The Changing Landscape of IP Investments – A Conversation with Abha Divine

Abha Divine speaking at the 2014 IP Dealmakers Forum.

Abha Divine speaking at the 2014 IP Dealmakers Forum.

Abha Divine is the founder and managing director of Techquity Capital Management, which is an IP investment firm that partners with IP owners to help them deploy their assets into untapped markets to broaden their reach and increase liquidity.

Divine will speak on a panel at the 2015 IP Dealmakers Forum in New York City on Monday, December 7, 2015. In advance of this she agreed to a conversation on the record, which took place on Monday, November 30, 2015. We had the opportunity to discussing the continually changing IP investment landscape. As you will read below, there were reasons why deals used to focus nearly exclusively on the number of patents transacted. Of course, that changed in the wake of recent substantive patent law changes. The focus of deals, at least those that were being done over the last several years, was quality. But now we are starting to see the marketplace value quantity again, but not at the expense of quality.

Without further ado, here is my conversation with Abha Divine.


QUINN: Thank you, Abha, for taking the time to chat with me today. I really appreciate it.

DIVINE: Certainly; happy to speak with you.

QUINN: I know you are going to be speaking on a panel about IP investment at IP Dealmakers, and the title of your panel is From Evaluation to Exit, which is a pretty wide open topic to be taking on in just a little bit over an hour. Perhaps we can start with a little bit of a preview as to what you want to talk about in New York?

DIVINE: Sure. Well, you’re right it’s a pretty broad topic and then in addition to that one of the things we are hoping to I think cover in the panel is the wide range of IP investment categories. I think a lot of times you go to these kind of conferences and the discussion centers on patents. Certainly, those will be on the agenda and part of the conversation, but we have people who invest in all types of IP — whether it be traditional tech IP, copyrights, and pharma/biotech areas; we also will be discussing different structures such as lending or financing, securitization, or other models. There’s just a wide range of expertise and experience on the panel and I think that’s going to make for an interesting mix. If you think of it from that context it’s not only what do we as one of many investors in the patent IP space with regard to our diligence and management of investments from pre-investment through exit, but how does that compare and contrast with the diligence and management approach in different IP asset categories. So I think we’ll be looking at what ties these types of assets together, what makes them similar and what makes them distinct and different and interesting from an investor point of view with regard to characteristics like risk profile, timing and investment horizon, and the like.

QUINN: So what is the risk profile for patents at the moment? I know that’s a big, broad question and patents aren’t some kind of single entity. I know you have portfolios that would have a software bent and ones that might have a medical device bent, but is there a bias away from certain kinds of portfolios at the moment and how would you compare a patent portfolio compared to say a copyright portfolio?

DIVINE: I do think it’s a changing landscape. I think on the one hand you have more sophisticated investors that understand the asset class and understand the characteristics of the cash flows and risk, for example, that are different from traditional venture kind of investment where it’s a larger upfront investment typically, maybe a series of some follow-on investments and then an exit that’s essentially through an IPO or an M&A transaction. So it’s many years until you see cash flows or returns. Whereas, I think in a lot of IP asset investments investors are looking for characteristics that make it more of an ongoing cash flow sort of business; in that regard even patents have some interesting behavior. If you think of licensing campaigns that cover a broad enough industry to have multiple participants, long-lasting importance in those industries so that it’s not a one-year or a few-year kind of license, but one that will span some long period of time you start to build something that looks more like an annual and more traditional sort of cash flow behind the asset and that can be very interesting. At the same time, investors have to understand that steady quarterly or annual cash flows take time to develop and you simply shouldn’t expect the steadiness seen in some other IP investments. Again, for investors that are looking to manage volatility in returns or simply because they have certain return requirements year after year, perhaps as a pension group or something like that, IP investments may give them many of the characteristics they seek. I think that’s one aspect that makes IP an interesting asset class. Copyrights, music royalties, those clearly have those types of characteristics. Pharma royalties typically have had those kind of characteristics in the past. And I think patents can sometimes have similar characteristics, depending on how licenses are structured in the given industry. I think that’s useful and interesting to note.

The other part of your question was how has the landscape been changing or what is the landscape today? Are people investing in certain things or not in others in terms of patents? Again, because there has been a growth in this part of the industry, in this investment sector, we have room for a lot of different strategies, and I know that there are firms out there that look for what might be considered traditionally ecommerce, software sort of assets and then there are others that are looking for hardware and device sort of IP. And still others are looking for process sort of IP on the semi-conductor side. What’s kind of interesting to note is that firms naturally specialize, typically to reflect the operating background or experience of the team because if you’re going to invest in patents you need to understand the market and the technology well enough, and not spread yourself too thin. At the same time we’re seeing a lot more financing options around IP which is, I think, also a good thing. It further underscores this is a real asset. People have spent money, time and resource to establish an innovation or invention and it increasingly can be used as a source of capital, whether for growth or other expenses that a company might have in their normal operations. So I think there are some interesting models evolving beyond simply litigation finance.

QUINN: This is an interesting time, I suppose, to be in the patent business in particular because I don’t sense that there’s quite as much unrest in the copyright realm. Would you agree?

DIVINE: Well, I’m not an expert on the copyright side, but I follow it at a high level, and I think that there is a little bit of uncertainty because of this pre-1972, post-1972 royalties issue that has come up as online streaming and distribution sites have grown in popularity. So I think perhaps not as tumultuous as the patent side where we’re seeing the growth of new challenges like IPRs and activity in each of the branches of government here in the US, as well as an increasingly active international courts. I don’t know if it simply feels more volatile to those of us on the patent side or whether it truly is more volatile than say the copyright space.

QUINN: From my vantage point it seems to me that the property owners are always looking for their way to get paid on the copyright side, which is completely legitimate. And every time you have a shifting technology landscape and with every new iteration of technology you have to go back and look at your licenses and see what do they cover? Do they cover this or do we have to pay for that? And that doesn’t strike me as the same as what’s going on with patents at the moment because the biggest problem with the patent industry at the moment really is should these things even exist? You know, with software, with genes, with medical diagnostics. And if you were to take those three areas out and say okay, you can’t get patents on them at all anymore, which I know we have not done yet, although at times it sort of feels that way, but if you were to prevent patents in those three areas you really would cut out a whole lot of innovation.

DIVINE: I think one of the really interesting factors that differentiates music copyrights, for example, and the patent space is the point you started with, which is people who own these copyrights expect to get paid and the unspoken part of that sentence is that people who use the copyrights aren’t surprised to have to pay for that property right. So there’s this kind of underlying acceptance that there is creative work that has been undertaken, it has a value and now we just need to go about the process of figuring out how mechanically or otherwise we’re going to account for that right. And I think in the patent world it’s an even more fundamental issue than the categories you listed. I think there’s a fundamental component of the industry, for self-serving reasons, that would like to treat innovation as something that just appears in the air and shouldn’t be compensated. From my perspective an invention is no different than a hard good that is the input to the manufacturing of a product. If you’re going to make a chair, you’re going to have to go get wood from someplace and upholstery and whatever else and nobody bats an eye at the fact that there’s a line on their cost of goods sold that says we had to buy lumber. But there seems to be this visceral response to having to pay for the contributions others have made to enabling various products in the marketplace.

QUINN: You know, it’s interesting that you put it that way. I think that you are exactly right. There’s this viewpoint that innovation exists and when the patent is granted you are taking something away from the public domain rather than adding something to the public domain and that really doesn’t seem to be the same thought process on the creative side in the copyright industry. And, I was just sitting here thinking about — and I was trying to recall how this argument played out during the Myriad case where I know one of the situations was — one of the examples was about a baseball bat. Well, the baseball bat’s wood. The bat has always been there, you just cleared the wood away from the bat. And that was just a crazy, specious argument because no, the bat was created. The bat wasn’t always there. If the bat were always there you could say that about a sculpture. The sculpture has always been there, it has just been hidden in the rock. In the context of an artistic endeavor, like a sculpture, saying the sculpture has always been there in the rock is laughable, but when you say it in an innovative context reasonable people seem to think is makes sense. Who are you people? And the other thing that I think is also wrapped up in all this to some extent is even if we were to admit that the innovation was going to happen anyway, the whole goal is to have innovation happen quicker by incentivizing people to do this. We don’t just want innovation to trickle out. We want people to aggressively seek to innovate so that then they can come up innovative solutions faster, which allows others to then stand on their shoulders, or to try and engineer around them, and that’s how the whole system operates.

DIVINE: Absolutely. And, you know, because I’m not a musician, I’m going give you a really absurd example in light of what you were just saying about people suggesting that the invention was always there and anyone could have thought of it; I hear that argument from time to time, too. These people will say ‘someone would have stumbled on this if it had not been for this person, it would have been this other person’. And I think you can illustrate the absurdity of that argument by applying it to music and say ‘well, music as just a series of notes, and someone could program a computer to put together every possible combination of notes and you’d have come up with every song there ever is’. But, rational people would never suggest that somehow every song already exists.

QUINN: Exactly.

DIVINE: I think the watershed events in the music industry were back when the whole digital distribution of music was starting and we had Napster and other distribution sites emerge. The same sort of questioning of property rights came up and these arguments were put forth: ‘I bought this CD and now I’m putting it on a server and I should be able to give it to everyone who can access my server as part of my right of ownership over this one copy, never mind the thousands of presentations to listeners.’ And that’s a similar analogy people use for invention. Some people will sometimes say well, it doesn’t diminish the invention if 100 people practice it or 1,000 people practice it, but it does diminish value when you consider the point of view that someone put time and effort and resources towards coming up with that particular solution to a problem that they saw and the fact that it turns out to be the one of choice for 100 or 1,000 or a million different product manufacturers should be recognized as something that helped speed them along the way to building or enabling whatever product or service they offer.

QUINN: The irony is that to some extent it is recognized, isn’t it? And when it becomes ubiquitous it’s recognized as nothing particularly important. No matter how revolutionary it was at the time it is now ubiquitous and it almost seems like a very kind of communist way of looking at the world. This is just too important for you to own when it is necessary, or even just desired by the community. A very communal way of looking at things, and of course always at the expense of the creator of the revolutionary innovation. I don’t get it. I really don’t get it because the people who are saying that we should have no patents, information wants to be free, and that there’s no evidence that patents foster innovation have absolutely no answer for the truth that wherever there is no patent system there is no innovation.

DIVINE: Right.

QUINN: And if it were true that a patent system stood in the way of innovation you would have runaway innovation where there were no patent systems and that’s just not what you see.

DIVINE: When they say there’s no evidence it is because they haven’t looked. There is evidence. There have been studies like the one you’re describing where the rise of structured system of laws and property rights enables the development of an economy and industry in developing countries. That has been mapped over and over and over again and part of the development of stabilized environments for growth rests on protection of intellectual property rights. I saw a paper in the last year to two years chronicling the advances in the wireless space; it empirically compared the pace of innovation in the wireless sector to earlier technology development eras. And the findings indicated that the pace of innovation has been phenomenal and certainly not hindered by the active protection of IP rights. I think a large part of that growth and pace can be attributed to the collaboration and contribution of inventions within the standards process. Innovators, large and small, participate in the standards process thereby furthering that industry, and in return they have to see adequate and fair compensation for their efforts and invention. I think every standards organization essentially speaks to that (with a few notable exceptions), by acknowledging that’s there’s a needed balance between the innovators who contribute and the implementers who take those innovations and put them out in the market. And, there’s nothing that says a company can’t be both. I think that’s the other issue that sometimes emerges; some companies don’t want to have to admit that they go outside for some of their intellectual property resources.

QUINN: Why do you suppose that is?

DIVINE: Well, my speculation is that it is related to the “not invented here” mentality. There’s this mythology that companies want to be able to tell themselves that they are the pioneers of an industry. And, they may very well have been the pioneers of a particular part of an industry’s technology, but that doesn’t mean no one else contributed. Nobody would say there’s only one medical researcher that’s going to cure cancer. It is going to be bits and pieces from many researchers along the way.

QUINN: So what does this mean for patent licensing, for example, patent licesnings as a business model? Is it alive today? Is it on hiatus? Is it going to come back? What do you see for the future?

DIVINE: I certainly think it’s alive today. It’s not going to go away. I believe high quality, fundamental inventions are going to survive and continue to be licensed and licensed broadly. It may take more time, it may take more effort. Those are sort of tactical elements of the climate, and those may change over time. While those are sort of ever evolving, I think that because the demand for a high pace of innovation will continue, there will always be a place for licensing because there will be innovators that aren’t going to ultimately be the best implementers. Before I came to IP investing, I was involved in more traditional sectors, and what I saw was that often the challenge in venture investing or private equity investing was not just whether the investment was a good idea or product, but also whether this it was the right execution team or market or plan. So to me it’s a very natural thing that a company or inventor may very well have a good innovation, but it’s going to do more in someone else’s hands. Innovators should have the choice to take an invention as far as they want, whether it’s to do the research and development and create the innovation and then sell it or license it to someone more capable of manufacturing and sales and marketing and all of those aspects of the business cycle or build and offer the product themselves. This type of disintermediation happens all the time due to business factors such as market structure, strength of brand, or plant capabilities.   I don’t think there has to be a one size fits all approach, and if that’s the case you need to have a robust licensing climate. It’s the way that you transfer that idea and invention from owner to another party.

QUINN: So what do you tell patent owners to do right now? Because that’s the $64,000 question I guess, right?

DIVINE: Well, yes. But what I tell them is the same thing I’ve always told them. Number one, if you’re going to invest in developing your patent portfolio do it mindfully. Don’t just do it for the numbers. Take care to understand what you’re really inventing; its scope and importance. Make sure you’ve prosecuted it well. Put quality into the production of that invention in terms of the drafting and so forth. That will ensure greater value and flexibility for the innovation’s use in the future. We come across companies who have great inventions that are fundamental to their product or service and they’re not really interested at that point in licensing it. They think that’s IP that’s core to their business, and it often it’s also the primary asset of their business at that stage of their development. If they have a good patent portfolio, they can use it for short-term financing. Firms like ours that understand the asset and can underwrite it offer that as one way to monetize assets in the short run. Even if you’re happy to sell your portfolio, make sure that you’ve cared for it well. In the long run having a well-cared for, well-developed, strategically sound portfolio, that you didn’t just willy nilly encumber with cross licenses or didn’t keep track of license records or any other factor that unnecessarily make it harder to transact around the asset, those are the things that patent owners ought to be managing better. Moreover, my personal point of view is that most companies should not undertake licensing themselves simply because it’ requires a specialized skill set. You want to have specialists who each day get up thinking about the industry, understanding the assets, thinking about the licensing process and how to make it better and how to get to the end goal of establishing the license with the counterparties that ought to take a license. Unless you have a large enough portfolio to do that regularly and truly make it a business, companies will find themselves reinventing the processes each time.

QUINN: So are you advising innovators right now to continue to seek patents? Are you advising any kind of change in behavior, maybe a flight to quality over quantity? I hear that a lot.

DIVINE: Yes. Absolutely. But I’ve always said that. I think patent counts are not nearly as important as patent quality.

QUINN: I’m hearing that more and more. People say that, but now I’m also starting to hear people talk about quantity again, but this time it doesn’t strike me that they’re talking about quantity in quite the same way that we were say five years ago.

DIVINE: Yes. And I can give you an example from a slightly different point of view. I think a lot of corporations, probably five, ten years ago, were very much caught up in the “I want to have the highest filing numbers in my industry or I want to have the highest issue count” mentality. With that type of focus on patent counts, it was less about assembling a portfolio that was well thought out and supported their business and strategic interests, or included transactable patents. It was just really about building up numbers. In that same period of time people on the acquisition side were focused on assembling large count portfolios for licensing in bulk. These approaches seem predicated on the “cross license” models of licensing which were highly count driven. The thinking seemed to be ‘I want to buy hundreds of patents at a time’. And not necessarily looking at porfolios from the perspective of how much quality is there in this portfolio. And as you just said, we went then from that point of view to companies asking what measureable value came for all the dollars spent on taking a license to a bulk portfolio. And I think they became a little more focused on understanding portfolios they considered licensing in and their own portfolios — understanding their strengths, understanding the true quality and depth of portfolios. This led to shift in the buying community. We went from give me 1,000 patents or 10,000 patents or whatever that people were buying in bulk and now I really want to find one or two or three really high quality patent families. So I think the next evolution is what you just pointed out, a recognition that a high quality patent portfolio, even if it’s smaller, is a really good asset to have. A high quality patent portfolio that is a little bulkier, a little larger, is even better to have. And I think that’s where we are now.

QUINN: And that’s probably where we should have been all along.

DIVINE: I think so, but I think it was a natural result of the way licensing was undertaken. My understanding is that so much of the earliest licensing was cross licensing driven and so it was really about ‘I have this stack, and you have that stack’ and who has more and we’ll figure out some compensating payment. Maybe this year I’ll pay you, next year you pay me, that kind of thing. So it did become about the counts and that’s why we were driven by a sheer patent count metric. As more pure play or transactional work came into the market where true arm’s length licensing was going on, obviously the flight to quality just naturally had to occur because people weren’t just going to take a license because your stack was big. And I think, as you say, this is where we should have been all along.

QUINN: So how long do you suppose it will take before this works its way through the system and we get back to some kind of equilibrium point?

DIVINE: Well, I wish I had a good answer for that.

QUINN: I know that’s a tough question to answer. Let me tell you what I have in mind. I ask everybody this question and nobody really has great answers, but when I first started my practice right out of law school so many moons ago I did general civil litigation. In the heyday in the 1980s, which I was not a part of, the insurance companies would settle everything. You could slip and fall on ice in New Hampshire during the worst winter and sue and get money. You could be drunk and plow into somebody and you could get an attorney, sue and the insurance company would settle for nuisance value. The insurance companies wanted to take nothing to trial and they would calculate nuisance value based on how much they were going to pay their attorneys and they’d offer you some fraction of that to just go away. So you could be completely in the wrong and you’d get something. So what happens? It was easy to predict what happened. What happened is every attorney that could sign a client up, no matter how much they were to blame, would sign clients up. It was a good business for many attorneys for a number of years.

QUINN: So then the insurance companies finally got to the point where they said no, we’re not paying anything and they didn’t pay anything for a while. Then after a while the perception sets in that they never paid anything no matter how meritorious, which wasn’t true because I know they were paying good cases because I was settling cases at the time. But after not paying anything for a while they then paid good cases and only bad cases ever got to trial. It reinforced the perception. It changed behavior.

I see where we’re at in this whole process, this whole troll PR process, about what is going on in the courtroom and the abuse of mom and pops and to some extent it is almost the same kind of dynamic where the money is plentiful and now the money is not plentiful and now all of a sudden we’re bouncing back a little and the cream is starting to rise to the top, but as the cream is starting to rise to the top it’s not like it used to be. I don’t know what the moment is going to be where we’re going to say, okay, we’re back, and this is where we should have been all along. I don’t know exactly how long it will take and frankly I don’t know whether we may need some help from the courts in a decision or two before we get there.

DIVINE: Yeah, I think you always need that. It probably happened in the civil litigation side, insurance settlements as well where the pendulum swung far to one side because of a collection of abuses that had perhaps built up over time and then it created a narrative that these people are just representing nonsense and the industry is settling out and we’re just not going to do it anymore. And I think we’ve been through that phase, frankly, in the IP market. I’d presume it would be much harder to be out there with a model that’s built on sending a bunch of assertion letters and see if we can get $100, $200, $1,000, $2,000, whatever from however many thousands of people we send this to. Given the current climate, I think we can all agree things have swung where companies have drawn that line in the sand and said we’re just not going to do that.

Where I think we are now is that so often companies have just taken a position where they’re not even undertaking what I would consider good faith diligence on the letters that do come in or on the overtures that come in for licensing discussions. We’re sort of forced into a model where there’s a lot of litigation going on and maybe that’s an element of the how companies are creating a proxy test for patents they are approached with. Perhaps they are presuming if you don’t have patents that you feel are going to go the distance it’s not a short process or a cheap process to go through so there is probably some weeding out that can be accomplished. But costs are now foreclosing access to resolution for a lot of patent owners, likely many that hold strong patents.

I think you’re right, we’re going to need some decisions from the courts to clarify. I think the courts have focused their attention on bad behavior of patent owners, whatever that might be, but I think there’s beginning to be more and more recognition that there’s bad behavior on the part of licensees as well. I mean, what would you say if you’re talking to a company, a prospective licensee who sat on a standards committee, was part of authoring the final draft of the standard and yet when you have a licensing conversation says they don’t know how the standard works. That’s ridiculous. That’s not good faith. Maybe they can find an argument as to why they don’t need a license, but they’re not even picking up a pencil to figure it out.

QUINN: I just actually published an article earlier today about a lawsuit that has recently been brought by a small research company against another company. The research company laid open their innovation and confidential information and then no deal was struck. Then, like you hear so many times, all of a sudden after that confidential disclosure there’s infringement. In this case the twist is that after all this information was laid open the defendant went and filed a patent application covering the disclosed information. You know, the popular press tells this story about the poor defenseless multinational corporation. And the narrative is taken as true. I hear you chuckling on the other end of the phone and I say it like that because it’s like people wake up! I feel like I’m living a Monty Python sketch or a Saturday Night Live skit where there’s this big huge $50 billion a year corporation that can’t possibly be expected to defend themselves from mom and pop inventor. It’s comical when, in fact, abuse is a two-way street and frankly in my experience I see a lot more abuse coming downhill towards the inventor than going from the inventor uphill.

DIVINE: Back to this forum, we should note it’s an investor forum. That means there are companies and firms out there who are sophisticated, long-term investors in this space and they are not fly-by-night, slap it against the wall and see what sticks kinds of firm. The amount of diligence and the amount of expertise that’s required to run one of these strategies through to an exit is significant and specialized. It’s not a lottery ticket industry.

And that’s where I think, if you step back and you realize okay, there’s real work going on by these IP investors. I mean, nobody goes to court or opens a licensing dialog around significant assets and doesn’t do their homework on these kinds of things, especially in this day and age. So there is a lot of abuse on the other side. There is a lot of delay and tactical advantage seeking and things like that by very large companies who have the resources to just let things draw out.

QUINN: And I guess like in so many different areas of law, bad facts make bad law.


QUINN: And I think we see that here in this case as well.

DIVINE: There are a few things on the horizon that I think are going to be interesting to watch. You talked about what’s going be the next round of changes. There are some cases that are swinging the other way, as far as willfulness standards and whether or not parties have acted in good faith on both sides.


DIVINE: Those are the kinds of questions I’m seeing more and more as part of what the courts are thinking about.

QUINN: Well, I think that if the Supreme Court does do what they seem to be gearing up to do in Halo that will be something that will make it very difficult for these companies that don’t put the time in on the demand letter side to continue to do that because with triple damages back on the table that has to be an incentive to at least do a little bit more due diligence before you circular file that letter, right?

DIVINE: Right.

QUINN: Well, this has gone long already and I know we could just keep talking. I really do appreciate you taking the time to chat with me and I look forward to hearing your presentation next week and catching up with you in person in New York.

DIVINE: Great. I look forward to seeing you in person there as well.


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