Outsourcing IP monetisation
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According to the 2014 Global R&D Funding Forecast released by Battelle and R&D Magazine in December 2013, 10 countries will spend approximately 80% of the total $1.6 trillion invested in R&D globally. As R&D funding grows, organisations are pressuring IP teams to focus on improving profitability and reducing the costs of their departments. Further, in a random sample of numerous Fortune 100 companies conducted by Adapt IP Ventures, most of the companies sampled let issued US patents lapse, deciding not to pay maintenance fees.
One approach that companies can incorporate to improve their financial position and increase bandwidth is to outsource portions of IP management to third parties.
What is driving many of these transactions?
Over the past few years, creativity and funding in patent monetisation transactions have increased as the market for patent monetisation has changed. The market has driven many multibillion-dollar transactions that drive discussions at management and board level. However, deal values, players and structures have changed. Additionally, the evaluation criteria and diligence process for assets of the greatest interest and value to buyers and licensing or litigation partners have become noticeably stricter as the search for high-quality assets is of considerably greater focus.
The drivers of outsourcing IP monetisation transactions often include:
- corporate groups coming under increased pressure to monetise assets, build and hit revenue targets and remove the perception of being a cost centre;
- corporate groups which remain targets for inbound patent acquisition and licensing opportunities driving dialogue regarding monetisation between corporate stakeholders (eg, the general counsel’s office, IP team, finance and business units); and
- financial investors actively seeking greater returns and turning to an esoteric and relatively illiquid patent market.
Outsourcing IP monetisation partnerships
Companies should consider retaining a patent brokerage and advisory firm to provide assistance with navigating the different options available to patent owners across all outsourcing models and expand the bandwidth of internal IP team members. Many of the best options are not always known by the patent owner and can be unlocked by a third-party adviser. Additionally, patent brokerage and advisory firms should be aligned to and able to manage a competitive offering process across a variety of companies, markets and business models to ensure that patent owners receive the best deal for their patent assets.
Common approaches to outsourcing IP monetisation include:
- transfer of licensing and litigation responsibilities;
- outright sale and upfront payment; and
- defensive partnerships and strategies.
Once a company decides that outsourcing patent monetisation is of strategic and financial importance, many issues must be considered carefully, including:
- pricing and timing of payments;
- existing and potential encumbrances;
- relevance of patents identified for monetisation relative to the product roadmap;
- challenges and opportunities associated with enforcement, licensing-driven partnerships and potential cross-licence opportunities;
- costs associated with undertaking a monetisation programme (fixed costs versus success-fee structures);
- target partners (both those that can be approached and those that cannot); and
- confidentiality of the offering.
The risk and return profiles for each approach are different (and vary widely depending on the buyer or partner involved). The licensing and litigation approaches often have the highest opportunity for the biggest return, but face the most potential risks and uncertainties (eg, invalidity, non-infringement, unclear damages model, countersuits and reputation risks). Further, this risk and return component of the decision-making process is amplified, as licensing and litigation are lengthy processes. Companies can look to patent sales programmes as a way to reduce many of these risk and time components, but often at the expense of greater return through a lower upfront purchase price relative to potential licensing revenue. Each outsourcing approach is described in greater detail below.
Licensing and litigation
Patent owners are turning to more creative financial structures through licensing and litigation to realise returns that are beyond the target returns of internally generated programmes. Many programmes in the existing market centre around partnering with third-party entities to fund, manage and license high-value patent assets. Further, many market-leading organisations focused on patent licensing organisations, including Conversant, WiLAN, Dominion Harbor and Finjin, have published developing internal standards and external commitments focused on quality and integrity in the business practices of patent licensing. These leaders are focusing on key tenets of patent licensing – including patent quality, transparent negotiations and target company selection – that take into consideration minimum annual revenue figures to reduce the burden of licensing on small businesses.
In many cases, the original patent owners receive little or no cash upfront, but share in either revenue or profits generated by the licensing programme. Further, there are relatively new entrants that have emerged as publicly traded entities. The effect of these entities on the marketplace is felt as equity components are being included in the compensation structure for outsourced IP monetisation transactions (eg, Spherix, Marathon and CopyTele).
Common deal structures include:
- transferring ownership of patent assets to a third party in exchange for a combination of upfront cash or a share in the licensing programme’s success (including equity);
- partnering with a financing entity to fund patent litigation and licensing efforts (yet retain ownership of the patents); and
- raising debt financing with licensing or enforcement value as collateral for a loan.
Deal economics in the licensing and litigation partnership model vary widely. In this model, most outsourcing partners will seek to share in either the revenue or profits of a monetisation campaign. Details of the transaction must be carefully negotiated as many critical – yet subtle – levers must be understood. If a company chooses to go directly to litigation, it has a variety of outsourcing options driven by third-party litigation financing and hybrid legal structures centred on fully contingent or partially contingent legal services.
Recent examples of patent owners and partners entering into diverse deal structures focused on patent licensing and litigation can be seen in Figure 1.
Figure 1. Recently announced patent transactions and outsourced monetisation partnerships
Acquisition – sharing in proceeds assumed (June 2014)
Entities advised by IPNav
Marathon Patent Group
Acquisition – payments spread across multiple years (May 2014)
Acquisition – revenue sharing (April 2014)
Acquisition – terms not disclosed (January 2014)
Partnership to monetise patent portfolio (December 2013)
Issued shares in company to patent owners related to IP acquisitions (Apr 2013 to November 2013)
Upfront cash, equity in Spherix and profit sharing (July 2013)
Upfront payment plus subsequent payments (May 2013)
Revenue sharing ranging from 20% to 70% (January 2013)
Outright sale, upfront payment
Patent portfolio sales with upfront buy-out payments remain a viable approach to monetising IP assets. Patent portfolio sales are especially relevant when sellers need to generate a return on a quicker timetable or are more risk averse. In many markets pricing is off its peak of recent years, but the number of buyers focusing on patent acquisitions has been steadily increasing over the past one to two years. Many companies turn to this model when patent licensing or enforcement is not an appealing option.
Many companies that decide to monetise their patents have strict controls over the type of programme and outcome that can be initiated. As a result, common discussion points relating to outsourcing IP monetisation include:
- exclusion of non-practising entity (NPE) type programmes or buyers;
- exclusion of competitors or existing partners;
- unrealistic pricing expectations based on per-asset metrics set by headline deals;
- uncertainty regarding potential encumbrances; and
- pricing exceeding book value, so that the patent owner does not book a loss on the assets. This is further complicated in licensing-driven structures with no upfront cash.
Defensive partnerships and strategies
While outsourcing IP monetisation is typically focused primarily on patent owners extracting value from these assets, frequent targets of patent enforcement actions are turning to third parties to outsource defensive strategies. Product companies at all stages and from a vast array of industries have turned to third parties such as RPX, Allied Security Trust, Open Invention Network, License on Transfer Network and Unified Patents to acquire patents, facilitate licensing and settlement discussions and deter litigation. Many of these companies offer access to their programmes and services on an annual subscription basis, with great variability in cost.
As part of RPX’s stated goal to “reduce patent risk and cost” and Unified Patents’ services that “addresses the risk and cost of NPE litigation”, each has been active in initiating inter partes reviews against active patents in litigation.
Unified Patents: Between September 2013 and June 2014, Unified Patents filed at least three inter partes reviews against patent owners, including Clouding IP LLC, Parallel Iron LLC and Level 3 Communications & PersonalWeb Technologies LLC. Historically, Unified Patent’s involvement in the market appears to have been focused on cloud computing-related IP disputes, but it also announced deeper involvement in content delivery-related markets.
RPX: Between November 2013 and June 2014, RPX filed numerous inter partes reviews against patent owners, including MacroSolve Inc, Science Applications International Corporation, VirnetX Inc and ParkerVision Inc.
Figure 2. Simplified decision tree for determining outsourcing efforts
Potential benefits of outsourcing IP monetisation
Improve internal bandwidth challenges to focus on core IP projects
Large organisations with thousands of patents simply do not have the staffing to effectively manage all assets deemed non-core. Identifying areas of a patent portfolio that are unrelated to an existing IP strategy for outsourced management should free up internal resources and lead to additional revenue streams and cost-savings outcomes.
Potentially increase revenue streams
Depending on the structure of the transaction, a patent owner can anticipate either upfront cash payments for the patent assets or a series of licensing-driven payments contingent on the success of the licensing efforts.
Shift risk of enforcing IP rights
Risks associated with litigating patents (including challenges to the validity of the patents and fee shifting) remain a focus of pre-litigation planning (especially as these topics remain active both judicially and legislatively). Outsourcing monetisation of IP assets to third parties (including the funding of such actions) shifts the risks of internally managing and funding licensing and litigation campaigns to the third party, allowing patent owners to prioritise budget and time allocation to core assets.
Reduce portfolio management and maintenance cost
Outsourcing IP monetisation should provide substantial cost savings, as the new partner should be responsible for maintaining the assets under management. Immediate decreases in costs (including patent prosecution, maintenance and annuity fees, personal time and expenses) can thus be realised.
Enter new sales and partnership channels
Outsourcing should lead to new monetisation channels, including untapped buyers and partners, new business models and new geographic markets.
Strengthen market positioning
Companies may look to outsourcing IP monetisation to improve the strength of unrelated negotiations and business activities by using ‘stick’ licensing and showing a commitment to protecting IP rights.
Potential concerns of outsourcing IP monetisation
Product companies must consider the risks of counterassertion as a result of outsourced licensing and enforcement programmes. There is no realistic way to completely eliminate the risk of a countersuit against the original patent owner after outsourcing IP monetisation, because the assignment records of the patent in question will be easily researched.
Many product companies have been categorically opposed to monetising their patents through partnerships with licensing and litigation partners that are often considered to be ‘patent trolls’. In many cases the companies that are considering outsourcing the monetisation of their patent assets are also being sued by these enforcement organisations in other programmes. As a result, some corporate groups immediately exclude these partners from the list of companies (or types of business model) that would be acceptable targets or deals.
Internal decision-making challenges
Corporate decision makers often struggle with, among other things, managing financial expectations and internal bandwidth or risk, and simply decide not to monetise their IP assets. Common discussion points include:
- financial goals internal alignment and approval of financial goals before beginning an outsourced IP monetisation programme;
- organisation-wide approval of the assets to be included in a transaction process; and
- timeframe, costs and required internal resources that must be committed to the outsourcing programme, even though outsourcing will save considerable time and improve the bandwidth for the patent owner.
Companies that own patent portfolios of any size and scope should look to outsourcing IP monetisation to protect the value of these assets while responsibly generating revenue and reducing operating expenses. Outsourcing functions of IP management and monetisation to patent brokerage and advisory firms and other IP monetisation teams should improve the breadth of monetisation efforts and drive additional revenue opportunities, while decreasing costs and improving the strategic position of the patent owner in the marketplace. Additional business and financing models driving growth that will evolve as intellectual property are considered an even stronger financial asset. The market for outsourcing the monetisation of intellectual property has never been more complex or more promising.
Adapt IP Ventures, LLC
30 Hendersonville Road
Asheville, NC 28704
Tel +1 770 883 2933
Grant Moss is the founder and president of Adapt IP Ventures, a patent brokerage and advisory firm. He manages patent sales and licensing programmes for global clients ranging from individual inventors to large corporations and research institutes. Primary areas of focus include all aspects of technology, ranging from hardware to software, automotive technologies and medical device technologies. He graduated with an MBA from Emory University and a BS from Georgia State University.