to its website IV has owned, at one point or another, 70,000 patents around the world).

However, like many non-practising entities (NPEs), IV has suffered in recent years from adverse legislative and judicial winds in the United States, meaning that its attempts at monetisation through litigation have been challenged in inter partes reviews or invalidated in the courts. As the climate has become tougher, it has also become clear that some IV investors have changed their attitudes about the merits of pumping cash into a huge monetisation vehicle.

Faced with those conditions, in the last 12 months IV has opted to change tack. It has always been open to selling assets but it has significantly upped its rate of disposals of late and in February this year sold a portfolio of around 4,000 former Kodak assets to Dominion Harbor. That was just one of several deals it has carried out with Dominion – although it was by far the largest – while it has also sold assets to the likes of Equitable IP.

The Kodak deal was followed by an announcement that IV was ending acquisitions by its third and most recent fund, effectively taking the iconic patent accumulator out of the secondary market as a buyer. For a company that has dominated the space for a large part of its existence, it was a highly significant move.

Then, in another surprise announcement, IV revealed that it was reshuffling its management team with a number of senior executives departing, including COO Adriane Brown. That shake-up means that IV’s seven business heads now report to CEO, co-founder and IAM Market Maker Nathan Myhrvold, effectively giving him more day-to-day, hands-on responsibility. Myrhvold plays down the significance of the changes, claiming that “I was hardly twiddling my thumbs before”, and pointing out that he had fairly regular contact with the business heads. However, as more senior figures depart, the former Microsoft chief technology officer has become the one big constant in what remains an extremely potent force.

In many ways that potency has only increased with IV’s beefed-up sales strategy. Many of the patents that the firm has sold have ended up in the hands of assertion vehicles which have quickly turned to the courts to convince recalcitrant licensing targets of the need to talk turkey. IV chief revenue officer Cory Van Arsdale admits that the sales have caused some companies to look again at taking a portfolio licence. “The reaction is that for some it precipitates them to thinking more quickly about whether working with us is going to be more efficient while there are others who are always going to fight,” he comments.

While some potential licensees reconsider their positions, the new sales strategy in part reflects the fact that while IV has built a considerable licensing operation, monetising such a large portfolio is an extremely onerous proposition. As Myhrvold explains: “We have a pretty full plate of things we’re going to be developing with our portfolio which means that if there’s something that’s off that plate and there’s somebody else who can get to it quicker than we’re going to, then yes we should find a way to do a deal.”

The IV head also claims there are some technology areas where others are better placed than it to carry out the heavy lifting, pointing to a 2016 deal through which IV gave Rovi (now TiVo) the right to license patents that relate to over-the-top content technology. Van Arsdale reveals that they are looking at a number of other similar arrangements in what they call “channel deals”.

The series of changes at IV which have come about during a time of intense pressure on patent monetisers is now running up against tentative signs that the market might be starting to improve. In the US Congress pressure to pass more legislation to effectively further weaken patent rights has died down, while some Federal Circuit decisions have helped make recent Supreme Court rulings around patent-eligible subject matter a little less opaque.

“We watch this very closely, as you can imagine, and there’s lots of evidence that it is coming back,” Myhrvold states. “We have some pretty significant deals in progress right now that suggest some of our licensees also see it coming back, otherwise they wouldn’t be doing transactions of that magnitude with us.” But he also sounds a word of caution: “I don’t want to claim that it’s all over and it’s all back and it’s all great, there are still lots of companies who think they don’t have to pay for patents anymore.”

Myhrvold insists that recent developments at the firm do not represent some radical, overnight revolution for IV. It still expects a return on its intellectual property, whether the pendulum swings forcefully towards stronger patent rights or travels in a longer, slower arc. But the new attitude at the pioneering business is clearly that it needs to work smarter to realise a return on its assets and to open up new opportunities.

And might there be a fourth fund at some point in the future? “Sure,” Myhrold replies. “Right now with the pendulum where it is I don’t think it makes sense, but in the future of course that would be a possibility.”

Ilkka Rahnasto
Vice president, Nokia Technologies

A team operating at the very highest level

The Market Makers rules state that only individuals can be named in the listing and that only one person from any given entity can be featured. However, while we have awarded the number one spot for 2017 to Nokia Technologies vice president, Ilkka Rahnasto, he would be the first to insist that he shares this honour with the entire IP team he leads. The group has had one hell of a year, which was rounded off nicely on September 18 with the announcement that an international patent licence arbitration that pitted the Finnish company against LG had ended well for it, with a decision which will boost Nokia’s patent licensing income even further.

Eeva Hakoranta
Head of patent licensing, Nokia Technologies

The LG news followed revelations in Nokia’s 2017 quarter two results, published in July, that Apple had made a one-off payment of $2 billion to it following the worldwide settlement of a dispute between the pair earlier this year and that the tech giant would be making ongoing royalty payments on top of that. Even for a business as cash-rich as the iPhone superpower, that is a serious amount of money.

As the entire IP market knows, Apple fights its corner as hard as anyone; so to be forced – and that is surely the right word here – into handing over such an amount would have been a bitter pill to swallow in Cupertino. On the other hand, at Nokia HQ in Espoo, just outside Helsinki, it would have been viewed as yet another vindication of the major reorganisation the company went through in 2014 which saw the creation of Nokia Technologies and the assignment to it of 30,000 patents, along with a brief to increase the monetary returns that Nokia makes from them. Under Rahnasto, that is exactly what has happened.

This was acknowledged by the company’s CEO Rajiv Suri in comments on the first half of the 2017 financial year, when he referred to “the excellent performance of Nokia Technologies”. To get a one-off $2 billion payment from Apple with more to come was a spectacular result; indeed, it may represent the biggest publicly announced return on a single licensing agreement there has ever been. However, it was not just the Apple deal that has made waves.

Suri also referred to a recently concluded deal with Xiaomi, which saw the two companies announce a business collaboration and a multi-year patent agreement, including a cross-licence to each other’s cellular standard-essential patents and the Xiaomi acquisition of assets from Nokia. Referring to the transaction, Suri described it as “a milestone win with a Chinese smartphone vendor, setting the stage for us to engage further with other vendors in the country”.

For Suri to talk so specifically about the Xiaomi deal and what it may lead to shows how central he believes the activities of Rahnasto, licensing chief Eeva Hakoranta and other team members are to Nokia’s future – and it is undoubtedly the case that striking such an agreement with the fast-growing Chinese smartphone maker, on top of the Apple deal, in a climate that is not conducive to patent owners shows a business team operating at the highest level. As Xiaomi’s Paul Lin told IAM: “The Nokia team is not soft… They are persistent and professional; they understand the key elements well and negotiate hard. Each party did a lot to defend their own interests, and at the end of the day we did a deal that I think both sides can be happy about.”

Most significant of all about the last few months for Nokia is what they promise for the future. The Apple, Xiaomi and LG agreements are not only big news in and of themselves; they also provide major validation for a high-quality portfolio built up over years of heavy investment in R&D, as well as of the strategic approach the company has decided to take to exploiting it. These days, it is a brave business that decides against sitting down to talk when Nokia knocks on the door.