Given your background as an economist and chartered financial analyst (CFA), what led you to a career in intellectual property?
I have a bachelor’s degree in electrical engineering, and studied innovation management and technology commercialisation during my master’s programme, while technology change and productivity were among my research topics when studying for my PhD. Intellectual property includes mainly legally protected technologies and other creations, so intellectual property is something that I have studied and researched for some time. Several years into my career, I realised that to communicate with finance and investment colleagues, I needed to speak the same languages with them, which is why I pursued and obtained my CFA charter. I think that today, I am one of the very few CFA charter holders working in IP business.
Can you tell us about your research and publications?
I like to research and write – I believe that I was among the earliest researchers outside academia to conduct comprehensive research into the patent market and NPEs. The two papers that I published in 2012 about the economics of NPE business model have been cited in many other works in the field.
My interest in patent markets then led me to conduct empirical research into royalty determination and patent pricing. Since 2011, I have been collecting data on market transactions of patent portfolios, including the number of assets in a portfolio, transaction price and other characteristics of a transaction such as technology field, seller and buyer organisation type, litigation history or quality ranking and the seller’s financial or strategic goal. Based on the samples collected over the years, I have developed an econometric model for patent portfolio valuation and published several articles, including one in IAM in 2016.
In addition, I have been actively involved in royalty rate and deal structure surveys conducted by the Licensing Executives Society USA and Canada (LES USA Canada). I served on the High-Tech Royalty Survey Committee to jump start its inaugural survey in 2011, and since then have worked on each of the surveys, including the current one (2021). Analysing data and writing the survey reports require hundreds of hours for each one, but my LES colleagues and I believe that our efforts are worthwhile because the survey reports are widely cited as an authoritative reference by practitioners in licensing, law, regulation, corporation transactions and financial reporting.
Why are these researches important to IP businesses?
As a consulting economist and financial analyst working in the IP space, I have first-hand experience in royalty determination and patent pricing for different purposes, from ballpark estimates for quick decision making to court and Daubert-proof damage calculations that are guided by laws and court procedures. Different valuation purposes necessitate different methods. With the pragmatic mindset developed from my engineering and financial analysis background, I believe in an empirical rule of thumb and quick methods because they help save cost and time. For example, using the econometric valuation model developed from our database of patent portfolio transactions, a buyer or seller can gain a quick estimate of portfolio price simply by inserting the number of assets and other parameters (eg, technology field, litigation history and patent quality ranking).
As another example, based on LES USA Canada royalty survey results, the LES team uses regression models to isolate and quantify the royalty rate premiums or discounts associated with exclusivity, technology lifecycle stages and technology fields, among others. This analysis gives a licensing manager a benchmark discount when they need to convert an exclusive to a non-exclusive licence. Or if they signed an agreement when the technology was at an early stage and now want to renegotiate the royalty rate because it is fully developed, the analysis would provide them with a benchmark premium.
What are your opinions about the pro and anti-patent debate in the United States?
As an economist and financial analyst, I do not take a position in this. It is sad that IP professionals have been divided by a series of legislation and court rulings since 2011. However, I am optimistic that market mechanisms will eventually lead to some solutions. For example, business models of defensive patent aggregation and litigation insurance have emerged to manage litigation risks for defendants. On the other hand, litigation financing business has witnessed explosive growth over the past 10 years, which can be a big help to capital-constrained patent owners. So, we work hard with colleagues and friends from both sides, and let the market play out.
Partner and Chief Economist
Jack Lu is the founding partner and chief economist of IPMAP, where he specialises in economic study and financial analysis of IP valuations, damage estimates and royalty determinations for IP transaction, licensing, litigation and corporate transactions including M&A, divestiture, venture capital, equity investment and distressed assets investment. An active researcher with over 20 publications, he has served as senior vice president for economic analysis and survey for Licensing Executives Society USA and Canada since 2018.