EDITORIAL NOTE: Erich Spangenberg, will be speaking at two upcoming industry events. First, he will speak at the IAM Patent Law and Policy event in Washington, DC on November 17, 2015. Second, he will speak at IP Dealmakers in New York, NY on December 7-8, 2015. IPWatchdog.com will be at both events.
The patent market—and I disagree with those who argue that there’s no such thing and that patents are not an asset class—had an amazing bull run from the late 1980’s through 2012. The peak was 2011 to 2012 when we saw a number of multi-billion dollar patent sales and patent-driven acquisitions.
Nortel sold 6,000 patents to the Rockstar Consortium (Apple, Microsoft and others) for $4.5 billion. Google paid $12.5 billion to acquire Motorola Mobility in a deal driven by Motorola’s 17,000 patents. Microsoft—with Facebook—paid over a billion dollars for 925 AOL patents.
The patent market started slowing down substantially shortly thereafter. Many blame the America Invents Act (AIA) in September, 2011 for the downturn. The AIA introduced a variety of ways to inexpensively challenge the validity of patents in administrative proceedings at the patent office. All of a sudden the confidence that once a patent was issued it was valid was shaken.
However, the AIA was only part of the problem.
The origin of the current market malaise actually lies earlier — with some large tech companies aggressively lobbying Congress and the judiciary dramatically changing the rules. This started to become apparent in 2006.
Give Google credit. It made patents a populist issue and was successful in getting the AIA enacted. Google and the rest of the anti-patent “big tech” mob came very close to getting even more drastic reform enacted this past spring. Big tech used small companies hit with abusive lawsuits as the “poster boy” to push through changes that do far more to help big companies efficiently infringe “little guys’” intellectual property than they do to prevent abuse. The market is still struggling to adapt to the rule changes that were pushed through in the AIA.
The eBay ruling effectively ended the availability of injunctions to block the continued sale of infringing products or services. Companies could keep making money from infringed IP, and pay for the privilege later rather than sooner. Or maybe pay never. Welcome to the dawn of “efficient infringement,” when companies consciously and confidently decide to infringe patents rather than seek a license.
The KSR decision made it easier to invalidate a patent on the grounds of obviousness. The test for obviousness was vague and it made for the further inefficiencies in litigation.
More recently, we’ve had the 2014 Supreme Court decision in CLS Bank v. Alice Corporation, calling into question the validity of many computer-enabled patents. The test announced in Alice is so vague that it could invalidate almost any patent and has been used by more than a few judges as a very effective docket clearing mechanism.
The Patent Market
As in any downturn, transactions continue to happen. But we’re not seeing the billion-dollar deals or the same prices for patents we saw in 2011-2012.
According to some, transaction volume has stabilized, but I haven’t heard anyone claim that prices have stabilized.
A quick survey of publicly traded IP companies demonstrates that the equity markets aren’t the least bit enamored with their business models. Most public IP companies, including Marathon Patent Group (MARA), Acacia Research (ACTG), and Vringo (VRNG), are trading at or near 12-month lows. A few companies that are patent-reliant but not pure licensing companies are doing a little (but not much) better – Qualcomm (QCOM) and RPX (RPXC).
Waiting for the Thud
We’ve not yet heard the “thud” of the market hitting bottom. Once we see a large patent portfolio or a large aggregator sold for a fire sale price we can look for the start of a recovery. Meanwhile, the patent market is still searching for the bottom. It feels close, but it is simply not there yet.
One ray of hope that suggests we may be in the darkness before the dawn is a recent (September 17) decision by the Federal Circuit in the global thermonuclear patent war between Apple and Samsung. The latest Apple v. Samsung decision makes it easier for a patent owner to get an injunction under the onerous eBay factors. The Supreme Court has also agreed to hear two cases that are widely expected to make it easier for patent owners to collect enhanced damages related to willful infringement. We hope this signals an end to the Supreme Court’s seeming anti-patent bias reflected in earlier decisions.
Despite this generally pessimistic view of the patent market, many of the large funds that I regularly speak with are looking to put capital to work in the patent space.
Many investors believe the stock market is nearing the end of a very good run. As a result, smart money is looking for “non-correlated investments” – investments that go up or down independent of the trends in the overall equity and debt markets.
Patents are a potential option for capital in search of non-correlated investments. The market may not have quite bottomed out, but it feels close. The question is what patent-driven business models the smart money will find attractive – or whether money will flow to new models not yet fully developed.
Models for Investing in Patents
Pure licensing is difficult in the US. Infringing companies have little motivation to simply take a license to patents they are using. The judiciary is making significant efforts to show Congress that the judiciary can handle reform without further Congressional action. Even if Congress does not enact new patent “reforms,” the judiciary is creating enough uncertainty to give capital pause.
The AIA’s inter partes reviews and the Supreme Court’s Alice decision lead many infringers to conclude they’re best off taking their chances on litigation. Add a political environment that is hostile to “non practicing entities” and, by extension all patent owners, means it will be a while before licensing models are attractive to new capital.
While I hear many extolling the virtues of the EU and the promise of the Unified Patent Court, there are many open issues. The Unified Patent Court doesn’t exist yet – it hasn’t yet been ratified by all the relevant countries – and it will also mean that a loss in one court is a loss in all of Europe. The sword cuts both ways. And since Europe is on a “loser pays” basis, where the loser of a patent lawsuit pays the other sides’ legal fees, a few negative experiences for patent owners could dampen the enthusiasm for Europe. Without a track record, capital is likely to be suspect of the EU model.
Litigation Financing, IP Lending and Aggregators
Litigation financing, an indirect patent play, is getting crowded and isn’t likely to attract new capital for a new entrant. IP lending is dominated by one huge fund that has a low enough cost of capital that it’s going to be difficult to compete with. Given the performance of the largest aggregator, aggregator models will not come back for some time.
Another indirect patent-related investment is in companies that provide patent analytics. One big problem here is that most of the products offered are not particularly good. The best ones aren’t publicly available. The number of people willing to pay and the overall size of this analytics market are not likely to attract significant capital.
Patent Sale Exchanges
There are also companies promoting exchanges and improved broker models for patent sales. Great idea, except now that there’s a free service coming on line that’s both simple and elegant, this transaction model is not likely to attract capital.
Traditional infringement insurance is a crowded field and not one likely to attract meaningful capital. A recent offering in the market is going to drive pricing and margins way down. There are alternative insurance-like offerings that have the potential to attract capital.
New Business Models?
With the patent market nearing the bottom and the stock market nearing the top, smart money is looking at patent related investments. Still to be determined are which existing business models will be the winners and which new business models may emerge.
No asset class is immune from downturns—we got spoiled. The patent market will come back.