The Merger of ipCreate and Article One Partners

Earlier this year, ipCreate and Article One Partners, perhaps best known for enabling crowd sourcing of prior art, announced a merger.  Here is part of the announcement about the merger:

Founded in 2012, ipCreate will continue to provide industry leaders in the US, Europe and Asia with on-demand patented inventions at the chokepoints of disruptive market change, with the patents themselves and related landscape opportunity systematically vetted by AOP’s global network of prior art researchers adding to quality assurance.  With poor quality patents a growing burden on business and the subject of mounting challenges by the courts and the U.S. Patent and Trademark Office (USPTO), the integration of patent quality control processes early in the invention process is expected to fill a vital customer need.

“One of the lessons my three-and-a-half years as head of the Patent and Trademark Office taught me is that businesses benefit greatly from a systemic approach to improving the quality of their patents — and the earlier in the innovation process, the better,” said David Kappos, ipCreate advisor and former Director of the USPTO. “With this merger, ipCreate has now put all the pieces in place to provide clients with high-value innovation on demand backed by unusually high-quality intellectual property.”

. . .

John Cronin, CEO of ipCreate, was also instrumental in the merger. “When I was IBM’s top inventor and ran its ‘patent factory’ in the 1990s, some people thought it was just a numbers game — about having the most patents. That was never what it was about,” he explained. “Our goal was to develop high-quality patented inventions in disruptive technologies. That’s how IBM invented the future. With Article One Partner’s help, that’s what we intend to do again. Only now we plan to invent “on demand” to suit the specific needs of our partners and to the highest standards of quality.”

Article One Partners brings much to the table. "The merger is expected to provide a number of strategic benefits including the ability to leverage AOP’s existing customer base, strong “white-hat” branding, enhanced patent intelligence, patent quality services and increased depth in executive leadership through the addition of Marshall Phelps and the AOP management team."

The board of directors and the advisory group is impressive, including Marshall Phelps, Jr., John Cronin, Peter Holden, Robert Armitage, Ruud Peters, David Kappos and Mike Brochu.  The leadership team is also a distinguished group. 

So, the game is not so much about amassing patents, but strategically acquiring one or a small set of quality patents (read Alice) “at the chokepoint[].”   True enough, most agree that quality patents are not so much a problem; however, litigation “abuse” is something that I am sure others will complain about.  But, I think this group will “work around” that problem with sensible licensing practices. 

Here is a blurb about the philosophy of ipCreate:

Our mission is to forecast the direction of innovation in the fastest-growing new product markets and then create strategic patent portfolios in the disruptive high-value technologies driving that growth. We know first-hand that the greatest value in the IP asset class belongs to a small minority of foundational patents. By working with select leaders in industries undergoing rapid technological disruption – whether dominant players in the market or visionary startups – we will employ ipCreate’s proprietary tools and resources to identify promising innovation areas and rapidly create foundational patents at the chokepoints of looming market change.

With major financial backing, we expect to fund and execute more than 100 strategic invention and IP creation projects and produce thousands of foundational patents by the year 2017. By restoring the historic link between patents and invention (rather than litigation), ipCreate also hopes to strengthen a patent system that is crucial to U.S. competitiveness.

I think the merger with Article One Partners is a pretty damn good idea.  Who doesn't want to wear a "white hat?"  I do wonder how many of the researchers will go along with the new venture.  [I have to say that I also like how they put “ip” in lower case letters and capitalize the “C” in create.]  What do you think?

“A Kodak Moment” or “Rembrandts in the Attic”: The Valuation for the BlackBerry Patent Portfolio

On the heels of the announcement that BlackBerry would start looking “at strategic alternatives,” the web has lit up with commentary and speculation on the value of the BlackBerry patent portfolio—a whopping 5,000 plus patents and almost 4,000 patent applications! (here, here, here and here) And, the value is – well, $2 billion.  Or, maybe $3 billion.  But, well, under some circumstances could be $5 billion.  Wow.  A $2 to $5 billion range?  To be fair, these valuations are being made “on the fly.”  I do hope that this time the folks doing the valuing are taking into account, at least, how extensive the licensing of the critical patents in the portfolio has been (apparently a mistake with the Kodak portfolio valuation), the existence of noninfringing substitutes, the relevant markets, the construction of the claims and potential prior art not considered by the relevant patent offices. (How much is that analysis going to cost?) 

Could the portfolio be a "Rembrandt in the Attic" (or a lot of them)?  Again, how extensive has the licensing of the patents been?  At least one analysis has pointed out that there is quite a bit of term left on some of the BlackBerry patents.  And, in early 2013, Intellectual Asset Management reportedly gave the BlackBerry Patent Portfolio a relatively high rating based on quality and quantity of patents and BlackBerry supposedly has been spending "$1.5 billion to $2 billion" on R&D a year. Here is the Envision IP analysis (and update) of the BlackBerry Patent Portfolio.  ThinkFire will release its analysis of the present BlackBerry Patent Portfolio soon.    Anyone need a shield or something to trade?    

Besides the valuation issue, it will be interesting to see if the BlackBerry patents are eventually used by so called “patent trolls” to hold up other entities since BlackBerry (Research in Motion) was such a famous “victim” of NTP and has been an outspoken critic of "patent trolls."  (the sword).  Again, anyone need a shield?  We shall see how the game plays out. 

Motorola Mobility: Has there been an impairment of goodwill in Google's acquisition of its patent portfolio?

When companies face a decline in the value of a certain asset, they may find it necessary to write down the goodwill value of that asset to reflect such impairment. One need look no further than such august companies as News Corp. and Tata Steel. Thus News Corp., in what was described as a "goodwill impair charge", recently announced a write-down in the value of its Australian and US publishing assets in the amount of $1.4 billion, here. As for Tata Steel, it announced in mid-May that it was taking a write-down of $1.6 billion largely in connection with the commercial challenges in connection with its takeover six years ago of Corus, a British steel maker, here. Technically, since goodwill is the excess paid for an asset over its book value, it can be argued that the write down of the goodwill is a mere bookkeeping technicality since it is in effect a non-cash loss. Perhaps. But such write downs by high visibility companies attract media attention.

I thought of the issue of goodwill write-downs in reading a report about the most recent decision of the U.S. International Trade Commission (ITC) regarding the patent wars between Google and Microsoft, here. In particular, the ITC ruled that Microsoft's Xbox device did not infringe a patent belonging to the Google subsidiary, Motorola Mobility. Initially, Google alleged infringement by Microsoft of five Motorola Mobility patents. Four of these patent claims were dropped (including two patents that were deemed essential to a standard and which Google choose not to continue to assert against Microsoft), leaving the one patent at issue in the current ITC decision.

Readers will likely remember that, to great media fanfare, Google acquired the Microsoft Mobility patents in an amount described in excess of $12 billion,here. Later reports lowered the amount attributed to the patents. As reported on c/net on July 25, 2012, here, "[t]he search giant yesterday filed a document with the Securities and Exchange Commission (SEC) outlining how it valued its $12.4 billion (not $12.5 billion it originally reported) acquisition of Motorola Mobility. Google says that $2.9 billion of the purchase price accounted for Motorola's cash, while $730 million went to customer relationships and $670 million to other net assets.The largest percentage of Motorola's value, according to Google, was the $5.5 billion in "patents and developed technology." The remaining $2.6 billion went to goodwill, or the company's value above and beyond its assets."

Either way, this is an extraordinary amount to pay for a patent portfolio. How was Google intending to benefit from this acquisition? Did the amounts paid represent, in whole or in part, a good-faith estimate of an income stream that Google hoped to generate from receipt of payment of patent royalties? (This rationale has been mentioned as the basis for the initial and ultimately widely over-optimistic valuation placed on the Kodak patent portfolio at the end of 2011).  Or was the portfolio intended to provide Google with a ready arsenal of patents that it could threaten to use, or actually rely upon to extract a favourable cross-licensing arrangement (in that wonderful phrase taken from the Cold War, "mutually assured destruction"), should it be sued by a competitor? Or was the portfolio, or at least select patents within it, intended to provide offensive legal firepower, ideally serving as the basis for obtaining a court-ordered ban against sales of product by competitors?

It appears, at least until now, that the third alternative has become front and central in the exploitation of the Motorola Mobility patent portfolio. If so, then I wonder what happens to the valuation of the patent portfolio, or at least those patents that form the basis for an infringement suit, when a court or administrative agency rules that no infringement has taken place. By analogy to the write-down of the goodwill of other corporate assets, does there come a time when a company acquiring a patent portfolio has to write down the goodwill value thereof? In particular, what is a company to do when it acquires a patent portfolio, on the basis of which the company then sues upon and expends significant sums in the maintenance of the law suit, ultimately to be rebuffed by the courts? Has there been a material impairment of goodwill that should be recognized (to extent that the accounting principles of the jurisdiction recognize goodwill in a patent in such circumstances)?

Any readers who might have insights into how a company should properly value a patent portfolio, especially following an acquisition, and whether such valuation is subject to change based on the fate of the exploitation of the patents, are invited to share their insights.

Kodak, Patents and the Deal That You Can't Refuse?

Let's start from the end: No, I am not going to let this subject disappear quietly.

Several months ago I wrote about "Patent Valuation, T.S. Eliot and the Theatre of the Absurd" here, where I commented on the steadily decreasing valuation of the Kodak patent portfolio. The saga continues. Last week it was reported by Joe Mullin on arstechnica.com here that Kodak has entered into a credit line of $793 million dollars with its bondholders, provided that the company can raise at least $500 million from the sale of its portfolio of patents. The arrangement still needs approval of the bankruptcy court, it is reported.

The names of potential purchasers remain a combination of smartphone companies--such as Apple, Google and Samsung-- on the one hand, and patent aggregators, such as Intellectual Ventures here and RPX Corp. here, on the other. The article goes on to make a number of points that are not entirely clear to me:

1. "Because such a wide range of entities is working together to buy these Kodak patents, it is unlikely that they would fall into the hands of patent trolls or be used for other types of patent attacks."--I don't quite follow this. What does it mean that these entities are "working together"? Are they allocating the patents between them? If not, what is the nature of this coordination? Moreover, depending upon on how you define a patent troll, both Intellectual Ventures and even RPX Corp can be seen as having troll-like characteristics.

2. "This deal would allow Kodak to get one big lump-sum payment rather than eke out its patent cash in court."--This seems to be a bit of false dichotomy. Did anyone really believe that Kodak's patent folio was going to earn the company aggregate recovery in the amount of many hundreds of millions of dollars? Is sale of the patent portfolio really a commercial alternative to continuing to slog it out in courts?

3. "But the endgame will remain the same: competing companies--and, indirectly, consumers--will still have to pay a hefty tax to buy out a dying, but patent-rich, business"--This is not clear to me at all. Who are the competing companies and why are they paying "a hefty tax" for the patents?

4. I do not understand the pricing dynamic that it taking place here. In particular,
what are the pressures that are being brought to bear on these potential purchasers so that they agree to pay an amount greater than if there was a free auction of the portfolio? What comes to mind is that the bondholders want to pressure the perspective purchasers to fork over at least a half-billion dollars or take the risk that the patents fall into the "wrong" hands. Maybe that is the "hefty tax" that is referred to in the article.

More generally, I would really love someone to dig into how it came to pass that the same patent portfolio was given a valuation of over two billion dollars last year. Who had in interest in championing this over-estimate? How was this supposed to translate into fees or other income for interested parties? Is there an IP equivalent here to the tawdry conduct of several major investment houses a half decade ago, who were flogging investments of the same bundles of assets that they were shorting (i.e., betting on their price decline)?

Stated otherwise, it seems to me that the time has come for at least certain elements of the patent valuation business to come clean on what happened. Greed, misjudgment, or something more sinister?

What future for Hewlett-Packard?

Leading computer manufacturer Hewlett-Packard has made the headlines over the past few days following its decision to discontinue the production of webOS-based devices Touchpad and Pre 3 smartphone.

This early exit of smartphone and tablet computer business segment is surprising since HP's acquisition of smartphone manufacturer Palm for $1.2 billion dates of July 1st 2010. At that date (and until a few days ago) HP was determined to succeed on the smartphone and tablet market by building an complete WebOS-based ecosystem that could compete with Apple's iOS and Google's Android.

But after 13 months and the Touchpad's commercial failure (in spite of a hefty marketing investment) HP plans to operate a complete turnaround and to exit the mobile and the PC industry altogether, in order to focus on software and IT services, much like IBM did in 2005 when it sold its PC division to Chinese Lenovo. This strategic move coincides with the purchase of British software developer Autonomy for $10.2 billion, another move which did not convince many professionals in the field since HP has never been a major player of the software industry.

Whether HP's new business strategy will prove successful or not, its purchase of Palm was probably a clever move given the number of patents it acquired in the deal: roughly between 1600 and 4000 according to a Breakingview/Zdnet's estimation. As Larry Dignan of Zdnet notes, 'given the patent price benchmarks set by Google’s $12.5 billion purchase of Motorola Mobility (and its portfolio of 17000 patents) and the Nortel $4.5 billion auction of 6,000 patents (acquired by the the Apple consortium, it’s possible that the unit formerly known as Palm may fetch a sum to offset some of HP’s losses.'

Whereas the outright sale of its IP portfolio seems unlikely for now, since HP did not announce the complete demise of WebOS. HP might look first at licensing its IP portfolio in order to make for the loss incurred due to the desastrous Touchpad launch. An auction sale à la Nortel is however not to exclude in the future. We should know very soon, which road will Hewlett-Packard take.