Monday, 19 January 2009

Has the Great Patent Fire-Sale Begun: Another View

Further to the January 14 comments of blogmeister Jeremy Phillips on the Bloomberg item "Cash-Strapped Technology Small-Caps Hold Patent Deals (update 3)," I have several additional thoughts. Jeremy focused on two points that were raised in his report: (i) Such a sale can raise cash and allow the erstwhile patent owner/assignor to earn cash while taking a license back to use the inventions; (ii) however, the need to raise cash by selling patents could lead to a fire-sale of valuable assets in the context of a depressed overall world economy. Jeremy suggested that one way to avoid the latter (at least from the point of view of the seller) would be to have a more multi-actor bidding market resulting in an ultimately higher purchase price.

I take all of Jeremy's points, but I remain unconvinced that the onset of the current economic crisis somehow constitutes a watershed, the result of which will be a significant uptick in the sale of patent portfolios by cash-strapped companies. Patents have and will be sold by their owners to third parties for a variety of reasons. This was true when times boomed, and it will apply as well when times are bad. The motivations for such sales may change, depending upon the underlying economic circumstances, but we lack good data to indicate what these systemic differences might be. To speak about a change in trends seems to me to be overstated.

One way to deal with a fire sale

As for the observation in the article attributed to a managing director of Ocean Tomo (a Chicago-based company that auctions off IP portfolios), to the effect that an assignment and license back arrangement can raise cash without diluting investors, while at the same time allowing the assignor to continue to use the technology ("to have their cake and eat it too"), several comments are in order.

First, assignment and license back arrangements (both for individual patents as well as have multiple patent holdings) have been around for a long time. I remain unconvinced that there is something in the current economic crisis that has increased their popularity or desirability. Second, not every sale or auction of a patent portfolio is intended to result in a license back arrangement. That does not make the sale less valuable to the seller, nor less attractive to the purchaser, whether or not the world is in an economic downturn. My hunch is that the assignment/ license-back situation is the exception and not the norm, but I would be delighted to learn to the contrary.

This is not to say that the economic downturn does not lead to a fire sales of assets. It does so , as my own practice can attest. This is especially so for companies where the technology model is to develop and exit, and a lack of resources forces the exit at a stage earlier than originally planned. But whether or not the exit is sooner or later, the sale of the patents is part of the overall sale of the company. That, however, is quite different from saying that we are now witnessing a significant increase in the number of fire-sale situations for patent portfolios of cash-strapped small-cap companies. This is so, I suggest, unless the starting point for such sales is so low that any increase becomes significant as an artifact of the data, or the underlying company is an empty shell except for the patent holdings, which case the asset sale becomes the sale of the company's patent portfolio.

I am sure that the the current recession will lead to some significant changes in the use and commercialization of patents. But I remain unconvinced that a significant increase in the sale of patent portfolios will be one of them.


Mary Adams said...

There are a lot of people that want to develop more mature secondary markets in intellectual property. There is a place for this. But, in general, selling your IP in the current knowledge era is like selling off your production line or your factory in the industrial era--you leave your company weaker. We need to learn to understand IP in its full context; what are the human, network and process capital components that are necessary to maximize the value of the IP--the whole will always be greater than the value of the parts. The exception (and the opportunity) is an "extra" bit of technology that is unrelated or tangential to the core strategy of the company--then you have an opportunity to sell assets for cash.

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