In May 2023, Eric Carlson directed questions concerning key trends and developments relating to the monetization of corporate patents and patent divestitures to a group of respected experts in the field. Their perspective is gathered below.
Underutilized patent assets can be a significant source of untapped value for companies. What are the primary options available to companies looking to monetize such assets?
Paul Riley: Typically, the primary options are one, build a dedicated internal team with the mandate (and budget) to mine the portfolio and develop and execute a patent monetization program; two, sell the patent assets; or three, partner with an external group that specializes in patent monetization, which will either take over all monetization activities or work side-by-side with the company’s internal team to execute a monetization program.
Each of these options has multiple permutations. For example, the sale of patent assets can range from a one-time sale for a lump sum upfront payment, to a more creative arrangement where in lieu of any up-front payment, the purchaser shares a portion of the revenue generated from subsequent licensing of the patents. Similarly, partnering with a third party may simply be an advisory-type relationship, with a fixed or hourly fee, or a more significant engagement, in which the third party does the heavy lifting and finances the monetization program in exchange for a significant percentage of the revenue generated.
Ben Hattenbach: Companies that have exited a business segment or simply have a large set of unused patents often consider selling them to generate quick revenue while avoiding maintenance fees and other overhead. Others explore amicable licensing arrangements, typically at lower dollar values than could be generated through litigation but without many of the associated downsides such as consumption of business resources, potential counterclaims, and a lengthy time to returns. However, in some instances, patents that are strong and have the potential to support significant damages claims are worth litigating to maximize value.
Micky Minhas: The first thing that a company should evaluate is how their assets are being used. It could primarily be either offensive or détente. Some use the term defensive to describe the value of patents, but I think this is a misnomer. Since patents are used to prevent others from doing something, I think the right way of thinking about patents is the concept of détente. Of course, that means defining value as not being in the conflict with another company, which is hard to measure.
Divestiture and assertion are the primary options to monetize. However, it is common for companies to consider ways to monetize that have less friction than litigation. Patent pools or platforms are an excellent option for those who want to monetize their assets without necessarily having to assert them. It is important to find ways to transfer technology from those who innovate to those who implement those innovations. When multiple companies with different backgrounds and businesses agree on a centralized way in which to transfer the R&D (which manifests itself in patents) to the implementation companies, it illustrates how well the system can work.
What trends are you seeing in terms of how companies are thinking about their patent portfolios and the potential for monetizing them?
Paul Riley: The biggest trend is that companies are looking at their patents as financial assets and finding creative ways to use those assets to solve other problems facing the business. For example, in years past, patent department budgeting often focused on efforts to prune the patent portfolio to lower maintenance fee costs. Now, the more sophisticated groups are proactively identifying pockets of value in their patent estate and presenting the internal business unit leaders on a quarterly basis with options for leveraging those patents to offset upcoming revenue shortfalls or increased budgeting needs. There is also less of a stigma associated with selling or divesting patents – in fact, more than a few of the vocal critics of patent monetization efforts are selling or actively licensing their patents. Some have even surmised that, in this current day and age, not exploring ways to extract value from a company’s patent portfolio is doing a disservice to shareholders.
Micky Minhas: Without naming a particular company, I find it particularly interesting that more and more operating companies are divesting patents in ecosystems in which they are active participants. This is especially true in product areas that are viewed as commoditized and where the relationship between the patent owner and the customer is not very strong.
Ben Hattenbach: No discussion of recent trends would be complete without mentioning our new friend, artificial intelligence. Companies with particularly large and diverse portfolios are leveraging AI to identify patents best suited for sale and assertion. Automated tools can now readily locate, from portfolios of tens of thousands of patents, those with a high probability of being well suited for litigation and that cover technologies of particular interest. The integration of AI into these tools has enabled results that are far more useful than those historically provided by simple word searches.
Why might a company decide to monetize its patents via a divestiture strategy rather than direct enforcement?
Ben Hattenbach: Divesting assets for assertion has many pros and cons. Using another entity as a vehicle for monetization through litigation reduces the likelihood that the original owner will be countersued, and may decrease the extent of discovery, public relations consequences and business impact. Also, as is often the case with specialization, entities with particular expertise in patent monetization can frequently perform that function in a more efficient and effective manner than a corporation focused on other endeavors. On the other hand, such a transfer could also negatively impact opportunities for injunctive relief and result in the plaintiff being less attractive from a jury perspective.
Paul Riley: Running an internal licensing and enforcement program is not easy. To do so effectively requires assembling a diverse team of lawyers, technologists and analysts; having firm internal support for a significant budget (and ensuring that those budget commitments are long-term, as a first revenue for a monetization program often takes years, not months, to generate); and navigating an ever-changing landscape of internal business conflicts.
On top of that, most negotiations also involve securing rights to the counterparty’s patent rights, which may not only decrease the revenue generated under the deal, but also increase deal closure time. By outsourcing the patent monetization efforts, a company enjoys the immediate benefits of licensing professionals who have the experience and contacts to execute a strategy quickly, without the inefficiencies created by internal business approvals and cross-licensing discussions. Moreover, it is quite common for patent divestiture compensation to include two components: An up-front payment and a “back end” (e.g., revenue share). As a result, companies can address immediate financial needs, while also enjoying a “no risk” option on future financial payments.
Micky Minhas: Divestiture may be beneficial for certain companies that are more interested in short-term monetization rather than mid- to long-term monetization. Divestiture is particularly attractive when exiting a business or if the company has ongoing relationships with other companies that may be impacted by the patents in question.
Are there any recent corporate patent transactions that stand out to you as particularly interesting? Why?
Micky Minhas: There have been some recent transactions with companies that have traditionally been vocal against patent monetization, but are now participating in it themselves. I think this serves as a good reminder that a balanced view is more apt to stand the test of time and withstand changes in business and business strategy.
Paul Riley: Two recent corporate patent transactions come to mind. The first transaction is the recent sale by BlackBerry of nearly its entire patent portfolio (over 32,000 patents). This is a classic example of a technology pioneer, which spent billions of dollars over the past few decades inventing and developing key technologies and is now realizing significant value from its patenting investment as its business moves in a different direction. Any company that has shuttered a previously successful business unit or abandoned a previously lucrative product line in the face of new, lower-cost entrants could benefit from exploring similar transactions for its portfolios.
The second transaction is Intel’s divestment of a large number of semiconductor patents to a non-practicing entity (NPE). The fact that Intel, a technology pioneer that has been on the receiving end of significant patent assertions from NPEs (including a multi-billion-dollar jury verdict), recognizes the value of patents and is willing to monetize its patents through various commercialization strategies, is a testament to the fact that patents are valuable business assets and useful tools in implementing corporate strategies.
Ben Hattenbach: Large technology companies, particularly those that have been on the receiving end of significant infringement verdicts, appear to be changing their tune about divestures to NPEs. Historically, many of these companies had been strenuously opposed to such relationships, but now appear to be developing an appreciation for some of the benefits of not being exposed on the front lines of litigation while still receiving compensation (often in the form of a back-end percentage) from the IP they originated.
Others are still struggling to clarify their opinions on this divide. In one recent case we tried, the defendant spent considerable trial time criticizing our client by portraying divestitures to NPEs as unseemly. However, the defendant itself had recently sold thousands of patents to an NPE and had neglected to inform its inventors of this development. It made quite an impression when the defendant’s “face of the company” witness learned to his dismay, on cross-examination before the jury, that his employer had sold one of his patents to an NPE.
What advice do you have for companies putting together a patent monetization strategy? How might companies leverage legal finance in connection with their monetization strategy?
Paul Riley: First, do your research and talk to those experts (both inside companies and outside consultants, service providers and litigation funders) who have a proven track record of success with patent monetization. And do so before committing to a specific strategy, as the information you will glean will be critical in identifying the right strategy for your company to pursue.
Second, build support for a patent monetization strategy with the business units and the CFO and work with them to develop a strategy that solves their specific needs. For example, a business unit may be facing a year when headcount needs to increase to meet business objectives, but an increased budget is not on the cards. Developing a strategy where patents are divested in a way that allows the business unit to recognize revenue over each of those four quarters may be the answer (while another strategy that realizes all the revenue in the first quarter, or that will take over a year to implement, may not).
And third, develop relationships with law firms and third-party funders well before litigation is contemplated. The best firms and funders have tremendously valuable insight into all facets of the litigation landscape and are often well equipped to provide an unbiased assessment of the strength of the monetization program and to present a variety of fee arrangement and funding options to meet your company’s specific needs at that point in time.
Micky Minhas: To the extent possible, my advice is to have a long term, realistic view of your company’s business. It is important to take a balanced view of how to utilize IP assets in a way that aligns with the company’s long-term business strategy to achieve the best results. This includes consideration of the channels of trade in ecosystems that the company is involved in in light of the patents the company owns that are of the greatest value. Such a strategy sometimes entails going against the company’s short-term interests – which may be a difficult position to take politically.
Ben Hattenbach: When considering the merits, most companies focus on the “big three”: Infringement, validity and damages. While that is certainly essential, when evaluating a campaign that requires a large investment and is likely to result in litigation, key considerations also include the venue, the story and the witnesses who will tell that story to a jury. A case based on technicalities explained by a highly paid expert will be far less appealing (and lucrative) than one with charismatic inventors who solved a genuine problem in an innovative manner and can personally explain how their solution substantially benefited the industry.
Many patent holders also fail to give sufficient forethought to pre-litigation licensing structures and amounts, lacking a full appreciation of the extent to which such deals can impact (both favorably and unfavorably) litigation damages. An incautious deal designed to fill a litigation war-chest can easily alter the facts in a way that litigation becomes difficult to justify or at least far less economically attractive. This is one situation in which litigation finance can be particularly helpful—underfunded entities are enabled to pursue their most important targets without needing to first create negative precedent. For similar reasons, it is usually prudent for companies that might require funding to learn about litigation finance early, both to understand what options are available and to avoid missteps that might otherwise occur in the initial phases of a monetization project.
Benjamin W. Hattenbach is a partner in the Los Angeles office of Irell & Manella with a particular emphasis on the trial of complex patent infringement matters. While representing patent holders, he has obtained more than six billion dollars in judgments and settlements, including the largest judgment in the history of the US patent system. He has served as a member of the firm's executive committee for more than a decade and is vice chair of the litigation practice.
Paul Riley is Founding Member and Executive Vice President at Patent Platform Services and an intellectual property executive experienced in all phases of the IP life cycle. He is regularly recognized as one of the world's leading IP strategists by IAM Strategy 300.
Micky Minhas is Senior Vice President at Marconi, an independent business which creates and supports licensing platforms and programs for several important technologies. As part of the Marconi leadership team, he plays a vital role supporting its vision of transforming how technology is shared through intellectual property licensing. In addition to his role at Marconi, Mr. Minhas is the distinguished professor of intellectual property practice at the Franklin Pierce Law School of the University of New Hampshire. Before joining Marconi, he was Chief Patent Counsel for Microsoft, managing the Microsoft patent group.
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Eric Carlson is a Managing Director with responsibility for assessing and underwriting legal risk, particularly in the intellectual property space. Mr. Carlson is focused on working with law firms, corporations, and IP holders to assess legal claims and leverage legal finance.