19 Feb
2016

With our NPE event just a month away, time for some predictions for the sector

Next month we’re holding our second NPE conference, the only event of its kind to focus specifically on the non-practising entity sector. We held the first one last year at a time of considerable uncertainty for most NPEs and it’s fair to say that since then conditions have not improved – in fact, they have probably worsened. The share prices of pretty much every public IP company (PIPCO), such as sector stalwart Acacia and one-time best newcomer Marathon Patent Group, have fallen sharply as investors have only become more spooked by the prevailing negative narrative around NPEs, while remaining extremely sensitive to one-off court decisions.

But despite these choppy waters, we believe that the NPE sector deserves the same analysis and debate as any other, and NPE2016 will allow leading industry players to discuss the opportunities that are still out there, as well as to chew over the many challenges that they face.

While the conference is sure to bring up many interesting discussion points and maybe some tips on future trends to look out for, I thought it was time to stick my neck out and make a few predictions for the sector. So here we go.

2016 will be a year of some notable successes …

VirnetX’s recent victory over Apple in Eastern Texas was a notable fillip for the sector as a whole. There’s every chance that the $625.6 million verdict will get reduced or even scrubbed by the Court of Appeals for the Federal Circuit (CAFC) – we have certainly seen that before – but, alternatively, VirnetX’s win may be the start of a series of significant NPE court victories against Apple. As this blog has noted before, the tech giant faces a series of NPE suits this year including ones against Marathon, Acacia, Smartflash and Network-1. Smartflash has already had one success in its lawsuit against Apple – winning $533 million in the process - although that has been sent back for a new trial. The patent in question in the Marathon suit has made it through an IPR so has cleared one hurdle that is still proving hard for some patent owners to navigate.  It’s safe to assume that Apple is going to win quite a few of these cases, but such is the company’s profile and the stakes involved that one or two NPE wins will grab the headlines and prove that it’s not all doom and gloom for those that have high quality assets.  

…which means the “troll” narrative is not going away

It seems clear that patent reform isn’t happening any time soon. With 2016 an election year in the US and the attention of the Senate Judiciary Committee likely to be squarely focused on the nomination process for the late Justice Scalia, there’s going to be little appetite to debate the merits of new patent legislation. Plus, as we reported yesterday, after a record high in November, new patent cases for the last two and a half months are close to record lows. If that trend continues – and we have seen trend lines quickly move back up after heading south so that’s a sizeable if – then the stories of an “explosion” in patent litigation that has underpinned much of the reform debate will no longer add up. Don’t expect that to dampen the enthusiasm of the pro-reform side however. It will most likely shift the focus even more on to the litigation tactics of NPEs – the punching bags of the IP community. And if Apple does suffer a few losses in district court then expect some of the loudest calls for reform to tackle the “troll problem” to emanate from Cupertino.

NPE management teams will try to find a private buyer

Although the public markets have fallen out of love with most if not all NPE stocks, many executives will tell you that a listing still holds appeal because of the (relatively) easy access to capital. However, as this blog and others have pointed out in the past, there’s ample evidence to suggest that the public markets simply don’t get PIPCOs and the valuations for some listed NPEs are getting to the point where you have to wonder whether being public still makes sense.

PIPCO executives have to look at those valuations and wonder whether they represent an excellent opportunity to take their business private. That’s not to say that it will happen – there’s no evidence as yet that private equity buyers are lining up to buy an IP business at a time of such uncertainty. The only take private of note that has happened in the sector is Sterling Partners’ 2011 buyout of MOSAID, now Conversant, so there’s not exactly a lot of precedents. But that shouldn’t stop management teams from at least seeking private investors to back a buy-out – at these prices they’d be mad not to.

The move away from a pure patent assertion model will grow

One of the emerging trends in the sector is that relying solely on the traditional patent assertion model is a hazardous business. Putting all of your eggs in that basket can leave you dangerously exposed to adverse litigation decisions. For some such as Unwired Planet, Finjan and Marathon that means looking to acquire or develop product businesses (although there are also accounting benefits in those possible acquisitions), but it will be worth watching whether and how others diversify from the business model that served NPEs well at first, but has increasingly come under strain.

One or more well-known NPEs will go out of business

You can only sustain so much bad news, bleed so much cash and lose so many cases. At some stage the money runs out. By the end of this year we will have said goodbye to one or more NPEs that at one stage seemed to promise so much. 

Richard Lloyd

Author | Editor

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