Tuesday 23 September 2014

"Patents and Value: A Dialogue": Distinguishing Dogs from Diamonds

From our friend and occasional contributor Janice Denoncourt (Nottingham Law School) comes this report on "Patents and Value: a dialogue" -- the IP Finance/IPKat event in which lawyer and scholar Neil Wilkof discussed with Intellectual Asset Management editor Joff Wild a number of what seemed to be increasingly controversial issues, egged on by comments and questions from an almost uncomfortably knowledgeable audience of lawyers, patent attorneys, accountants, insurance folk and financial and management consultants.  The event, the second in a current sequence of blog-driven dialogues [the first being on life in the European Patent Office's Boards of Appeal, here], was kindly hosted by London-based multidisciplinary IP practice EIP.

This is how Janice saw it:
"This event, chaired by IP Finance blogmeister Jeremy, took place on 16 September when a roomful of members of the IP community was welcomed by host Gary Moss, head of EIP Legal, London. Jeremy then told us he was inspired to hold the event as a result of an exchange of blogpost comments [see links here] on the subject of IP value. This exchange took place between well-known personalities in the IP field: Jeremy simply had to bring them together for a live dialogue to share their well-informed and critical insights with the IP finance community.

Jeremy introduced the session by reminding us that, only a few decades ago, ‘IP value’ as a concept didn’t even exist. He recalled one transaction back in the 1980s in which patents were given a nominal value of £1 each, a sum that does not quite compare with values attributed to certain mega-patent transactions today.
Neil spoke first and offered his views on the effect of litigation on patent value in the United States. He presented a list [presented in PowerPoint format which you can read here or download hereof twelve key US patent cases that are said to have had a negative impact on the value of patents generally. This list, the basis for Neil's presentation and commentary, first appeared in Terry Ludlow’s article entitled “Sign of the times: trends in technology IP Licensing” IAM, July-August 2014 (here).

Neil took us through Ludlow’s list and the discussion is summarised below:
  • eBay (2006) – Reduced (virtually eliminated) probability of getting an injunction even if you win a patent litigation. Per NW, the use of a patent as a sword is blunted.
  • Sandisk (2007) Lowered the bar significantly on the grounds for filing a declaratory judgment for non-infringement. Per NW, this has made it easier for defendants.
  • KSR v Teleflex (2007) Lowered the bar for obviousness and makes it easier to invalidate patents
  • Seagate (2007) Raised the bar for wilful infringement, reduces the prospect for treble damages
  • Quanta Computer v LG (2008) Resulted in patent exhaustion for downstream products, limits options for licensing
  • Cornell University v Hewlett Packard (2009) Virtually eliminates the ‘entire market value’ (EMV) basis for damages
  • Uniloc v Microsoft (2011) Eliminates the admissibility of the 25% rule of thumb to determine damages: comparable licence agreements to determine royalty rate are now required.
  • Laser Dynamics v Quanta Computer (2012) Damage calculation based on smallest saleable patent practising unit, damages values drop with shrinking royalty base.
  • Motorola v Apple (2012) questions the sufficiency of damages expert opinion and highlights the risks and uncertainty of damages law for patent cases.
  • Motorola v Microsoft (2013) the Value of Standard Essential Patents (SEPs) drop.
  • Samsung v Apple (2013) The President exercised his veto for the first time since 1987 to deny an exclusion order based on the ‘anti-competitive’ use of Standard Essential Patents (SEPs).
  • Alice Corp v CLS Bank (2014) May reduce (or even eliminate) the value of many software related patents.
Neil then posed the question, “What part does patent litigation play in fixing the price of patents?” Based on the Ludlow table and analysis, and from the point of view of patent as a litigation weapon, the potential for individual patents to accrue value has been impaired by the decisions listed above and, as a result, US patents on the whole are probably less valuable than they were before 2006. 
At this point, Joff joined the discussion and explained that he is not a lawyer, an attorney or an engineer, but a journalist who just reports on what he sees and hears, and makes the odd observation. He commented that the cases discussed did not so much reduce patent values as make patents potentially less valuable than they might otherwise have been by making enforcing patent rights harder and, therefore, less attractive. The effects of the Alice v CLS Supreme Court decision are well worth watching, Joff stated. Further if, as some believe, the case renders hundreds of thousands of software patents granted by the USPTO unenforceable, then the market for such assets is almost certainly going to fall through the floor. Joff also noted the cases were all American and that different dynamics may exist in other parts of the world. For example, depending on how the unified patent court system develops, patents in Europe may become more valuable – he knew of a few non-practising entities and established US law firms that are presently looking to Europe as a potentially much more interesting place than may have been the case up to now. Joff then introduced a second list [presented in PowerPoint format which you can read here or here]: high value multi-million and billion dollar mega-patent transactions with which most readers will be familiar, including:

• Google’s acquisition of Motorola
• the sale of the Nortel patent portfolio to a consortium of smart phone manufacturers,
• Google’s acquisition of shares in Motorola Mobility, and
• the curious Quanlin Paper debt finance transaction that recently occurred in the People’s Republic of China, among others.
Nortel, in the good old days when
phones were phones and nobody
knew patents were an asset class ...
Joff stated that this list of patent transactions was unusual both because the deals were publicly disclosed and because of the enormous values attributed to patents. Most deals, he said, were done privately and for much lower sums. He also asserted that there was more going on besides strict patent value in all of these transactions. What’s more, he stated, it is important to remember that the vast majority of granted patents are worth very little or nothing at all. Neil elaborated by pointing out that several of the sellers were in financial distress eg Motorola was experiencing economic difficulties, Nortel was bankrupt and Kodak was nearly so, and pressure was on AOL to improve its share price. As a result, he said that many of the mega-transactions may simply have been “sales to get rid of dogs and get suckers to pay for them”. Joff did not agree – saying that the patents may not have been “dogs”; instead, the management of the companies that originally owned them may not have had the expertise or the inclination to maximise their value potential.  Neil observed the particular interest in securitizing patent rights in places such as China and Singapore.  He further noted that that it is important to put mega- transactions into context in terms of value. In 2002, there were low interest rates, lots of liquidity and lots of money looking for asset classes. Now in 2014, we are in a similar financial environment, with low interest rates, accumulation of capital searching for a yield. Joff noted that none of the deals in the list were about one party buying patents from another in order to monetize them through the courts, instead much more complex strategic issues were at play – and it was these considerations that had driven the patent valuations. 
Diamonds and dogs share
another context thanks to
Dave Bowie (or should
that be Bow-Wowie?)
Jeremy was quick to assert that “you can’t call a patent ‘a dog’ because it is sold by a company in insolvency proceedings”. Further, when it comes to treating patents as an asset class, it is more important to understand the patent's value story in connection with business strategy in order to assess value. Jeremy offered an illustrative analogy with postage stamp collection value. He explained that most stamps are valueless but a small percentage are worth something that makes them an asset class. There is scarcity at the top end and it is a skill “to distinguish the dogs from the diamonds”. Joff was not so sure, noting that patent value is very contextual – and depends on things such as ownership and timing. For example, he stated, if his mother owned an 1840 British Penny Black stamp it would have an intrinsically high value that she could find out and rely on; on the other hand, give her ownership of a patent and however good it might be to someone else, in her hands it would be worth absolutely nothing because she would have no idea what to do with it. 
Apart from the speakers,
the other big attraction
was the host firm's
excellent IP Ale
The discussion turned to Europe. Joff found it notable that to date there have been very few mega patent transactions in the EU. However in his view the position may change with the introduction of the Unified Patent Court (UPC) as the permanent injunction remedy may increase the value of good quality patents that read on popular technologies. If that turns out to be the case, he said, don’t be surprised to see more patent transactions and litigation activity in the EU in the future. He named one very well-known US law firm in which a number of senior partners have been sitting the Qualified Lawyer Transfer Test exams to qualify as solicitors in England and Wales, expressly to offer advice on English / EU patent law.

Jonathan D.C. Turner (barrister, 13 Old Square), joined the discussion and suggested that the absence of mega-patent deals in the EU may be due to the impact of strict competition (anti-trust) law and that the intervention of competition law procedures may paralyze such transactions. In his view, competition law would still be an important issue, even with the UPC in place.

Joff concluded that we needed a better understanding of the dynamics of these large patent transactions coupled with their huge patent valuations. He thought there was a danger that we might overhype patent value and that it was important to understand the patent ecosystem properly in order to extract any value at all. He added that the other thing that creates value is if many parties are bidding against each other for the patent portfolio. This drives up the price. This what happened in the Nortel sale; by contrast, in the Kodak sale companies interested in the portfolio ended up working together and the $525 million sale price was much lower than initial predictions, some of which were in the region of $2 billion to $3 billion.

Charles Till, formerly with Nortel, agreed that the dynamics of the auction process had much to do with the patent values being drawn up. He explained that Nortel was not interested in patent enforcement as it would have needed to sue its own customers. Thus the company’s strategy was to transfer the patents to its competitors, for a price, as the competitors would have no such reservations.

Jeremy clarified that, whether the asset is a postage stamp or a patent, any asset will be affected by ‘context’ and what we must be sensitive to the circumstances that tend to make patent assets more valuable.

To conclude the dialogue, Joff advised attendees to think of patent value as being about much more than monetisation. Patents are potentially valuable for any number of reasons and if you see them only as monetisable assets you will probably end up failing to make the most of what they can offer. Neil advised that, against the backdrop of the attempt to amend US patent law, it will be very important to evaluate what is currently taking place with respect to the anti-patent lobby led by a group of IP academics. It will be important for the IP community not to underestimate the power of academics and their anti-patent sentiment. As an academic myself, I think this is particularly good advice".

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