Mega-Patent Portfolio Sales: Chimera or Here to Stay?

I do not usually use this blog platform to offer my counterpoint to a post by one of my IP Finance colleagues. However, I will make an exception this time in connection with Rob Harrison's interesting post of yesterday--"AOL posts profit based on Microsoft patent sale" here. Rob focused on the connection between the $1.056 billion dollar sale by AOL to Microsoft for a large chunk of its patent portfolio (Microsoft then turned around and sold a large portion of these former AOL patents to Facebook) and the rise of AOL's share price to a level not seen in years.

Rob concluded as follows:

"The whole deal has been presented as beefing up Microsoft's patent portfolio in the search business and helping Facebook's patent dispute with Yahoo. Certainly the volume of patents probably means that both companies have probably a better arsenal to defend themselves in this and future patent suits. AOL's shareholders can comfort themselves in having realised value from a substantial IP portfolio built up over the past fifteen years."

I have recently questioned elsewhere ("Of Medieval Marauders, Tulips and and the Sale of Patent Portfolios", here) whether the sale of these mega-patent portfolios, starting with the $12.5 billion sale by Motorola Mobility to Google, is the most graphic example of the potential value to be extracted from a properly developed patent portfolio, or the result of a number of idiosyncratic circumstances that have created a distorted market for patents, bordering on being a full-fledged patent bubble (interestingly, an item this week suggests that, contrary to previous accounts, patents may not have been the sole driver for the Motorola Mobility purchase. As reported by Washingtonpost.com on July 25th, "A report from VentureBeat highlights that Google’s acquisition of Motorola Mobility was only partially fueled by patent acquisitions, which many suspected was the main drive behind the deal. The report says that only $5.5 billion of the $12.5 billion deal went to patent acquisition. Google hasn’t provided much information on its strategy for Motorola, saying only that everyone should expect “some changes” at the hardware maker.").

Circling back to the AOL-Microsoft transaction, I would make the following comments in response to Rob Harrison's observations, to try and get a better understand the nature of the $1 billion plus payment received from Microsoft.

1. How much did AOL expend over the years to register, maintain and enforce these patents over the 15-year period?

2. To what extent did AOL receive licensing fees from third parties with respect to these patents?

3. What portion of salaries and other company resources can be attributed to the invention and registration of these patents?

4. To what extent did expenditures in the patent portfolio constitute forgone investment in other AOL activities?

5. Can we determine a rate of return with respect to these patents? How does it compare with the rate of return on other AOL assets?

6. As a matter of policy, to what extent should patents primarily serve the shareholder's interests in boosting share price by a one-off enhancement of revenue within the company?

7. Is the sale of the patents in the name of shareholder value another way of saying that management did not make effective internal commercial use of its patents?

8. Is it any coincidence that sale of these mega- patent portfolios has occurred about the same time as investment banks have made a push to introject themselves into this market (and earn substantial fees as a result), see "Investment Banks Seek Business in Patent Deals as M&A Work Slows", Bloomberg.com, June 25th here?

It appears that the sale of mega-portfolios of patents is not going away, especially in these difficult economic times and, with it, increasing questions about what is going on.

Low patent count portfolio strategy succeeds against Toyota

Hot on the heels of last week’s post about UK hybrid automotive technology company EVO Electric comes the news that, after six years of litigation, US hybrid automotive technology company Paice LLC has finally reached a settlement with Toyota regarding certain Toyota vehicles found to be equivalent to a Paice US patent.

The litigation has been notable for the refusal of both US district and appeal courts to grant an injunction, prompting Paice to launch proceedings before the US International Trade Commission (ITC), which has the power to bar imports by Toyota. The prehearing conference at the ITC was scheduled for July 15.

“Paice is committed to the ongoing development of hybrid technology and selected research activities,” notes the CEO of Paice in the company’s press release. However, no new patent filings in the name of Paice LLC are indicated on the Espacenet database; rather, all six entries are indicated as having a priority date of 1998. Similarly, the eleven US patents listed on the Paice website all appear to derive from US filings made between 1992 and 1999.

For some views on the ethical rights and wrongs of Paice’s business model, see "Trolling in cleantech-Paice & Toyota settle".

A low patent count portfolio strategy?

At the beginning of 2010, business consulting company Frost & Sullivan awarded their Entrepreneurial Company of the Year award to EVO Electric Ltd, a spin-out from Imperial College London in the field of green automotive technology. As noted here in April, F&S appeared to place more emphasis on innovation in EVO’s business processes than on technical innovation as measured by patent filings.

A similar emphasis on the part of EVO is suggested by a 1 June 2010 press release to investors, which announces:

“the launch of its new generation of Axial Flux motor and generator technology, which promises to dramatically improve the cost, performance and efficiency of hybrid and electric vehicle powertrains. Applications include hybrid, plug-in hybrid and all-electric vehicles, range extenders, auxiliary power units (APU) and integrated starter-generator (ISG) systems. The new generation of Axial Flux products offers the highest power density among electric motors currently available for automotive applications.”

Despite this announcement, no new patent filings in the name of EVO Electric are indicated on the electronic UK IP Office Journal. Rather, the last UK application would appear to have been filed in February 2009.

Patent portfolio strategy revisited

Writing in Innovation Science, Brent Edwards ("Trolls Attack Innovation: Panic in Corporate Parks!"), left, reviews an article in the June 2008 issue of the Harvard Business Review by management professors Joachim Henkel and Markus Reitzig ("Patent Sharks: Legal strategies aren’t enough to deal with these predators of the IP world. You need to rethink your approach to R&D"). Edwards addresses the authors'recommendations which he criticises as being unrealistic in that they idealise the willingness of competing companies to cooperate with each other and to forgo competitiveness in technology development in order to protect themselves against the trolls.

The first of the professors' recommendations is "High-technology firms should move away from building huge patent portfolios for the purpose of cross-licensing with competitors". On this, Edwards comments:

"The authors correctly point out that one reason companies generate patents is to trade them for patents needed from other companies. Such trading is done because the patents behind key components in complex technical products are usually distributed across all of the major companies in an industry—no one company owns all of the patents necessary to produce a product. Because no company can produce a product solely on technology from their own patent portfolio, companies trade their patent licenses for licenses to the other companies’ patents. The cellphone industry is a typical example of this, e.g., Nokia trading patent licenses with Motorola and Samsung. The authors suggest that this strategy of building a strong portfolio and trading licenses is no longer valuable to companies and should be stopped because it doesn’t protect them from trolls. Indeed, it doesn’t—it protects them from their competitors, who are ultimately more threatening than patent trolls. Just because a patent strategy does not affect patent trolls does not mean that it isn’t worth doing. If I were Nokia, however, I would certainly try to convince Motorola to follow this advice to stop building up Motorola’s patent portfolio".

It seems to be by no means clear that one's competitors are ultimately more threatening than patent trolls. By virtue of the fact that they are in the same market -- particularly where that market is technologically complex and patent-rich -- competing players becomes increasingly reliant on one another in terms of standards-setting and cross-licensing, so each has a long-term incentive to cooperate with one another. A troll, however, is an outsider; he is not interested in cooperation or developing any relationship outside that of rentier. The more rent he receives, the better able he is to defend his patents if their validity should be challenged, and the less he does apart from collect his rent and keep it, the more focused he is on his continued role as rentier.