Tag:  “IPR”  | (4) posts

The global IPR transactions market

The global IPR transactions market

 

Recent comments in Swedish business press point at the lack of a functioning marketplace for IPR and the need for governmental and industrial intervention in the process of commercialization of innovations and intellectual property. However, I feel there is a clear need to increase the general understanding of how a ”capital market” functions and the fundamental demands that must be met for a market to exist and fulfill both buyers and sellers and therefore serve its purpose.

IPR are no uniform “goods” on a traditional “market”
A ”market” arises first when both a buyer and a seller exist for a ”good” which can be defined in a clear and exact manner. Beyond that, the ”good” must be transferable and the right of ownership must be able to established and recorded. The price for the ”good” must be decided by joint agreement between buyer and seller and both parties based on their own perceived value of the “good”.

A fundamental demand for a functioning market is that the ”good” is clearly defined and that units of the ”good” are as uniform as possible. A class B share of Volvo is the same as all other B shares in Volvo. A barrel of crude oil contains the same amount of oil in Chicago or London or Amsterdam. In addition, a well functioning market shall have a good measure of transparency and frequency of transaction/turnover in order to allow all parties to realize a gain or reverse a position if they desire to do so. Under such conditions both the seller and the buyer can be confident in what they are trading and the ”good” is easy to set a price for since there is transparency and one can observe similar transactions.

Intellectual assets (IPR = granted patents, trademarks, designs and even domain names) are by their very nature not uniform. They do not function well as a ”good” used for quick deals on a traditional market. To call after help and strong measures from Swedish politicians and industrial owners to establish a ”marketplace” for IPR is naive and can easily lead to confusion and mistaken counterproductive initiatives.

Nortel’s patents sold in a box
If we focus on granted patents as a subject for this discussion, it is clear that they have different strengths depending on, among other things, their age, how often they are cited by other patents, their area of technical innovation, how well they cover a method or a product and if they generated a revenue flow through a license. In other words, all IPR are not of the same quality. They fail the test for uniformity or fungibility. It is not correct that all of Nortel’s patents were equally good or that the price per patent sold was 2.4 MSEK. On the contrary, a few nuggets of gold were blended with many patents of lower caliber. But all were sold in a box to the party that bid highest at the auction. In that case it was the consortium led by Apple that bid higher than Google and several other companies. Now that the Nortel portfolio has been sold, the majority of the patents will most likely not come out on the public market again for strategic reasons. The consortium is now more or less married to their purchase. Here the process fails the test of frequency of transactions and pricing transparency.

The history of an IPR transactions market
A bit of background on the IPR transactions market can be instructional. Patents have traded hands since the beginning of patents themselves; often secretively and without a trace in the public view. This was very inefficient as a market and served both buyers and sellers badly. Patent auctions for high quality assets were created to improve market functions and have existed for several years with Ocean Tomo’s Live Auctions as the guiding star in the market until the finance crash of 2009, when a lack of liquidity undermined the market and the auction team was disbanded and sold to a ”money and commodities broker” in London.

For several years there have been initiatives to start an IPR market with the intent of listing all granted patents on a ”marketplace” (preferably web-based) and let interested buyers find and bid on chosen patents. Several web-marketplaces exist with enormous lists of IPR that is for sale. Conceptually this may be attractive but in practice it has not worked out. The reason is simple. Professional buyers of IPR (industrial users and financial investors) have certain demands for information concerning the legal aspects of IPR. For instance, who is the actual owner of the patent and if there is a clear ”chain of title” without any unfulfilled covenants or missing payments. Since many companies may not want to reveal, for strategic reasons, who they have licensed a technology to or from, it is often difficult to verify license revenue flows from a patent. That makes it difficult to use the DCF method (Discounted Cash Flow) to estimate an IPR ’s value. Buyers don’t have the time to waste searching for this type of information. Such markets fail to meet the needs of both buyers and sellers and have not been successful.

Fulfilling the price transparency requirement for a functioning market as it is traditionally meant, places to high a demand on IPR as a tradable ”good” that is neither uniform nor fungible. Not to mention that correct information about possible patent infringement from products is enormously important for price development and value perceptions. It is not easy to establish these ”facts”, and they are often not clear until after a legal process and judgment, which can itself take several years and cost a fortune. It costs time and money to analyze an IPR portfolio. The ”due diligence” processes that Nortel’s and Motorola’s portfolios went through took months to complete. It takes a long time to analyze if a patent matches a potential buyer’s business, product and legal strategies. Thereafter, the management must also request and allocate funding from the corporate budget. So, in a traditional sense the market for IPR cannot be compared to other markets like those for commodities or commercial property. Trying to create a market for IPR or “innovation” by political force will only lead to a dysfunctional market that is ignored and will be perceived as a destructive invasion of the state into the private sector.

IPR are part of the international stock markets …
In fact a liquid market for IPR assets exists already today. That is shown clearly by the few deals that have been seen in the media recently. The ”IPR market” is actually part of the well-established international stock markets where one can buy and sell shares in companies like Motorola, Nortel and Interdigital. It is today an accepted fact that during the last three decades a shift in the relative weights of assets on balance sheets has occurred in the majority of technology driven companies. From a weighting of 20 % IPR–80 % hard assets before the 1980’s it is now common with an 80 % IPR – 20 % hard assets weighting. (Source: Ned Davis Research among others).

If you want to buy an attractive IPR portfolio held by a competitor today, you can put a bid on the entire company where these IPR assets are found undervalued and then ”strip the assets”. That is precisely what the Motorola deal was about, and it is not unusual today that corporate raiders and M&A deals are based on IPR. To yearn for political initiatives to create markets and tax breaks to promote IPR based deals to promote innovation can easily lead to a ”Pandora’s Box” experience and twist markets with very unexpected results.

… and the IP Broker market
Today there is also a well functioning ”IP Broker” market that takes care of many IPR portfolios continuously. These portfolios can be made up of one or several hundred IPR, but they must go through the same process steps that the Motorola deal did, even if they do not have the same dignity or size.

Low prices for patent applications
The market that does not function well today is the market for patent applications. It is unfortunately true that a patent application is just that – an application. It has no legal standing and can not be enforced until it reaches granted status. For any number of reasons they can be shot down by the relevant patent office or remain bound up in long challenge actions initiated by competitors. Selling a patent application is merely transferring the financial risk of the application process from the seller to the buyer. Few buyers are willing to pay much for high-risk assets that also require payments to maintain them until they are granted. Therefore, prices are usually very low for applications. Other paths for monetization are necessary to help or clients with applications.

Licensing portfolios and new industries
Even if I agree that there is a need in Sweden for politicians, industry, universities and even the law to promote research, innovation and patenting in order to secure the nation’s future welfare and growth, there is no direct link between the number of patent applications and their quality or likelihood of reaching granted patent status. It is only truly good innovation and discoveries that lead to strong patents which lead to strong revenues and high values. And we don’t necessarily need to sell our ”precious metals” for short-term financial gains. A concerted strategy for building licensing portfolios and new industries is what is important – the market can and will take care of itself.

Matt Miskimin, Intellectual Asset Manager

EU survey now open for participation

EU survey now open for participation

Every two years the European Commission conducts a survey in order to identify the most important obstacles met by EU citizens applying for and enforcing intellectual property rights in countries outside the EU.

The 2010 survey is now open and anyone may participate using the online questionnaire found here.

The results of the survey together with data from other sources, such as customs authorities, will be compiled into a report identifying the countries where the problems encountered have reached “worrying proportions and are seriously harming EU right holders”. This will help The Directorate-General for Trade to prioritize its efforts and to identify countries with which the cooperation on IP should be strengthened.

In the last report published in 2009, which was based on the 2008 survey, China once again came out as the highest priority country regarding IPR enforcement, not least because 54% of all suspect goods detained at EU borders at that time originated from China. This was not much of a surprise. But western countries such as Israel, Canada and the U.S.A. were also to be found on the list. Israel and Canada amongst other due to deficiencies regarding pharmaceutical-related IPR issues and the U.S.A. i.a. for disrespecting WTO dispute settlement decisions.

It shall be particularly interesting to see whether the efforts of the Chinese government, which include the enactment of a new patent law and a new trademark law as well as a reform of the court system in IPR related matters, have had enough of an impact for them to hand over the top of the list to somebody else. The fact that in 2009 China’s share of goods seized at EU borders rose to 64% does not promise well.

The survey is open until 31 October and the report may be expected in the fall of 2011.

Vibeke Warberg Rohde, European Patent Attorney, Awapatent

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IPR2 to strengthen the Europe-China IPR relationship

Last month, the EU-China IPR2 Project, focused on enhancing the enforcement of IP rights in China, was introduced to representatives of European industry, the national patent offices and European intellectual property experts by the European Commission and the European Patent Office (EPO). Few would question the importance of their agenda, but I would like to acknowledge the progress that Chinese IPR has already made in recent years.

Actually, of the IPR cases settled in Chinese court during 2007, no less than 3/4 had an outcome in favour of the IP owner, regardless of the nationality of the plaintiff. Implemented as late as 1985, patent law is still young in China but I think we should have faith in the country’s remarkable ability for change and development. Just consider the numbers: it took 15 years for SIPO to receive its first million patent applications but when they passed the four-million-mark late last year, the last million had been filed in just 18 months*.

The EU-China IPR2 Project is in itself quite interesting. In many aspects, Chinese IPR law is already shaped with Europe as a model. Now, for four years and with an investment of more than EUR 16 million, enforcement of IP rights in China will be improved through a project partly managed by EPO. The project does not address legislative changes but will provide technical support to, and building the capacity of, the different levels of the Chinese legislative, judicial and administrative authorities to help improve their effec-tiveness; as well as improving access to information for users and officials and reinforcing support to right holders. This all is very welcome and for us European-based IP Attorneys with an interest in China it is of extra interest to know that much of the expertise in this development is drawn from our region.

Of course, when it comes to China, changes are many and often dramatic and even more will happen during 2008, at least judging from China’s IPR Strategy Action Plan for IPR Protection for 2008 which was announced at the end of March. This plan contains 10 aspects including 280 concrete meas-ures relating i.a. to legislation, law enforcement, training and public awareness-raising activities. So keep your eyes open and stay updated.

* This number includes all three types of Chinese patent rights: inventions-creations (protecting any new technical solution relating to a product, a process or improvement), utility models (protecting any new technical solution relating to the shape, the structure or their combination of a product, which is suitable for practical use) and designs (protecting any new design of the shape, the pattern or their combination, or the combination of the colour with shape or pattern, of a product, which creates an aesthetic feeling and is suitable for industrial application).

Maria Stenbäck, European Patent Attorney

“It depends!”

A week ago I got a telephone call from a potential client asking me to generally suggest the royalty rate or price for an intangible asset. My immediate attorney answer in this case (which, by the way, would be the same in any other similar case…), was not the one wished for, namely: “It depends.” And it does.

The price/royalty and the value of an intangible asset are interlinked. Usually, the value of an intangible asset is calculated by reference to a royalty under a license (which can be an actual or hypothetical license). A license is simply an agreement, whereby the proprietor (the licensor) grants the rights to use an asset to a licensee. The royalty rate is then the price or rent for this use, reflecting e.g. the rights and obligations of the parties (licensor/licensee), the risks assumed by each of the parties, the real or potential value of the rights and obligations transferred to the licensee.

However, the business context of the valuation and the royalty rate is not always understood. In considering acquiring or licensing an intangible asset, a company would weigh up certain options. Broadly speaking, the various technology acquisition strategies may be:

  • internal exploitation, i.e. create a similar asset itself. (what would it cost to create, recreate and/or design around the asset?)
  • acquiring the asset (what is the price of a similar asset?) 
  • licensing-in the asset (what is the royalty to licence in the same asset or a similar asset?)
  • do not acquire or license the asset at all (what profits would be given up if the company did not acquire or license the asset?)

Each of the above-listed approaches can, and should be, used either to determine the value of the intangible asset or to determine the royalty rate. As with any IPR valuation, the quality of the resulting outcome of the valuation depends on the level of exactitude and insight in the underlying analysis. By now, you might note that valuation of intangible assets is not a very easy task! A proper valuation not only requires knowledge about specific valuation methodologies, it also requires a deep understanding of the asset to be valued, and of the market, and not the least the context in which the valuation is to be performed, etc.

To make things even more complicated, note that while the statement “The price/royalty and the value of an intangible asset are interlinked” above is correct at a general level, this link also depends on a number of parameters, for example, whether one discusses the value for the owner of the intangible asset or the potential acquirer of the asset. For example, an intangible asset may be, in principle, worthless and a cost driver for an owner but constitute a real business opportunity for an acquirer. How should the price/royalty be determined in such a case ? Again, the answer is probably: “It depends”.

The Black & Scholes model for evaluating options has gained wide spread use in the valuation of patents. This model is a mathematical model of the market for an equity, in which the equity’s price is a stochastic process. The value of the equity, i.e. the patent, increases the more volatile the environment is, for example, the value of a patent within a technical field experiencing a fast development will probably increase. This model gives an approximate value, which is as inexact as the approximations made in the model, but at least it gives an objective value. The option market functions due to the fact that there exist a commonly accepted model for valuating the equity. The approximations used on the input side will though vary – otherwise no market would exist. In light of this, the market for valuation of IPR would probably benefit from accepting a model for the valuation process.

So, if you are still pondering about the price of an intangible asset my immediate answer would still remain the same: It depends. This answer would remain so at least until we meet and define the framework for the IPR valuation together…

Christian Arkelius, Patent Attorney