What the age of mega NPEs really means for the IP world

In June it was announced that Fortress had made a formal offer to acquire the NPE Finjan in yet another signal that some of the largest players in the monetisation space are hoovering up IP assets.

In late July the deal was approved by Finjan shareholders, adding the NPE to the investment giant’s hoard of assets from a small group of public IP companies (PIPCOs) that emerged as licensing forces in the early 2010s. These include Inventergy and Marathon, both of which were businesses that Fortress did not acquire outright, instead picking up large portions of their patent portfolios when market conditions went south for the NPE community.

Finjan, to its credit, weathered the tough conditions better than most, notching up some sizeable deals – a settlement with Symantec worth at least $65 million in 2018 stands out in particular – and steeling its balance sheet with a 2016 fundraising. It also saw its grants survive an avalanche of validity challenges before the PTAB, which in many cases might have been a sign that its rights were good quality and up for licensing.

Except, of course, it still had to contend with a steady stream of district court cases against recalcitrant licensees driving up costs, meaning that Finjan was burning through several million dollars each quarter. This, combined with a relatively small portfolio to monetise, has meant that Finjan could never quite break into the big leagues of licensing. Things became even tougher as the covid-19 pandemic prompted district courts around the United States to halt in-person proceedings, causing one case to be ruled a mistrial and another against Cisco to be pushed to later in the year.

So, shareholders’ approval of Fortress’s offer has handed it a battle-hardened portfolio for the relatively modest amount of $44 million. Throw in the fact that Finjan has just under $30 million in cash on its balance sheet and the deal looks even sweeter for the IP investor.

Of course, Fortress is about more than acquiring failed NPEs – it also owns portfolios from NXP and scandal-ridden former diagnostics company Theranos and has acquired IP-rich companies such as DivX and SiOnyx. It has also agreed loan deals with several companies collateralised against their intellectual property, which have ultimately seen the debt repaid with no patents changing hands.

It is, in short, an investor that touches many parts of the IP world and such is Fortress’s reach that late last year Intel and Apple launched a lawsuit against the business, claiming that it has stockpiled patents in a way that violates US antitrust laws. The example of Intellectual Ventures – which survived its own antitrust challenge from Capital One – suggested that Apple and Intel always faced an uphill task in making that stick and in early July a district court judge granted Fortress’s motion to dismiss while giving the tech giants with an opportunity to amend their complaint. But the fact that the pair filed the suit in the first place demonstrates the shadow that Fortress now casts over the patent market.

With a deep pool of capital (its IP-specific fund is rumoured to be close to $1 billion) and a team of considerable expertise, Fortress’s IP group would probably have thrived in any era. But it has succeeded since its launch in 2013 in the years after the America Invents Act was passed and as large parts of US patent case law have turned against rights holders in a direction favoured by many in Silicon Valley.

These forces have meant that for the Finjans of the world, time to money has got longer, in large part because any company trying to assert assets in court is likely to be hit by a steady stream of inter partes reviews challenging the validity of its patents. Plus the exposure brought by the public markets means that defendants can sit back and watch cash reserves melt away as litigation drags on.

And Fortress is not alone. The teams at Hilco IP Merchant Banking and the IPNav breakaway Dominion Harbor have also capitalised on the higher barriers to entry to the monetisation space in the past few years by building massive portfolios of thousands of assets. They have given us the era of the mega NPE, boasting the resources to weather numerous PTAB challenges and enough patents in their portfolios that if one gets knocked out, there are still plenty that are potentially infringed. They also have the resources and know-how to launch assertion campaigns in multiple jurisdictions in Europe, China and the United States as they look for different points of leverage against a host of defendants.

In terms of size, the likes of Fortress are following a trail blazed by Intellectual Ventures in the 2000s, although their approach differs. Intellectual Ventures tended to prefer portfolio-wide licensing deals (although it would agree smaller transactions for a sub-set of its portfolio with some companies) and, initially at least, it declined to litigate against alleged infringers. Fortress and others have been prepared to litigate from the beginning.

With the current economic uncertainty possibly prompting more assets to come onto the market and the climate improving for rights holders, conditions are excellent for these mega NPEs to continue on their growth path. While Big Tech and other prospective licensees may have been able to wave away the likes of Finjan, Fortress is a whole different ball game.