In this article, we discuss how monetizing and divesting non-crucial patents can provide companies with new revenue. Legal finance is key to patent monetization.
As companies cope with the pressures of inflation and an uncertain economy, underutilized patent assets can provide new sources of corporate revenue. Companies with significant patent portfolios that have historically been reluctant to leverage their patents are increasingly seeking new ways to monetize these patents—either through direct enforcement, or through partial or full divestiture.
Intel serves as just one example of this growing trend: The multinational technology company, which is the world’s largest manufacturer of semiconductor chips, recently entered into an agreement with IP Value Management Group to transfer nearly 5,000 patents to the well-known patent monetization entity.1
Patents are commercial assets that can produce significant revenue for a company just as other areas of the business, but monetizing those assets requires some action to enforce patent rights or to divest those rights. Regardless of which route a company may choose, the fact remains that an overwhelming percentage of patents fail to be commercialized. Companies can end up with large portfolios of unused patents for a variety of reasons; they may go through mergers and acquisitions that result in underutilized or redundant assets, or simply change business direction. These assets provide no business value and generate no return on the investment made in the patent asset unless action is taken.
Intel’s divestiture is just one example of a growing trend to take action to monetize patent assets, which suggests that in-house legal departments should carefully review the benefits of monetizing their companies’ patents and ensure they have a monetization strategy in place. This article analyzes IP owners’ available options and provides a basic roadmap of the process.
How to monetize corporate patent assets
Step 1: Assess the degree to which the company is willing to be a direct plaintiff
Before deciding whether to monetize patents through enforcement or divestment, the company must first decide whether it is willing to litigate directly against infringers. As the Intel example suggests, companies have a range of options, with enforcement through direct litigation at one end of the spectrum and full sale or divestiture at the other. Below, we review some of the basic considerations:
Direct enforcement: Greatest control Monetizing directly through litigation to enforce rights against infringers is likely to yield the greatest recovery to the company given the large damage awards associated with infringement cases. (Consider, for example, recent US patent litigation awards exceeding $500 million.) However, many companies struggle with two challenges. First and foremost, companies may not want to be seen as litigating due to business relationships or reputational concerns, especially if the brand is a household name. Secondly, direct litigation is costly and poses significant duration and binary risk, and this creates challenges for companies facing financial constraints that wish to prioritize retaining existing capital for investing in R&D, new technologies and products or for day-to-day business operations. Legal finance can remove the second challenge, but companies that are most concerned about their external perception as litigators may decide that partial or full divestiture is better fit.
Divestiture: Greatest flexibility Companies that do not wish to invite the exposure of direct enforcement can still monetize their patents by setting up relationships with holding companies that serve as the litigating entities, and these structures can range from a simple arm’s length relationship to full divestiture. As companies with large patent portfolios go through various cycles of business growth, such divestitures may be the ideal option: They allow patent owners to reassess their core assets and divest patents that do not contribute to the business’s core revenue.
Corporate divestitures provide immediate sources of revenue, allowing companies to realize the value of their non-core patents without devoting further resources to their maintenance, protection and development. This approach also allows companies to disassociate themselves entirely from ensuing litigation involving the patents sold. Divestitures are suitable for companies that want to prioritize their attention, money and other resources on other business streams and not on the litigation. However, Companies can and should see divestiture as providing a spectrum of options and great flexibility around the degree of control and decision-making they wish to maintain around litigating the underlying patents.
Step 2: Identify which patents to monetize
Once a company has determined its appetite for direct litigation, it should do the work of identifying which patents to monetize. Navigating and reassessing patent portfolios is a complex process, often requiring the support of multiple internal departments, including the in-house legal and finance teams as well as individual business units. The process can also include external parties, such as licensing and strategy firms with in-depth knowledge of monetizing corporate patents, prosecution and litigation counsel hired for the case, and legal finance partners. Recognizing which patents could be good contenders for monetization requires a review of strategic and economic factors including:
Revenue potential: Assets that are widely used, likely to be infringed or actively being infringed are obvious candidates for monetization.
Non-core assets: Assets inessential to the company’s financial success, such as outdated technology or patents from discontinued product lines, could be good candidates for monetization through divestiture.
Redundant assets: Equally, assets that a company may have obtained that are irrelevant to its core business, such as patents acquired through mergers or acquisitions, could be good candidates for monetization through divestiture.
Prior history: Patents that are burdensome for a company to keep, either due to licensing encumbrances, low valuations or history of prior litigations, could also be good candidates for divestiture.
Litigation strategy: Patents could be identified for strategic reasons, such as patents that have foreign counterparts or that are eligible to be asserted at the International Trade Commission (ITC).
Step 3: Put the right strategy in place to monetize selected patents
Having made the decision to monetize patents and identified which assets to leverage, companies should ensure they have the right strategies and structures in place to proceed. These can include:
Single case A company can choose to pursue a single case if, for example, it only has a select number of patents available to monetize or a one-off patent that is particularly valuable to monetize.
Multiple related cases Patents can also be grouped together by similarity in a portfolio and can either be pursued at the same time (as they are likely to have similar litigation strategies) or in stages to offset legal expenses and risk.
Broad campaign Finally, a company could choose to enforce entirely different groups of patent families as part of a broader litigation campaign, maximizing its recovery options overall. This is particularly suitable for large companies that operate in a number of industries and that have acquired broad portfolios of patents during their lifespans.
Step 4: Put a finance strategy in place
Regardless of whether a company has decided to directly enforce or to partially or fully divest its patents, one thing is certain: The process of extracting value from an existing patent requires significant capital and expertise, and selecting the right finance strategy is an important step in the process.
Self-financing Of all of the financing options available, self-financing—whether of a direct enforcement through litigation or of an indirect enforcement through a partial divesture to an arm’s length company—is the most familiar choice but typically presents the most risk to the business.
Self-financing also requires a company to invest money upfront—whether to fund litigation or to fund a shell company that is litigating on its behalf—that it may not recoup for the years that its takes the litigation to resolve and recover damages, or that it may lose entirely if the underlying claim fails. This approach may be viable for companies with large litigation budgets and dedicated teams with relevant expertise, but can be challenging even for the largest companies based on external economic pressures, business priorities and other factors, and it may be entirely unattainable for companies without these resources or that need to dedicate capital towards other areas of the business.
Risk-sharing with law firm Another familiar approach is to share risk with outside counsel engaged on a contingency fee basis rather than an hourly-fee model. Given the heightened risk of patent litigation, many law firms may be unable to work on a purely contingent structure.
Legal finance Companies that choose to enforce their patents can leverage outside legal finance to offset the financial risk both of direct enforcement through litigation and of the full range of divestiture options. Legal finance companies like Burford can of course pay for lawyers and legal fees so that litigation may proceed, allowing IP owners to proceed with enforcement without the burden of financial and duration risk. Legal finance companies can also accelerate or advance a portion of the expected recovery to provide immediate working capital to the business. Legal finance providers can help at any stage of the recovery process with capital and expertise. For companies that decide they want to monetize their patents through a partial or full divestiture, legal finance providers like Burford can provide finance and expertise to create the structures needed, identify patents suitable to monetize and lay out a path to maximize recoveries.
Legal finance and patent monetization
Financing related to future litigation
Litigation counsel
Experts
Litigation costs
Ancillary legal proceedings (IPRs, reexams)
Upfront payment to acquire or transfer the patent assets to a new entity
Working capital for the company or, in case of divestiture, the new entity
Analysis (technical, economic, legal) required to develop the monetization strategy
Management/strategy execution
Conclusion
Monetizing patents is increasingly relevant for companies of all sizes, and IP owners should look into their existing patent portfolios as a potential new source of revenue. Intel’s divestiture speaks to a growing trend of companies taking action to monetize patent assets, and in-house legal departments should carefully review their companies’ patent assets and ensure they have a monetization strategy in place.
About the author
Katharine Wolanyk is a Managing Director with responsibility for leading Burford’s award-winning intellectual property and patent litigation finance business. Prior to joining Burford, Ms. Wolanyk was President, Chief Legal Officer and Founder of Soverain Software, an enterprise software company whose patent portfolio has been licensed extensively in the software and Internet retailing industries.
