Patent Asset Buyers See Goliath v. Goliath Fights Ahead

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By Tony Dutra

Nov. 18 — Against a backdrop of financial and market pressures—not just changes in law —the days of patent rights investors supporting David in infringement claims against Goliath are over, according to a panelists at a Nov. 17 conference in Washington.

Instead, “large-scale monetization programs” setting up patent holding companies in “Goliath vs. Goliath” fights are the new order, Michael D. Friedman, managing director of Ocean Tomo, said at the IAM Patent Law and Policy conference.

Friedman pointed out that, if predictions are correct, IP investment opportunities will be affected first, by interest rates going up and, second, by the stock market going down. Ranking “only a distant third” is whether the U.S. Supreme Court changes patent law standards.

Other panelists agreed—to the potential dismay of inhouse counsel in the audience—that companies should shift responsibility for managing patent assets to their firms' chief financial officers in order to make the most of them.

Single-Patent Success Days Over

Erich Spangenberg, CEO of nXn Partners, who sat on a panel on the “investor's view,” had his other firm, IPNav, featured in a July 13, 2013, New York Times article, “Has Patent, Will Sue: An Alert to Corporate America.” The article cited IPNav's representation of individual inventors in patent litigation against large firms, but Spangenberg's nXn business model has changed significantly.

“I wouldn't think of buying a single-patent asset today,” he said. “The days of being successful with one patent—certainly in the U.S.—are over.”

David Kennedy, managing director of Berkeley Research Group who sat on the panel with Spangenberg, placed some blame on the Supreme Court's decision in Alice v. CLS Bank, which has led to the invalidation of a large number of software patents, and uncertainty about whether Congress will pass patent litigation reform. However, he and Friedman said those developments are directed to patents representing the “dreck” in the system.

Alice put a knife through medium- and low-quality patents,” Friedman said. “For a while, we've known that only 2-3 percent of all patents have value, and the rest of the stuff really is noise.”

Capital was available for “the rest of the stuff” for a long period, Kennedy said, “but it's just not there any more.”

Big Potential Licensee Holding Driving Big Deals

There is, instead, a “layer of activity” on much bigger deals, said Terry Ludlow, founder and CEO of Chipworks, the panel's moderator.

“We can consistently raise money for large-scale monetization programs,” said Friedman. That may include thousands of patents, but he insisted quality is a key consideration.

“The smart money coming into this space is making [quality and valuation] decisions,” he said. And, he added, some patent purchasers might be thinking of combining large portfolio companies to create “patent thickets” that potential licensees just can't get around.

“The market is moving to licensing entities as a specific response to holdout,” Friedman said. He was referring to large firms—particularly in the high-tech industry—who allegedly refuse licenses when the worst that can happen is that courts later award, at best, compensatory damages for what they would have paid in the license. Ludlow cited Joe Nocera's “The Patent Troll Smokescreen” in the New York Times on Oct. 23 as a guidepost for that kind of behavior.

Friedman predicted “worldwide assertion programs in multiple jurisdictions simultaneously” against holdouts, with Kennedy noting that “even a large [operating] company can only handle so many litigations.”

Inhouse Problems

Spangenberg predicted changes within operating companies that have large patent portfolios as well, with “more financial engineering coming to this asset class.”

He also foresaw some software firms having to “take a massive write-down because of Alice.” Software companies have been writing off the value of their intellectual property assets over 10-15 years, he said, and now they're going to have to admit they have no value for the rest of the period.

When Ludlow asked whether “the CFO and finance guys should take over management of IP assets,” Spangenberg criticized inhouse legal departments for failing to manage IP assets to maximize value.

“I agree, even though the audience is mostly lawyers,” Kennedy said.

“It's almost a no-brainer that [IP] should be moved to the CFO's office,” Friedman said.

Spangenberg gave the lawyers in the audience some solace, saying, “Lawyers shouldn't feel threatened by it; they should embrace it.”

Friedman agreed, citing “an enormous gap” between what Wall Street understands about the value of IP and what IP lawyers know about exploiting it. “Lawyers can play a big role in education,” he said.

Patent ‘Troll' Legislation

The discussion did not address details of any bills pending in Congress targeting the patent assertion entities—derisively called patent trolls—that the panelists were referencing. But if their predictions come true, both sides of the legislative debate will have to deal with the results.

Those who favor legislation are, generally, driven by high-tech industry claims of extortion by the trolls—claims that could be belied if entities make a legal case that a high-tech firm is holding out against licensing high-quality patents. Those against legislation have built up a narrative that patent assertion entities frequently represent individual inventors and small startups that can't otherwise succeed against hold-out firms. That argument promises to have less force if the entities abandon smaller patent holders in favor of “Goliath”-like portfolios.

Former U.S. Patent and Trademark Office Director Q. Todd Dickinson, in the audience, asked the panel why the assertion entities don't have a trade association in Washington?

“The large tech companies have done a great job of labelling and getting labels to stick,” Kennedy said. “I don't know that lobbying at this point could help that much.”

To contact the reporter on this story: Tony Dutra in Washington at adutra@bna.com

To contact the editor responsible for this story: Mike Wilczek in Washington at mailto:mwilczek@bna.com