For the half-year to 31 December 2014, the IPKat's regular team is supplemented by contributions from guest bloggers Rebecca Gulbul, Lucas Michels and Marie-Andrée Weiss.

Regular round-ups of the previous week's blogposts are kindly compiled by Alberto Bellan.

Friday, 11 July 2014

Patent value: but how do we understand the market?

Last week this Kat published a blogpost entitled “Have U.S. courts made patents less valuable?", here, which discussed aspects of the article by Terry Ludow, “Signs of the times: trends in technology IP licensing”. This article had been published in Intellectual Asset Management (IAM) magazine. The blog post engendered a lively discussion among Kat readers. In addition, it drew the attention of Katfriend Joff Wild, the editor of IAM, who published a long and thoughtful response to the post on the IAM website, here. Joff’s comments are worthy of attention to Kat readers. Accordingly, this Kat takes the opportunity to summarize Joff’s observations.

Joff accepts the assertion that monetization is not the sole reason that patent owners build patent portfolios. However, he takes the position that whether or not monetization is the primary mover for patenting,
“the price of a patent is ultimately a reflection of its overall value, not just its monetization potential. Although there are always exceptions, the ones that will generally generate the most money were they to be put up for sale are the ones that are of high quality and which read on key technologies that underpin products want to buy.” 
Joff then goes on to make a series of more specific points about patent value:
1. U.S. patent values have fallen in recent years, presumably for many of the reasons that Ludlow argued in his article.

2. On the other hand, we may be at the cusp of increasing patent values in Europe (and perhaps later down the line in China) The key is high-quality patents, more predictable court rulings and better enforceability.

3. While patent valuations will not return to the levels of a couple of years ago (e.g., Nortel’s auction generated $4.5 billion and Google paid $12.5 billion for Motorola Mobility) we will witness higher valuations for patents across a wider range of industries, including automotive, energy financial services and medical services. Previously, the highest valuations tended to focus on telecoms-related industries.

4. The current situation in the U.S., where it is harder to enforce patents, “is bound to play itself out. At that state a level of certainty will return to the market which will have an upward effect on prices.”

5. More than ever, quality is what will ultimately count regarding patent values. With higher quality patents, higher patent values as a function of litigation opportunities will spread to Europe and perhaps to China down the road.
Joff has raised some compelling points. However, in the view of this Kat, there is the unaddressed elephant in the room—the market for patents by which patent values are presumably set. But what exactly are the contours and structure of this market and how has it operated over time? Is it more akin the fine art market in the sense that no two assets are alike, it is subject to changes in tastes and it is dominated by a relatively small number of high rollers? Or is this market sui generis ex extremis?

The oversized amounts paid especially in 2011 and 2012 were, in this Kat’s understanding, due to an idiosyncratic confluence of factors, including large patent portfolios being flogged as a result of bankruptcy or like financial difficulties by the patent owners. The story still needs to be written about how these valuations came about, including what was the role of investment bankers and the criteria used by those who offered valuations for the portfolios. This Kat suspects that developments in the patent case law in the US had little impact on what happened to patent values in 2011 and 2012, but he would be delighted if Kat readers could point him to research to the contrary. If this Kat is correct, however, it becomes more difficult to explain why case law developments are, contrary to the 2011-2012 period, now taking on substantially greater importance in depressing patent values.

This Kat cannot stop thinking about two anecdotes in connection with patent values.

A well-known figure in the area in Silicon Valley recounted how, in the 1970s, patent negotiations were often conducted on the basis of which side could physically place on the table the larger bundle of patents. Mere bulk mattered and, to his view, it does so as well today. What has been happening in recent years is redolent of those earlier times.

Ah, you might say, with patents of greater quality, a better job can be made in better evaluating patents. Maybe yes, maybe no. A lawyer who was involved in one of the big mega-patent transactions of several years ago admitted to me that it was impossible to review even a fraction of the patents that were being offered for sale. What one tries to do is identify and evaluate the key patents. But key patents need not necessarily mean patents of higher quality (whatever exactly that means).

What these anecdotes say about the nature of the patent market is way beyond this Kat’s pay grade. At the least, however, they underscore that the most urgent need is for those involved in the “patent as a valuable asset” industry to provide a clearer explanation of this market and how it goes about setting the price and ultimately the value of patents.


Michael Risch said...

I've followed this back and forth, and it's very interesting. If you haven't seen it, my Duke LJ article Patent Portfolios as Securities deals with some of the regulatory and market issues associated with treating patent portfolios as assets.

Anonymous said...

My biggest problem with Neil's opinion is that it is an opinion.

Let me clarify: The "feeling" factor that Neil uses to assess the comments of Joff Wild minimizes those elements that are not in line with Neil's view, and does so for no stated reasons (other than anecdotally).

The choice of words (e.g. "oversized") exhibits a biased flourish that is de facto presumed to be true and justified.

Now I do "get" that this is an opinion piece, and that "opinion" remains an opinion no matter how biased or ill-informed the opinion may (or may not) be.

Separating the wheat from the chaff is required. Sometimes, there is lots of wheat to be had. Other times, well, not so much.

Secondarily, I will point out that the anecdote of Silicon Valley negotiations has a much wider and more current vintage - up to and including the advent of the pejorative "Troll" and the so often overlooked benefit of "Trolls" to break through that Silicon Valley patent Armageddon strategy of amassing a size (with perhaps a healthy portion of dubious quality patents) and simply taking a "well, deal with us as you are no doubt infringing something in our stack, and we have other non-patent strength to outlast you" mindset - think i4i.

Lastly, as a general economic note, I would recommend some Adam Smith reading.

Anonymous said...

I'd say that patents are not products per se, they depend on the actual products they are supposed to protect. So I doubt that there would be a "patent market" as such. Even the patent trolls rely on what I call blackmail to make their patents pay, which has of course nothing to do with the true market value of a patent that really protects an actual product. A patent that protects a good product will be worth more than a patent that does not.

As to the "bulk" issue: yes, I have seen it myself: the amount of patents allegedly protecting a product or a process helps to convince potential buyers of the value of the product or process. Of course there the market is not the patent market. In that case, there also is no need to have a granted patent. What is important is to have a lot of patent applications, to impress. That is the reason, according to me, that so little use is made of possibnilities to accelerate the grant of patents. Granted patents do not matter, it is the applications that do. Only in rare cases (yes, there are a few) is it nice to have a granted patent in order to try to get some licence money. But the bulk of the patents (over 90%) does not even protect something that is actually used. I have heard that only about 4% of the patents do protect some actual product/process and a further 4% protect easy work-arounds. So the rest is worth what?

Point is, of course, that patent applications are usually filed at a stage that the commercial value of the product/process it protects is not yet known. Most applications/patents will therefore not reach the age of 20, but they will be kept alive for as long as possible, "just in case" and as long as it does not get too expensive (grant; translations).

So I myself do not see a "patent market" as such, I'd always see a patent's value in the context of what it protects.

Anonymous said...

Speaking for the States, the view that "I'd say that patents are not products per se, they depend on the actual products they are supposed to protect" will not hold.

Our Supreme Court decided this issue more than one hundred years ago.

Further (at least here), patents are viewed as what is called a negative right - there is no right to make what you have patented - only to prevent others from making.

Also in the state, this has an immediate impact in our patent eligibility analysis, as improvement patents are to be liberally granted - and one's improvement can be on someone else's (still enforceable) patent. Requiring a mindset of "to practice" in this type of case, would require the ability to deny the full protection of exclusivity to the patent from which the improvement patent is based.

That being said, a market for what a patent is is indeed in place and workable. Marketeers are by no means whatsoever constrained to a present physical good in order to develop and have a market. Entire markets are built on esoteric concepts like future value and risk, so the intangible nature of a negative right is by no means a constraining force to having an actual market.

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