Monday 3 November 2014

IP not a homogeneous asset class: patents are the big risk-bearers

On 5 September IP Finance hosted a contribution from Aritra Chaterjee, "New frontiers in intangible asset financing", which has drawn the following observation from Ron Laurie (Managing Director, Inflexion Point Strategy):
In response to Aritra’s Chaterjee’s excellent guest post on the use of intangible assets as loan collateral, I would like to add the following U.S. perspective.

What patents are all about?
Those of us that have been looking at IP collateralisation over the past several years recognize that valuation challenges are at the heart of the “problem".  However, it is of critical importance to recognize that the valuation uncertainty varies considerably with the type of IP under consideration. More specifically, the risk profile impacting liquidation value uncertainty in the event of default differs materially depending on the type of IP involved. Most of the IP-backed finance that occurred from 1995 to 2005 involved “brands" (trademark IP) and “content” such as music and film (copyright IP) which carry much less legal risk — in terms of validity, scope of rights, and infringement — than do patents. This is even more true today in light of
(1) the recent U.S. Supreme Court patent-related decisions (e.g., Alice, Nautilus, Octane); 
(2) the new America Invents Act-based administrative procedures for challenging the validity of issued patents in the USPTO; 
(3) the practical unavailability of injunctive relief for patent infringement after eBay; and 
(4) the rapidly changing Federal Circuit and District Court case law affecting the calculation of reasonable royalty damages for patent infringement, the net effect of which is to lower the expected return from enforcing patent rights in court.

Bottom line: in this area as in others, one should be careful in talking about “IP” as if it were a homogeneous class of rights.
Thanks, Ron!

1 comment:

Aritra Chatterjee said...


Many thanks for your valuable insights. Can't agree more to the fact that IP is heterogeneous which poses a risk and an opportunity. Each IP portfolio should be individually valued keeping the objective in focus.

Risk = Opportunity; If these were all homogeneous and easy to value then none of us would be required in the value chain. Its a daunting task to build a model around the valuation keeping in mind the highly volatile nature of some of these assets.

I'm no expert on IP valuation and looking from outside in, I contemplate that going concern value is more volatile than the liquidation/bankruptcy value and probably less meaningful to build a product around. The liquidation value instead depends on the circumstance under which the operating entity filed bankruptcy (assume only corporate operating entities). If bankruptcy occurs due to fraud or a significant wrong doing e.g. World Com/Lehman the trademarks will have virtually no value while patents may have some residual value depending upon the invention it supports. While if it is a tech obsolescence patents will have significantly low value. Using such an analogy you can build up a matrix of the most probable scenarios and based on OE's charecteristics & industry figures you can draw a DFA model to value the "core" IP of the OE. How accurate depends on the kind of assumption you use, my approach will be to use conservative figures since very often bankruptcies will occur at economic downturn and ignoring correlation is not a good idea.

Legal risk for patents is difficult to estimate in a model although linguistic algo's may provide some insight, not sure how accurate those analysis are.

This is an overly simplistic version of the idea, definitely much more complex to get in the weeds.