Bullish about patents?

Ok, so we have traded stocks, currencies, commodities, art, weather, electricity ... what next? Looks like the world is never out of ideas. At least James Malackowski, the CEO of Ocean Tomo has one. In an interview last month with Fox Business news, he discussed his ideas about an IP exchange. The interview video is available at www.foxbusiness.com.

The online patent auction platform created by Ocean Tomo has been one of the pioneer efforts in this area. There are several other websites offering a patent auction platform. But in most cases an auction is a one time phenomena in a patent's life. Then how does James Malackowski propose to build an IP exchange where patents could be traded like stocks, everyday, every minute. The concept of a "Synthetic Royalty Stream" appears to be one solution for this problem. Though synthetic royalty is not a very new concept but it is definitely not very popular either. Synthetic royalty is an investment mechanism where the investor would pay a lumpsum for a percentage share of a product's future revenue.

The issue now is to associate a synthetic royalty stream with a patent. Consider the case of a hypothetical company with one patent. Following are the steps in which the company can turn its patent asset into a liquid financial instrument:
1. Launch an SPV which holds the patent as an asset
2. Attribute a share of its product revenue to the patent and hence the SPV
3. Collect funds from investors in return of a stake in the SPV
4. The investors then trade their stakes as the product revenues rise or fall
5. These stakes will involve the risk of a substitute technology replacing the patented technology in the product

Several variants of the above mechanism can be used to make liquid financial instruments out of patents. The investment fraternity will need more technical support than ever to assess the risk associated with these instruments. Attributing a share of product revenues to a patent will involve development of standard methodologies for assessing royalty rates. This task will become even more challenging when revenues from multiple products need to be attributed to multiple patents. AT&T Knowledge Ventures (KV), under the leadership of Abha Divine has set an example of successful implementation of this process. AT&T KV implemented a methodology to annually measure the impact of its IP Portfolio on its per share earnings. It will take lots of such successful examples and a lot more standardization of processes before the world can start trading in IP.

Patent Valuation: Theory Vs Practice … and Whose Practice

The most widely known fact about Patent Valuation is that it is one of the best kept secrets in the Tech Transfer world. Edward Cooke, in his article “A little knowledge can go a long way” rightly describes the need and lack of a clear patent valuation approach. A clear indication of the absence of even a near exact valuation approach is the court’s irrational damage estimate of $358 M in the Lucent Vs Microsoft case. Though the damages have now been overturned but this clearly is no excuse of why the court was vastly away from what Microsoft and many other experts had estimated. The legal intricacies apart, the court proceedings even include debates on whether or not a particular valuation technique is correct irrespective of this case.

Most books on Patent Valuation stick to defining the Cost, Income, and Market approaches without discussing their feasibility. The most widely used of the three, the Income Approach, too cannot be followed in its textbook form. It is extremely difficult to estimate the change in sales and profits of a particular television model due to a small change in one of its circuits. And all this is expected to be estimated when there are hundred other bigger or smaller changes in its circuits, along with probably a change in its sales policy or may be its competitor’s.

The very reason that valuation techniques are still a well kept secret has given rise to multiple variants of the three basic approaches discussed above. Variants based on the income model probably are similar in structure, but what definitely differs is their evaluation of risks and royalties associated with a patent. These evaluations vary with the objective of the person/entity who is evaluating the patent. During an M&A deal an investment banker on the buyer’s side might chose to consider the probability of a patent being valid and the one on the seller’s side might chose to completely ignore this risk. For an independent evaluator, for whom ignoring such risks is no option, the question boils down to the importance that such factors deserve in estimating the overall risk of the patent. Validity litigations are to some extent a gamble for even the best written patents. However, this does not justify that each patent transaction should be done at half the value to account for such risk.

Many practicing entities in the patent transaction world find the law of averages to be their best excuse of not knowing / wanting to know the various risks associated with the patent. They assume that most risks will disappear when considered for a large patent portfolio. I have come across some glaring examples of players in the transaction space defining a “per patent value” for a large portfolio and selling patents as if they were all the same. Such cases have become more prominent post sub-prime due to increased abandonments to save on maintenance costs. There is a high chance that the risks and rewards associated with such transactions may be sharply mismatched.

When the portfolios are large, a scrutiny at individual level might not be justified economically. However the chances of error can be reduced by doing two additional low cost studies. First, a quick and dirty ranking of the patents in the portfolio should be done using statistical scoring tools or expert assessments. Second, the portfolio should be categorized into broad technology domains to enable differential pricing.

Last but not the least; a second opinion does not hurt, especially when the first one is coming from an investment banker.

The Case for Better Administrative IP Management

Management of IP portfolios has undergone significant evolution in the past decade. However, this has been true more for strategic management i.e. treating IP assets as other business assets, keeping them aligned with business objectives, monetizing them, divesting them when needed and so on. Administrative management i.e. management of physical and online files, dockets, interaction with patent offices, external counsel etc, on the other hand still remains without a scientifically managed process in most companies. Due the nature of the administrative management, it has traditionally remained an activity that a few people in the legal department have done without much focus of the legal department managers towards ensuring continuity of operations and not really depending heavily on the specific individuals handling the tasks. This, however, is set to change.

The current economic environment has had an impact on the budgets of the corporate IP departments. Some departments have had as much as 30% budget cuts in the current financial year - some others are expecting a second round of cuts in a few months. This may also be due to sometimes prevalent perception of IP department being a 'cost center'. Tighter budgets are only one of the factors for progressive Heads of IP departments to start demanding efficiency and process for the administration of their portfolios. In some companies, the initiatives to move away from physical files or in general going paperless ('green' is in!) has led to a sharp increase in the workload of the personnel involved in the task. Bringing in the temp workforce has been a solution, but not without its problems. Temp workforce is known to have a lower accountability and require a closer day-to-day management, something which not all IP departments are able to provide. In increased workloads, whether using temps or otherwise, there is usually a lack of discipline in ensuring data consistency and data entry problems often abound.

Due to a lack of bandwidth to provide tight management, there is often a concern of wasted effort or duplicated effort. In geographically spread IP departments, a lack of a central command has led to concerns over quality, consistency and productivity of staff involved in handling of external communication. In many corporations with more than 300 patents, the docketing function in general can benefit immensely from being more efficient and reliable. I have witnessed a desire to establish better organization, reporting and continuity around the administrative support processes.

In addition to the need to improve the processes, the Heads of IP are also looking for ways to 'upskill' their IP administrators and paralegals. This is also true of law firms. It is not uncommon to see the desire in paralegals to enroll themselves in JD or equivalent courses and explore a career beyond just handling the paperwork. This leads to the need for addressing this HR issue.

One reliable solution to the problems mentioned above is surfacing in the form of sending part of the routine IP administration work offshore to destinations such as India, Philippines, South Africa or parts of Eastern Europe. This is not a new move; many of the largest patent filers such as Microsoft have been using India based providers of IP Support Services. There are several advantages of considering such outsourcing:

§         Cost savings due to labor arbitrage in lower cost locations. There are vendors who may offer the extremely low costs, however with IP, Quality is not something anyone would like to compromise - therefore, important to select vendors carefully.

§         Own staff can be up-skilled to perform higher level work; thereby reducing cost of tasks hitherto going to outside counsel, improving morale and tackling attrition.

§         Greater control of costs of outside counsel and tasks performed by the outside counsel. Some offshore based vendors also provide IP Billing Management that involves managing the invoices, properly coding them and loading them onto a database, some even manage the wire transfer of payments. It is sometimes surprising to see the lack of transparency that some organizations live with when it comes to managing outside counsel costs.

§         Introduction of a process, that is both repeatable as well as scalable, in tasks which do not involve custom thinking each time they need to be executed. Activities such as docketing (document filing) and form-filing (majority of paralegal's activity) can definitely benefit from thoroughly documenting, reengineering if required and tightly controlling through metrics. Some vendors which have international certifications such as the ISO 9001 can easily help in attaining such process-centric methodology for such tasks. This should not only help in making these activities person-independent but also present opportunities to optimize cost, remove necessary steps and attain greater efficiency.

50% of EU companies have no IP management Practices!

Startling, isn't it? More such facts at the Piperpat IP Audit Checklist


"50% of EU companies have no strategy for managing their IP rights beyond mere filing or renewal payments"

Need for a Standardized Approach for Patent Valuation

This article originally appeared in the Irish Times and aptly describes the challenges of valuing IP, specifically patents, and activity towards creation of standardized approaches for the same.

Source: http://www.irishtimes.com/newspaper/finance/2009/1005/1224255886330.html

A little knowledge can go a long way

EDWARD COOKE

Mon, Oct 05, 2009

Intellectual property is a valuable asset in the knowledge economy – but can firms determine its value?

ONE OF the main outcomes of the financial crisis and the global recession has been a drying up of credit. The ensuing search for liquidity has meant businesses are looking beyond tangible assets on their balance sheets and towards the value of intangible assets like intellectual property (IP), staff know-how or company reputation.

This switch in focus should be regarded as a natural progression as we move from an industrial-based economy towards a knowledge-based one.

Recognising this link between innovation and growth, it is appropriate to regard IP assets such as patents, trademarks, copyright and design rights as knowledge economy currency. How is this currency valued?

There are over 50 different approaches to IP valuation. That none of them have been adopted on any significant level is testament to the complexity involved and the varying goals of the interest groups behind them.

However, if IP and patents are to become a viable asset class, some form of transparent, credible and intelligible valuation standard is required. In business there is the notion that the value of a company’s IP is equal to the sum of its market value, minus the value of its tangible assets.

However, while market value and tangible assets can easily be expressed in monetary terms, this is where their similarity ends.

The market value of a company can change rapidly based on the confidence shareholders have in its future, while the value of tangible assets are determined under different factors by different buyers and based on transaction prices occurring in the past. Given this fundamental difference in value, it is not meaningful to subtract one from the other to determine IP value.

Indeed the bankruptcy of GM has not led to a decrease in the value of its IP. However, there was a concern over IP ownership if the firm did not retain a major shareholding in Opel. Splitting the IP between the firms would be a terrible dilemma.

If the value of IP cannot be so easily computed, how difficult is it to value an individual patent? Financial accounting provides us with three theorems for valuing assets. Market value indicates the price of the asset based on the going rate for similar assets. The obvious problem is that a patent provides a certain market monopoly, and therefore it may be difficult to identify similar assets for comparison. While cross-licensing and auctions try to identify a price, this is rarely regarded as an objective one.

Alternatively, cost valuation uses the expenses generated during development, eg RD, fees for filing and renewal. However, this suggests a patent can be replaced or a new one developed using certain ingredients. Clearly, the value of innovation is more than the sum of its parts. Probably the most relevant approach is that of income value, which uses the projected value of the total monetary gain for valuation.

In certain circumstances this is a viable approach, as patents have a predetermined life cycle and if the income during this period can be computed, a value can be assigned. This is probably most apparent in the biotech and pharmaceutical industries, in which exclusive rights to sell a drug or medicine can be valued in billions. However, it is widely recognised that this approach is not suitable for all patents, and furthermore is a labour-intensive, costly and complex approach.

Despite the lack of clear valuation methods, corporations like IBM and Qualcomm generate huge amounts of revenue from the successful licensing of IP. Less well known is that IP is being used as collateral for securing credit and being auctioned. A number of Asian banks offer IP-backed loans.

In 2006, the Bank of Communications in China started offering loans of a maximum of 10 million yuan (€1 million) with a maturity of three years to certain SMEs. Patents, utility patents or trademarks could be used as guarantees. By the end of 2007, they had provided 300 loans based on 700-plus patents at a total value of 6 billion yuan. Also in 2006, the Development Bank of Japan accepted patents, patent applications and copyrights as collateral, and approved 250 loans. Probably the most substantial barrier to more banks providing IP-backed collateral loans is the extensive analysis they are required to perform for valuation. In an attempt to rectify this, the Initiative Finanzstandort Deutschland, which contains representatives from a broad spectrum of the German financial sector, has recently announced that it is working on patent valuation guidelines for banks.

In the IP auction arena, the biggest stakeholder is probably Ocean Tomo, which organises auctions and provides valuations for IP. The money raised depends on the quality of the IP and the market liquidity available. Last October, over US$12.5 million (€8.57 million) was raised on 48 lots, while at their last auction in March they managed to sell only six of the 80 lots of patents, generating US$2.9 million.

With vast quantities of IP churned out of multinational RD departments and only a fraction ending up in products, some of these normally closed companies are embracing “open innovation”.

Microsoft set up its IP Ventures group in 2005 to license its superfluous IP to entrepreneurs across the globe, and its collaboration with Enterprise Ireland has recently been cited as being one of its most successful.

Such collaborative schemes involving IP have the potential to generate valuable new revenue streams within economies.

It is apparent that the valuation of IP assets is more complex than tangible assets. However, it is also apparent that IP represents an untapped source of credit. Recognising these issues, the European Patent Office released in March the free software download IPScore, which enables users to analyse the value of individual patents using a multitude of different factors.

Independently, what might be regarded as an IP valuation community has started debating what would be required of an acceptable valuation standard.

The consensus is that it must define a glossary of terms; a definition of what should be in a valuation; an indication of the valuation’s context; the entry-level knowledge requirements for IP valuators, and a code of ethical behaviour. Whatever the outcome, now is the time to assess whether your company is getting value from its IP.

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Dr Edward Cooke is a patent examiner at the European Patent Office

© 2009 The Irish Times

Patent Scoring for Protection against Patent Trolls

A large number of companies are suffering from the Patent Troll menace. In a recent news item, titled "Local firms suffer patent suits", several Korean majors such as Samsung and LG have been reported to be among the top victims of offensive suits by Patent Trolls.

One way for large corporations to protect themselves against patent trolls may be to preempt such an attack. A reliable and tested patent scoring methodology may be able to provide the top 3%-5% of patents in a classification, say the US Classification (USC). This will enable an analyst to discover the assignees of those patents. Such an analysis should result in the identification of holders of key IP in a given area.

As an example, I have been reading about the Typhoon Touch Technologies patent US5,379,057 being used for suits against a whole lot of companies such as Samsung, Nokia, Motion Computing Inc., Electrovaya Inc. and Xplore Technologies Corp., Apple Inc., Fujitsu Computer Systems Corp., Toshiba America Information Systems Inc., Lenovo (United States) Inc., Panasonic Corp. of North America, HTC America Inc., Palm Inc., Samsung Electronics America Inc., Nokia Inc. and LG Electronics USA Inc.

Upon querying this patent in a scoring system developed by my team, I discovered that is a very highly scored patent with a score of 69.04 according to our system. This places the patent in the top 3% of the patents in its US class (all digits) and the patent's score is more than 2 standard deviations away from the mean. Such a company and the patent could have been uncovered in a periodic analysis of the key areas of practice for the company.

This is just one of the potential use of a patent scoring mechanism. As they say, better safe than sorry, and that appears to especially true when dealing with the Patent Troll menace!

Andrew Ramer's new company: Marqera

Andy Ramer, the well-known ex-leader of Ocean Tomo auctions has formed a new company, called Marqera. He is joined by ex-colleagues Nicole D'Hondt, David O'Steen from Ocean Tomo and Joe Kessler, Sharon Dayan from Global Technology Transfer (GTT).

The underlying theme of the company's services can perhaps be sensed from the following snippet from their website:

"For years, companies have been investing billions of dollars in creating, prosecuting, and maintaining their patent portfolios. They are now at a point where these portfolios must generate revenue and a return on that investment, through sale, license, or other creative structure."

Whether the company is successful in creating a new platform of commercialization of IP remains to be seen. This blog wishes Marqera all the best!

Pluritas Conducting a Patent Auction of GPS related IP

Pluritas did a press release (click here) about an auction of a patent portfolio related to GPS emergency locator patents. The broker seems to have discovered quite a good portfolio.

My team at work invested about 18 months researching and building a methodology for evaluation of patents and patent portfolios. The table below shows the scores of the portfolio being auctioned (best guess using assignee/inventor searches, as the press release did not mention the patent numbers)

4 of the 5 US patents are 98th percentile or higher among comparable patents with exceptionally high scores.

It remains to be seen how much value does this portfolio fetch. Guess we will know in a few weeks time.

Patent Monetization: Why even bother?

That IP in general and patents in specific occupy a significant importance is much talked about. How much is generally a question that is avoided. The figure above, based on Ocean Tomo's research, shows that Intangible Assets comprised about 75% of the market capitalization of S&P 500 companies. About 22.5% of the total market cap has been attributed to patents which is about 1/3 of all value attributable to Intangible Assets.

In an economy where about 1/5th of the valuation that most companies, especially those in 'knowledge' based industries, derive is due to patents - their monetization is not just a matter of choice anymore. It is a matter of shareholder responsibility.

Global Patent Congress 2009

This author is attending the Global Patent Congress 2009 in Copenhagen, Denmark starting tomorrow (September 22).

The conference agenda promises to touch on several aspects related to Optimization of patent portfolios - some of the key sessions include:

Day 1

1. Building your Internal IP Organisation to Drive Market-based Innovation to Support Business Goals

2. Managing your Portfolio Value by Capturing your IP Market and Strategic Value

3. Expanding your Market Share by Negotiating & Marketing IP Licenses Globally

4. Extracting Value from your IP Portfolio by Integrating Market-Oriented Evaluation to your Licensing Programs

5. Strategic IP Management in a Global Corporation

6. Reviewing your Geographical Protection and Enforcement Strategies to Minimise Risks

Day 2

1. Building & Merging Patent Portfolios to Align IP Assets with Corporate Objectives

2. Using IP Portfolio Management & Divestiture to Maximise the Business Value of your Patent Portfolio

3. Leveraging your Patent Portfolio to Monetise your Portfolio and Strengthen Competitiveness

4. Managing your Portfolio Value to Maximise your Long-term Market Strength

5. IP Portfolio Management, Portfolio Optimisation and IP Strategies in Emerging Markets

6. Increasing the Value of your Patent Portfolio by Balancing IP Costs and Potential

Watch this space for updates from the conference.

OptiSourcing - Optimization and Outsourcing of Intellectual Property

The crash of the captial markets and the failure of banks leading to a severe liquidity crunch may be remembered for several things. However, the one good thing that this 'recession' will be remembered for is the rapid adoption of best practices by corporations across the world.

This blog is about the evolution of the practice of intellectual property creation, management and exploitation due to the changes that corporations, law firm, and private practitioners are facing.

The two key themes that will impact IP management, both administrative and strategic, will be Optimization and Outsourcing. Optimization broadly covers practices and initiatives toward

• Rationalizing costs of IP creation and management
• Strengthing of patent portfolios by ensuring an alignment with business objectives
• Monetization of intellectual property including patents leading to a self sustaining IP department, and
• Emergence of patent portfolios as real weapons (for defensive and offensive purposes) in a corporate strategists arsenal

Outsourcing, especially offshore outsourcing, of administrative tasks and activities in the IP department of corporations is fast becoming a reality. Several multi-national corporations have tied up with providers of IP Support Services located in low cost locations such as India, Philipines and South Africa to address their needs related to:

• Patent and Trademark paralegal work
• Management of dockets related to patent prosecution, management, and litigation
• Proofreading of patents
• Illustrations within patent applications
• Billing Management and management of payments to outside counsel

This blog will cover strategies to achieve OptiSourcing, examples of successful "OptiSourcers", common pitfalls and best practices. Reader feedback and sharing of their experiences is also welcome.