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.

Patent Litigation, the ITC, and Hardship in the Chip Industry

One of the verities of IP law and practice is "Wilkof's Law". For those of you (probably all of you) who have never heard of "Wilkof"s Law", it goes like this. Question: "How do you know when there is economic slowdown?" Answer: "There is an increase in patent litigation."

A clear example of this principle was described recently on Bloomberg.com (23cDecember 23) under the title--"Chipmakers Hire Armies of Lawyers to Boost Revenues Amid Slump." The report described the efforts of chip (of the computer and not the confectionery kind) manufacturers to make increasing use of patent litigators to try and make up for the expected severe downfall in profits for the industry during 2009. The anticipated drop in revenue for 2009 is indeed grim. According to the report, 2008 witnessed a 4.4% decline in sales, and a 16% crater-like decline in sales in forecast for 2009. Never has the industry experienced back-to-back declines in overall annual sales.

The list of current and possible patent litigation activity is broadly based in the industry. Thus it is reported that Qimonda, LSI and Spansion have all brought patent infringement actions before the ITC. Such actions tend to take much less time than a court action, and they may lead to a settlement with payment made into the patentee's coffers. Particularly notable is Spansion, which is reported to have not recorded a profit since going public in 2005. Licensing fees from defendants is one way to remedy this situation, if only in part.

When licensing fails, going forward with the suit is always a possibility. In one such high profile court filing, Spansion has recently sued Samsung for patent infringement in the area of flash memory chips. As well, Qimonda is reported to crossing patent swords with Seagate Technology, and LSI has commenced patent litigation matter with Freescale Semiconductor and Elpida Memory.

The pros and cons of bringing an ITC action with the intention of reaching a licensing arrangement were described by Robert Krupka of Kirkland & Ellis as follows. On the one hand, an ITC proceeding might actually be more expensive than a regular court proceeding (this is due to the procedural requirements of such action), with costs in the area of $5 million or more. On the other hand, for the target, settlement might be the better part of valor, especially since such an arrangement ensures the target's continuing right to sell in the U.S. market. It would seem that there is a bit of the patent-troll mind-set in all of this, although I suspect that none of the plaintiffs to such an action would so characterize themselves.

Your friendly patent trolls in action

In considering this expected flurry of chip-related patent litigation during 2009, we bring you the following comment from from the Bloomberg article. As noted, "Jerry Sanders, the founder of AMD, used to say, "Real Men own fabs", said Craig Berger.... That's kind of changed. Now it's, "Real men have huge armies of lawyers."

Or, stated otherwise, Wilkof's law is alive and well.

"Real men own fabs"--that is so yesterday ...

IP and the credit crunch: hot topics for the financial freeze

Here's a little list of hot topics that was put together by someone doing a little research into one of my favourite topics -- the impact of the current credit freeze on various aspects of IP. The list

1. Technology: Open Source reduce upfront costs; outsourcing creates savings -- so both those sectors should fair well in recession.

2. Intellectual property transactions: there will be a continued focus on IP liquidity, i.e. buying, selling, licensing and litigation of IP (in particular patent assets).

3. R&D: tax credits will make R&D attractive -- but will R&D budgets be cut? In many sectors, e.g. pharma, this may be the last thing to go, but might others look to reduce overheads by "pruning" their patent portfolio?

4. Venture capital: Many IP generative businesses depend on external finance and funding to bridge the time between creation and exploitation. The economic climate will restrict that funding and make it difficult for many of these young businesses to survive -- which will have a major impact on the innovation pipeline into the future.

5. Managing risk: everyone is looking to maximise the potential of what they have. For all IPRs (especially patents and brands) this commonly depends on a range of third party contracts, i.e. licences, franchise agreements, collaborations, sponsorships. All these agreements are scrutinised for issues such as royalties, change of control and insolvency. Those companies with robust agreements will be better placed to weather the storm.

If you'd like to comment on these, or add your own, please feel free to do so.