The Current State of the Patent Marketplace

The following are highlights from my recent presentation on “The Patent Marketplace: Past and Present,” at the National Bar Association’s 85^th 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 21^st 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.