Welcome to IP Market 2.0
The IP market has never been more fluid, so there was plenty to discuss for the close to 700 delegates from over 30 jurisdictions who gathered for the eighth IPBC Global, held at the Palace Hotel in San Francisco from June 14 to 16. Patent reform and a series of unhelpful court decisions are driving greater numbers of players to look more closely at alternatives to the US market in Europe and Asia; while transactions are on the rise, with signs that prices might soon start going up. Company boards are increasingly looking at intellectual property, but may not yet have a proper handle on value and strategy. All this and a lot more was debated over the three days of another highly successful event
The patent world is not what it used to be, was the major lesson to come out of IPBC Global 2015. For so long focused almost exclusively on the United States, interest and activity are now growing in Europe and Asia, and before too long both could rival – or even surpass – the US market as deal-making and dispute resolution hotspots. An increasingly dysfunctional US system, combined with much more attractive options further east, is driving IP owners, intermediaries and advisers to reconsider established ways of working. So although IP Market 2.0 may not yet have fully materialised, there is little doubt that it soon will. For all but the most US-centric, this means that there are exciting opportunities ahead.
Art Monk of TechInsights makes a point during the “Future of IP sales and acquisitions” plenary, as fellow panellists listen. From right to left – Nader Mousavi, Sullivan & Cromwell; Anders Arvidsson, GN Store Nord; Russell Levine, Allied Security Trust; Brian Hinman, Philips; and – to Monk’s left – John Veschi, Marquis Technologies
Moving east
One simple illustration of this evolving ecosystem was the number of Japanese among the 680 delegates at the event. Last time that IPBC Global was held in San Francisco in 2011, there were no Japanese corporates in attendance; this time round, 10 IP-owning entities from the country were represented: Canon, Denso, IP Bridge, Mitsui & Company, Toshiba, NEC, Panasonic, Rohm, Sony and Sumitomo Chemical. This reflects the growing involvement of Japanese businesses in the international patent transactions market. Panasonic and NEC are two of the most active patent sellers of recent times; while semiconductor firm Rohm has also begun to get in on the act, inking a number of deals in the last 12 months. On the other side of the coin, partly state-funded aggregator IP Bridge has been busy buying up assets; while defence-minded Canon has taken a leading role in the creation of the anti-non-practising entity (NPE) License On Transfer (LOT) Network.
Enjoying the opening drinks reception
When patent transactions are discussed these days China usually gets a mention and it was no different at the Palace. In the “IP Market 2.0” plenary, held on the morning of June 16, panellists agreed that the country is on the road to becoming a major market player. However, the point at which it currently stands on this journey was less clear. Ericsson’s chief IP officer (CIPO), Kasim Alfalahi, praised the achievements of China’s State IP Office (SIPO) over the past few years, stating that his company has seen a marked improvement in the quality of the assets being issued. Erich Andersen, vice president and deputy general counsel for intellectual property at Microsoft, was more cautious, however. “Don’t bet everything on the continuous exponential growth of patenting in China,” he warned, underlining that the efficacy of the country’s IP enforcement infrastructure remains an open question.
Eric Andersen of Microsoft answers a question during the “IP Market 2.0” plenary. To his right, Kasim Alfalahi, Ericsson; and David Brown, Thomson Reuters IP Solutions (moderator); to his left, Peter Holden, ipCreate; Grant Philpott, European Patent Office; Laura Quatela, Alcatel-Lucent; and Boris Teksler, Unwired Planet
Networking is always a major part of every IPBC
Grant Philpott, principal director for information and communications technology at the European Patent Office (EPO), looked at the issue from a slightly different angle. While the number of filings that SIPO handles has shot through the roof in recent years – making it the world’s largest patent office by volume – he noted that Chinese residents still constitute a conspicuously small proportion of applicants in foreign jurisdictions. “I am not so sure we will see a flood of Chinese patents coming our way any time soon,” he predicted, suggesting that Chinese companies’ relatively small patent holdings outside of their own country is perhaps indicative that they have some way to go in terms of IP sophistication. For Laura Quatela – head of intellectual property at Alcatel-Lucent, as well as a member of the board at Technicolor – this implies that we will see even more of a phenomenon that has become increasingly apparent over recent years: the acquisition of foreign patent assets by Chinese entities.
The panel in the “Banking on it” session. From left to right: Bruce Berman, Brody Berman (moderator); Michael Chernoff, MDB Capital; Andrew Ramer, Cantor Fitzgerald; and Sean Reilly, The Clearing House Payments Company
But it is not just in Asia that the action is hotting up. Philpott also noted that US companies are giving much greater attention to redrafting their US applications to comply with European Patent Convention requirements. Though Philpott did not say it, this may well reflect a realisation that in future EPO-granted rights will be much more important to US entities. Meanwhile, corporate figures as senior as Andersen, Alfalahi, Apple’s head of intellectual property BJ Watrous and Unwired Planet CEO Boris Teksler all predicted more patent litigation in Europe once the Unified Patent Court (UPC) is up and running, with Andersen also forecasting a “spike” in European patent values. Whether enough Europeans have grasped what is coming their way and will be upon them sometime within the next five years is something else entirely. But they need to be ready.
Transactions bouncing back
The consensus that emerged throughout the event was that, after a sticky couple of years, patent transactions are firmly on the rise again. The opening plenary of IPBC Global 2015 explored the future of patent sales and acquisitions. It was an outstanding session featuring five market experts – Anders Arvidsson of GN Store Nord, Russell Binns of AST, Brian Hinman of Philips, Art Monk of TechInsights and John Veschi of Marquis Technologies – expertly moderated by Sullivan & Cromwell’s Nader Mousavi.
The breaks were a chance for exhibitors to make their pitch
Deal volumes in the United States have been healthy during 2015, reported Binns, with sales continuing on last year’s upward curve. Prices, however, remain stagnant and may actually be falling. In part, that is down to the amount on offer (Monk mentioned an average of 90 brokered packages coming onto the market each month) and quality (Hinman reported that 99% of what comes across his desk does not pass muster). However, the prevailing opinion was nonetheless that there is good intellectual property out there and lower prices make it less risky to take a punt. Even in the post-Alice world, software can be interesting, said Veschi; at some stage, he explained, it is almost certain that the pendulum will swing back – especially if the Supreme Court ever gets round to issuing a decision in which it explains exactly what kinds of subject matter it thinks are eligible.
Traditionally focused on telecoms, software, electronics, semiconductors and related areas, deal-making activity now appears to be expanding into other sectors. Hinman highlighted the opportunities that Philips sees in the medical space, citing a growing number of patent transactions in relation to medtech. Marking a contrast to what has typically been seen with wireless and telecoms patents, he suggested, competitors are primarily focused on building an exclusive position in the consumer market and getting medtech products onto shelves as quickly and cheaply as possible, with licensing revenues and defence much further down the list of priorities. Therefore, he said, issues such as royalty stacking should not be a big problem.
However, the number of NPEs getting in on the act might suggest otherwise, warned Binns, pointing to the number of significant medtech patent acquisitions made by such entities in recent years. Moreover, argued Monk, the connectivity that will be a core feature of many next-generation medical technologies – as well as next-generation automobiles, wearable devices and ‘smart home’ products – means that wireless, telecoms, semiconductor and software patents will all have an important role to play. As a result, their value – to operating companies and NPEs alike – is set to rise again.
Binns noted that applications to the US Patent and Trademark Office are now falling for the first time, which could signal a swing to higher-quality patents as companies become more careful about what they submit. Were that to happen, it would lead to fewer inter partes reviews and less concern about validity generally –something which in turn could push prices higher, especially if the passage of patent reform legislation in Congress also creates a level of certainty. Throw in increased demand for patent assets focused on both Europe and China, and the chances are that the transactions marketplace could well be set for a significant and sustainable uptick. Of course, a cynic might say that what is really going on is that companies are abandoning patents for trade secrets; but if this panel turns out to be right, there may be reason for cautious optimism that the next few years could turn out to be a golden age for the IP market.
Much more than monetisation
Another highlight of IPBC Global 2015 was a morning plenary which put a panel of world-class inventors in front of delegates. Moderated by Rembrandts in the Attic co-author David Kline, the “Inventor insights” session featured Charles Hull, founder and chief technology officer of 3D Systems Corp; Carles Puente, co-founder and chief scientist of Fractus SA; Jean-Christophe Giron, vice president of R&D and product development of SageGlass; and Laura van ‘t Veer, co-founder and chief research officer of Agendia. All have been honoured as either nominees or winners at the EPO’s annual Inventor of the Year awards.
World-class inventors on the “Inventor insights” plenary panel. From right to left: Laura van ‘t Veer, Agendia; Carles Puente, Fractus; Charles Hull, 3D Systems Corp; and Jean-Christophe Giron, SageGlass. Far left: moderator David Kline
Kline began by making a simple, but important point: patents are about much more than monetisation. “If you asked the man on the street what patents meant, he would more than likely respond with litigation,” Kline lamented. “As an industry, we need to make patents mean invention again, rather than lawsuits.” For those engaged in the business of intellectual property, Kline stated, it can be easy to forget the individuals who are changing the world with their innovations; but it is their ground-breaking work that has created the IP market in the first place.
Over the next 90 minutes, the panellists returned to this point time and again. Laura van ‘t Veer – who led a team the Netherlands Cancer Institute which developed a gene-based test that evaluates tumour tissue to assess the 10-year risk of breast cancer recurrence – was clear that the intellectual property owned by Agendia, the company formed on the back of this invention, “allowed us to interest investors”. For his part, Carles Puente emphasised that patents were particularly crucial to the success of Spanish tech company Fractus, a pioneer in the mobile space, which rolled out a licensing programme when it realised that as a small operator, it could never satisfy all of the demand for its products from the tech industry. Thanks to this strategy, its patented inventions are now used in 90% of the world’s mobile phones.
Puente also had some sobering words for the hundreds of US-based delegates in attendance. “The truth is that for a long time, inventors around the world have come to the US to defend their rights,” he said. “For decades, it has been the best patent market in the world and we’re astonished to see that it’s now going in the other direction. It’s a big concern because it’s not just about the US economy; it’s about the global economy.”
The main exhibition hall, packed out during one of the breaks
The politics of change
Inevitably, the possibility of further patent reforms in the United States was a regular topic of conversation throughout IPBC Global 2015 and also formed the basis of a fascinating plenary when a superstar panel – comprising Allen Lo of Google, BJ Watrous of Apple; Kurt Kjelland of Qualcomm; Mark Lemley of Stanford Law School; John Whealan of George Washington University; and former Chief Judge of the Federal Circuit Randall Rader – discussed a range of subjects touching on the debate, all under the expert stewardship of CIP Gothenburg Deputy Director Bo Heiden.
Examining issues such as standard-essential patents, fair, reasonable and non-discriminatory (FRAND) licensing, US patent reform, inter partes reviews, recent court decisions and whether the United States now offers enough incentives to innovate, the plenary had delegates’ full attention from first to last. Lo and Watrous differed in their views on whether further reform is needed (Lo insisted more must be done, while Watrous was less convinced); but both agreed that as things stand, the protection pendulum is about where it should be. Kjelland, however, worried that it has swung too far against patent owners – a concern that Whealan shared. Lemley surprised a few people by stating he thought it was too early for further reform, given that the full impact of the America Invents Act and recent Supreme Court cases has yet to be felt; while Rader observed that the world no longer sees the United States as its patent leader.
Throughout, however, the exchanges were courteous, civilised and constructive; the shrillness of the reform debate taking place in Washington DC – with its name calling, political cynicism and closed agendas – seemed a long way away. Perhaps a few more of these kinds of conversations and a little less grandstanding from all sides might end up producing far better outcomes.
The general consensus seemed to be that new legislation will be put in front of President Obama for signing either late this year or early next, but as yet it is unclear what form this will take. Those closest to events believe that it will likely be based more on the Senate’s PATENT Act than the House of Representatives’ Innovation Act – something that will mean no one is delighted with the outcome, but everyone is okay with it. Everyone, that is, except small inventors and innovative, patent-rich, cash-poor small and medium-sized enterprises (SMEs) – they will be much worse off than they are now. Before a bill makes it to the White House, further compromise is needed on the thorny issue of inter partes reviews, as well as joinder and end-user provisions; but in the end, a wording will be found that will allow most who have spent big lobbying dollars on both sides of the debate to claim victory in some way. Those that have not – such as inventors and SMEs – will face a future in which the rights they own will be harder, more expensive and far riskier to enforce. This is likely to be good news for deep-pocketed corporates and NPEs, both of which will probably head to Europe when they have big-ticket, multinational issues to resolve.
That said, there could be a potential spanner in the works: one cynical but savvy delegate observed that legislators have realised that patent reform is something of a cash cow for them; and with elections looming next year, finalised legislation will not fill the campaign coffers. On the other hand, further delay in getting something done may incentivise further generous contributions.
FRAND focus
Standard-essential patents and FRAND came up time and again over the three days of IPBC Global 2015. Standard-essential patents have been in the headlines in recent months thanks to the Institute of Electrical and Electronics Engineers’ (IEEE) decision to change its terms for licensing patents deemed essential to a piece of technology, and a number of court cases – such as Microsoft v Motorola – which have thrust the question of what is fair and reasonable firmly into the spotlight. Microsoft was brought up by Lemley, who pointed to the dramatic difference in expectations between the software giant and Moto on how much the former should ultimately pay for a licence. That gap, maintained Lemley, is an illustration of the breakdown of FRAND terms. “We don’t have a reasonable framework on what you should pay for a licence,” he stated.
It was cases such as Microsoft that led the IEEE to change its equation for determining the value of a standard-essential patent’s contribution to patented technology and reduce the availability of injunctive relief for patent owners. Lemley’s fellow panellists insisted that injunctions should still be available, but the prevailing view was that this must depend on owners acting in a fair and reasonable way. But there always are two sides to the argument: Rader observed that while there is the threat of hold-up over standard-essential patents, there is also the prospect of hold-out, where potential licensees refuse to take a licence and opt instead for litigation.
The point was echoed by Kasim Alfalahi of Ericsson, a business which has made plain its opposition to the IEEE’s new licensing terms. Despite the changed conditions, however, Alfalahi insisted that the value of standard-essential patents would rise over the next five years. Microsoft’s Andersen was not convinced, though; he forecast that values would decline thanks to industry convergence and increasing scrutiny from regulatory authorities, particularly in Asia. Spying a deal opportunity, Alfalahi indicated that he was ready to move in to take Microsoft’s standard-essential patents off its hands if Andersen would agree to a sale!
The panel for the “NPE challenges” breakout (left to right): Richard Lloyd, IAM; Joe Beyers, Inventergy; Frank Knuettel, Marathon Patent Group; Matt DelGiornio, Dominion Harbor Group; and Jaime Siegel, Acacia Research
Value and the board
Most stakeholders within the IP business community would probably agree that the lack of widely recognised valuation methods is a major obstacle to the realisation of patents’ potential as an asset class. But an exercise in subjectivity – backed by plenty of objective data – may ultimately prove to be the best way of attaching a monetary figure to these rights.
Speaking in the “Value conundrums” breakout session, ABB CIPO Bruce Schelkopf suggested that unrealistic expectations and overly simplistic valuation practices are partly to blame for IP owners’ inability to value their portfolios. “I am excited that IP is getting more attention in the boardroom… What doesn’t excite me is the $750,000 per patent that Google paid for Motorola or the $1.2 million per patent that Microsoft paid AOL,” he said. “These set expectations the wrong way.”
For Schelkopf, such approaches to valuation are probably useless to rights holders and, at best, will not be right for the majority of companies. Instead, IP valuation should be less influenced by external events and the high expectations they create, and more by the IP owner’s own business strategy and commercial goals. “Don’t just use other people’s benchmarks,” he advised. “That can only give you average figures in a broad context. You need to measure against your own objectives too.”
On a related issue, delegates were given unique insight into the way that company boards engage with intellectual property when they got an inside view on a dispute between French business Technicolor – a European pioneer in communication and media innovation, as well as licensing – and activist shareholder Vector Capital during 2014 and early 2015 about its future direction. Both board member Laura Quatela and Unwired Planet’s CEO Boris Teksler – until recently the head of technology licensing at the company – explained how this played out.
Vector wanted to create two distinct businesses – one based on products, the other on IP licensing – and this, explained Quatela, caused a lot of division among board members themselves. She herself had argued vocally against the plan, on the basis that so many licensing deals spring from opportunities and relationships created on the product side. Teksler clearly agreed. Although not speaking directly about his experience at Technicolor, he stated that company boards often struggle to understand the connection between product businesses and licensing businesses, and warned that thinking only of patent licensing is often extremely limiting. No one ever “wants” to buy a patent licence, he observed; technology licensing, on the other hand, is far more collaborative.
Farewell NPEs?
Another panellist alongside Schelkopf in the “Value conundrums” session was Aistemos CEO Nigel Swycher. He made a bold prediction: “In five years’ time, the term ‘NPE’ won’t appear on the IPBC programme.” Basing his forecast on the premise that the IP transactions marketplace will have grown more transparent and, as a result, more efficient by 2020, Swycher argued that labels such as ‘NPE’ and ‘troll’ will have become largely irrelevant – as will the business models to which they are normally attached.
“We don’t have equity trolls or real estate trolls,” Swycher stated, pointing out that a truly efficient market in patents should resemble other ones for established financial assets. “By then, IP transactions will happen more and more often at a corporate level and will be mainly strategic”, as opposed to revenue or defence focused. It will be interesting to see whether Swycher’s prediction comes true; after all, five years is an awfully long time in intellectual property. As Kasim Alfalahi noted at the end of his plenary session, if the speed of developments in the technology market is anything to go by, the big IP movers and shakers of the third decade of the 21st century may not even exist yet.
Back to Europe
Of course, there was plenty more discussed over the three days of IPBC Global 2015 than the issues covered in this article. For a more detailed understanding of the issues that came up for debate, visit the conference website at www.ipbusinesscongress.com/2015/. There you will find links to daily reports from the event, to its Twitter feed and to a series of video interviews conducted with some of the speakers and delegates. Attendees can also find password-protected links to videos of all the plenary sessions and audio of the break-outs.
Next year, IPBC Global returns to Europe: the event will be held at the Arts Hotel in Barcelona from June 5 to 7. Further details will be available in September.