The Current State of the Patent Marketplace

by Raymond Millien on August 12, 2010

The following are highlights from my recent presentation on “The Patent Marketplace: Past and Present,” at the National Bar Association’s 85th Annual Convention in New Orleans, LA on August 11, 2010.

I have previously written that independent research, conducted by Ned Davis Research, Inc. in 2005, has demonstrated that as much as 80% of the value of a U.S. publicly-traded company comes from intangible assets. This is an inversion from 35 years ago when less than 20% of a company’s value came from intangible assets, and is significant because the largest component (or subset) of intangibles is intellectual property (IP).  This data has now been updated, and as of 2008, as much as 75% of the value of S&P 500® companies comes from intangible assets such as IP.  While I am not sure what to make of this 5% drop from 2005, the fact remains that IP remains important to the success of publicly-traded companies.  Further, data showing that small businesses generate 13-14 more patents per employee than large firms would empirically suggest that this observations applies, if not more so, to smaller (and private) companies as well.

Recognizing the importance of IP to the success of companies competing in the present-day economy, and despite the rise of several IP-related intermediary business models, IP is still a highly-illiquid asset class with a very inefficient marketplace.  That is, potential sellers of IP rights historically have been unable to access a large quantity of buyers who are willing to pay a predictable price under an agreed-upon set of conditions.  Furthermore, IP transactions are characterized by difficult acquirer identification, long periods of negotiations and endless due diligence activities.  Such transactions are also hampered by the lack of widely-accepted valuation models and independent valuation organizations.

So, what is one to do when faced with the need to engage in an IP-related transaction?  Well, here are some (often sobering) facts presented in Q&A fashion and compiled from a variety of sources[1] to assist with setting expectations when entering into IP-related transactions:

  • Who Owns U.S. Intellectual property?  Approx. 56% of Corporate U.S. Patent Assignees are Asian firms, 44% of those being Japanese.
  • Are U.S. Patent Applications down along with the U.S. economy?  There were approximately 11,000 less U.S. utility patent applications in FY2009 as compared to FY2008, and approximately 9,000 less U.S. provisional patent applications during the same period.
  • What is the value of U.S. intellectual property?  In 2005, the value of U.S. intellectual property was measured at $5.5T, which is more than the nominal gross domestic product (GDP) of any other country.
  • Is there a measure of IP-related exports?  60% of total U.S. exports come from “IP-intensive” industries from 2000-07, rising from $665 billion in 2000 to $910 billion in 2007.
  • Has Intellectual Ventures (IV) – presumably the largest of the Non Practicing Entities (NPEs) – generated any licensing income from their portfolio?  It is estimated that IV has generated a total of $1B in licensing revenues from their acquired patents as of 2009.
  • What is the median patent infringement damages award?  The annual median patent damages award, observed from 1995-2009, is $4.4M.
  • Is there a difference between the patent damages won by NPEs versus practicing entities?  Since 1995, patent damages won by NPEs have averaged more than double those for practicing entities.
  • Do NPEs fair better than practicing entities in patent infringement litigation?  NPEs, in patent litigation, have been successful 29% of the time overall, versus 41% for practicing entities.
  • Who are the top NPE targets?  Between 2004-2009, the top five NPE targets were Apple (56 law suits), Sony (55), Dell (50), Microsoft (49) and HP / Samsung (48).
  • What is the median sales price for a patent or patent family?  The median sales price for a transaction (i.e., a single patent or patent family sold in a single transaction) was approximately $25K in 2006, over $100K in 2007 and over $150K in 2008.
  • Are there any summary patent licensing data available with respect to royalty rates and up-front license fees?  From 1990 to 2009, the following data has been observed:
    65%     of the licensing transactions had royalty rates of 5% or less


    90%     of the licensing transactions had royalty rates of 10% or less

    Only 20% of all the licensing transactions included running royalties and up-front license fees as part of the compensation terms to licensors; Up-front payments can take the form of cash, stock or a combination of cash and stock

    The average cash-only license fee was over $2M

    61% of up-front fees were $500,000 or less

In sum, it is clear to me that the economic downturn has lessened the appetite for companies to engage in any type of “bulk” patent filing strategies.  The continued importance of patent rights in a 21st century, knowledge economy, however, dictates that individual inventors and small and medium enterprises (SMEs) continue to find capital to file for patents relating to their truly innovative products and services.  Such individual inventors and SMEs, however, must understand the economic reality of the above-presented data to help set expectations when entering into patent-related transactions.  Further, individual inventors and SMEs looking to transact their IP as NPEs should be aware that, in the current environment: (a) truly innovative/cutting-edge IP will always sell or be licensable in “carrot licensing”-type transactions[2]; and (b) “stick licensing”-type transaction[3] plays, however, are extremely difficult to consummate or receive financing absent sound legal analysis (i.e., claim carts comparing issued patent claims to one or more infringing products’ features) and market analysis (i.e., data reflecting actual marketplace sales).

[1] Sources for the following are: USPTO, FY 2009 Performance and Accountability Report; H. Wegner, The 2009 U.S. Patent Grants: Who’s Getting the Patents; The Seattle Times; PriceWaterhouseCoopers, 2009 Patent Litigation Study; www.ipresearch.com; www.patentfreedom.com; and www.theglobalipcenter.com.

[2] “Carrot licensing” describes a friendly and voluntary process in which an IP holder convinces a potential licensee of the technical and economic benefits of licensing an IP asset. In such cases, the two parties are in agreement that a license is desirable and mutually beneficial, and the negotiation often serves as the beginning of a long-term business relationship.

[3] “Stick licensing” refers to the process of trying to obtain payment from a prospective licensee who is believed to be committing patent infringement by producing and marketing technology encompassed by the IP at issue.  It is an adversarial process and often a prelude to litigation.

{ 4 comments }

Business Method Patents Survive U.S. Supreme Court Review

by Raymond Millien on June 29, 2010

In the last decade, software and so-called “business method” patents have been the subject of numerous lawsuits, academic debates, articles, economic impact studies, and Congressional hearings.  Yesterday, the U.S. Supreme Court finally weighed in on the issue with its decision that: “the Patent Act leaves open the possibility that there are at least some processes that can be fairly described as business methods that are within patentable subject matter.” Bilski v. Kappos (No. 08-964, June 28, 2010).  So, what does that mean?

First, some legal background.  U.S. Patent Law recognizes four broad categories of inventions eligible for patent protection: processes; machines; article of manufacture; and compositions of matter.  See 35 U.S.C. § 101.  The U.S. Supreme Court, however, has long recognized that there are three specific exceptions to Section 101’s four broad patent-eligibility categories: laws of nature; physical phenomena; and abstract ideas.

Second, while so-called “business method patents” have been filed and obtained by software, insurance, Wall Street and e-commerce firms, there is no precise definition of what exactly is a  business method patent. Thus, I offer the following definition to frame the discussion below: “A (software or manual) process employed in an entity’s business model in order to perform services related to insurance, securities trading, health care management, reservation systems, electronic shopping, auction systems, catalog systems, incentive programs, redemption of coupons, banking, billing, point of sale systems, accounting, inventory management and the like.”

Thus, the question which the Supreme Court addressed in the Bilski case was whether business methods are eligible for patent protection as a “process” under Section 101 and, if so, what is the test?

In Bilski, the applicants sought to patent the following claim:

“A method for managing the consumption risk costs of a commodity sold by a commodity provider at a fixed price comprising the steps of:

(a) initiating a series of transactions between said commodity provider and consumers of said commodity wherein said consumers purchase said commodity at a fixed rate based upon historical averages, said fixed rate corresponding to a risk position of said consumer;

(b) identifying market participants for said commodity having a counter-risk position to said consumers; and

(c) initiating a series of transactions between said commodity provider and said market participants at a second fixed rate such that said series of market participant transactions balances the risk position of said series of consumer transactions.”

The U.S. Patent and Trademark Office (USPTO) and the U.S. Court of Appeals for the Federal Circuit (CAFC) both rejected the Bilski application as being directed to a non-patentable process under Section 101 using the “machine-or-transformation” test.  Under this test, a claimed process is patent-eligible under Section 101 only if: “(1) it is tied to a particular machine or apparatus; or (2) it transforms a particular article into a different state or thing.”

The Supreme Court, however, ruled that: “[T]he machine-or-transformation test is a useful and important clue, an investigative tool, for determining whether some claimed inventions are processes under [Section] 101. The machine-or-transformation test is not the sole test for deciding whether an invention is a patent-eligible ‘process.’”  The Supreme Court also ruled that Section 101 “precludes the broad contention that the term ‘process’ categorically excludes business methods.”

The Supreme Court reasoned that Section 101 is a “dynamic provision designed to encompass new and unforeseen inventions.”  “[T]he machine-or-transformation test would create uncertainty as to the patentability of software, advanced diagnostic medicine techniques, and inventions based on linear programming, data compression, and the manipulation of digital signals.  … As a result, in deciding whether previously unforeseen inventions qualify as patentable ‘process[es],’ it may not make sense to require courts to confine themselves to asking the questions posed by the machine-or-transformation test.”  Thus, the Supreme Court encouraged the CAFC to develop “other limiting criteria that further the purposes of the Patent Act and are not inconsistent with its text.”

In the specific claims at issue in Bilski, the Supreme Court affirmed the USPTO and CAFC’s rejection of the Bilski patent application because: “[Bilski seeks] to patent both the concept of hedging risk and the application of that concept to energy markets. Rather than adopting categorical rules that might have wide-ranging and unforeseen impacts, the Court resolves this case narrowly on the basis … that [Bilski’s] claims are not patentable processes because they are attempts to patent abstract ideas.”

In conclusion, we will have to wait and see how the USPTO and CAFC implement the Bilski decision.  I do know now, however, that the decision will benefit applicants seeking business methods because no categorically exclusion of such patents was endorsed by the Supreme Court.  Also, business method applicants will no longer have to show that their claims are tied to a particular machine or involve the transformation of a particular article.  Such applicants, however, may still want to ensure that their claims meet the machine-or-transformation test – when possible – so as to insure they do not run afoul of the abstract idea, law of nature, or mathematical formula exceptions.

{ 0 comments }

SMEs and Cutting Through The Hoopla Over False Patent Marking

June 18, 2010

There has been a lot of recent talk, blog posts, articles, court activity and even proposed legislation in Congress around the issue of “False Patent Marking.”  What does it all mean and why should small- and medium-sized enterprises (SMEs) care!?  Well, I present answers, in brief, to these questions below.
The first thing to know is [...]

Read the full article →

Five Ways of Delivering Value for Clean Technology Innovation Through Intellectual Property

May 24, 2010

Last month, I had the honor of being one of five speakers at a seminar in San Francisco sponsored by the Global Innovation Forum and ACT’s Innovators Network where invited guests included Bay Area senior executives from clean technology companies and principals from the investment community.  The seminar, titled “Delivering Value for Clean Technology Innovation [...]

Read the full article →

High-Tech Startups in a “Mixed Source” Software World: Can Money Be Made?

May 3, 2010

Although the software business model taxonomy is neither perfect nor universal, most high-tech entrepreneurs recognize the existence of (and difference between) the “proprietary” and the “open source” software business models.[1]
The proprietary or “closed source” software model is one where a software program is distributed solely in object code form (i.e., only computer-readable [...]

Read the full article →

Don’t Forget to Describe What You Enable: A Potential Patent Application Trap For Small Chemical and Biological Tech Companies

April 14, 2010

A case decided a last month by eleven judges of the U.S. Court of Appeals for the Federal Circuit[1] — the “Supreme Court of Patent Law” as it is often called – illustrates a fatal mistake that can be made while preparing a patent application (especially in chemical- and biological-related technologies).  The case involved Ariad [...]

Read the full article →

Five Common Intellectual Property-Related Mistakes Made By Small High-Tech Companies (Part 5 of 5)

March 27, 2010

No. 5: You Call Your IP Attorney Too Late!
My last of the top five is an easy one to comprehend: Call your IP lawyer sooner, rather than later! And “sooner” means before signing a contract, engaging an independent contractor, hiring a technical employee, entering into a joint development arrangement with another company, commercializing a product, [...]

Read the full article →

Are Your Corporate Attorneys Harming Your Future IP Strategy?

March 17, 2010

Entering into a corporate transaction without a careful review of the intellectual property (IP) involved can have negative consequences on your enterprise’s future IP strategy.  This is especially true when IP owners do not adequately supervise their corporate attorneys who may not appreciate or be aware of the unintended consequences of the language typically employed [...]

Read the full article →

Gathering Information on Your Competitors: Competitive Intelligence or Trade Secret Theft? (Part 2 of 2)

March 3, 2010

In a Part 1 of this post, I stated that engaging in competitive intelligence is not the same as, or synonymous with, engaging in economic or industrial espionage or the misappropriation of trade secrets.  That is, gathering competitive intelligence should not involve the intentional gathering of competitor’s confidential information or trade secrets.  To the extent [...]

Read the full article →

Gathering Information on Your Competitors: Competitive Intelligence or Trade Secret Theft? (Part 1 of 2)

February 19, 2010

Traditionally, companies gather information on their competitor’s marketing activities,  advertising strategies and organizational structure, or perform some form of industry-wide benchmarking.  Recently, however, companies have started to engage in more formal competitive intelligence activities.  “Competitive intelligence” is the process whereby a firm monitors its competitors (and the marketplace as a whole) by collecting information, analyzing [...]

Read the full article →

← Previous Entries