Best Practices in Patent Monetization
Topics addressed include:
- Setting goals
- Identifying patents to monetize
- Selecting the right monetization strategy
- Choosing the right targets
- Costs and financing
Over the past ten years, IPNav has developed an extraordinarily successful approach to patent monetization that’s generated half a billion dollars for our clients. This paper highlights some of the best practices that lead to a successful patent monetization campaign.
The first step in any monetization campaign is to be clear about goals. When IPNav works with clients to set goals for a monetization campaign, it’s an iterative process that starts with broad goals and then drills down to more specific ones.
Broad goals may include:
• Recover investment in R&D
• Secure a competitive advantage by hindering a
• Build recognition as a leader in innovation
• Generate revenue
Clients often have specific financial targets in mind before they even meet with IPNav. Clients may also have other business objectives that either conflict with or complement these financial goals. Before we start evaluating a client’s patents, we help clarify the client’s goals and rank them in order of importance. Our evaluation then takes place in the context of these ranked goals.
After we’ve evaluated a client’s patent portfolio we give our opinion about whether – and how – the patents can be used to meet the client’s goals and whether the client’s financial target is attainable. If we think a target is attainable, we’ll commit to achieving it within a set time frame.
This commitment to meeting specific financial targets differentiates IPNav from other monetization providers. Others may say “There are too many unknowns” or “Litigation is unpredictable” or “Market conditions may change.” IPNav is willing to make commitments that others avoid, and we fully expect to get fired if we don’t achieve what we promise.
But after 10 years in business, we’ve never been fired.
Identifying Patents to Monetize
For organizations with large patent portfolios, selecting which patents to monetize isn’t a trivial task. IPNav has the tools and processes to handle this critical step quickly and efficiently.
We start with our proprietary IPNav Analyzer™, correlating data from the client’s patents with data from other sources: other patents, technical papers, scientific journals, etc. This helps us identify which technologies in a patent portfolio are likely to be commercially valuable.
Criteria used in selecting patents to monetize
The criteria used in deciding which patents to monetize include:
- How valuable is the patent?
- Is someone infringing the patent?
- How strong are the patent’s claims?
- Does the patent cover the client’s core or non-core technology?
Value. There’s no simple way to value patents. Attempts to create market-based pricing mechanisms for IP are still in their very early stages. Thus, the value of patents is often determined only after costly litigation. In fact, District Judge James Walker criticized the parties in one high profile case for using the court to set patent license royalty rates:
"The court is well aware that it is being played as a pawn in a global industry-wide business negotiation. The conduct of both Motorola and Microsoft has been driven by an attempt to secure commercial advantage, and to an outsider looking in, it has been arbitrary, it has been arrogant and frankly it appears to be based on hubris."
Litigation is an inefficient and expensive way to value patents, and IPNav litigates only as a last resort. Our extensive database of IP transactions lets us quickly and accurately estimate the value of a given patent.
Infringement. After we’ve identified the most promising patents in a portfolio, we do a “deeper dive” with our technical and legal analysts. The first question they answer is whether anyone is infringing the patents. If we can’t identify any infringers, we may advise commercialization, sale, or abandonment of the patents. When we identify products that do seem to be infringing, we do a thorough study; in some cases we hire “teardown experts” who can dismantle a product to gain a deeper understanding of the technology inside.
Strength. Not every patent holds up to close scrutiny in court. We evaluate patent claims to determine how strong they are. The strength of a claim rests on two things: 1) Is the claim novel? 2) Is the claim “non-obvious”? IPNav’s proprietary software tools help us evaluate the strengths of a patent’s claims quickly.
Core vs. Non-Core. Many technology companies focus their monetization efforts on “non-core” technology -- technology that’s not central to the company’s main lines of business. Clients may assume that they’re already earning a return on their core patents, and want to generate revenue from patents that are either underperforming or not generating any revenue at all.
Some companies are reluctant to launch a monetization campaign involving core patents for fear that competitors will fight back with counterclaims, putting core businesses at risk. However, we’ve found that it’s often worthwhile to monetize core patents.
Core patents are generally the most valuable patents a company owns. This isn’t surprising, since companies make the biggest investments in core technologies because they expect to reap the greatest rewards. Competitors with their own valuable IP are likely to use it offensively whether or not a client’s monetization campaign impels them to use it defensively.
More and more frequently, monetizing core patents is becoming an essential business strategy. For example, in 2011 Nokia transferred 2,000 patents from its core wireless technology business to a monetization entity.
Sometimes patents have value in different fields. A client could also decide to monetize a core patent in a non-core application.
Selecting the Right Monetization Strategy
Many different techniques can be used to monetize patents. Most IP monetization firms are focused on one particular method for monetization:
- law firms favor enforcement (litigation)
- patent brokers favor sale
- non-practicing entities (NPEs) favor indirect licensing
IPNav, on the other hand, is comfortable with all methods of patent monetization, and we work closely with our clients to select the monetization method best suited to the patent(s), the client’s financial goals, and the client’s strategic objectives.
Patent Monetization Strategies
IPNav uses all of the following monetization methods on behalf of our clients:
- Direct Licensing. The client retains ownership of the patent(s) and therefore controls the campaign. IPNav serves as an outsourced service provider to manage licensing and any litigation that may be required to compel licensing negotiations.
- Indirect Licensing. The client transfers the patents to a third party, typically an NPE, which will focus on and manage the monetization campaign. IPNav will manage the transfer to the third party, and will continue to manage the monetization process. One advantage to clients is that indirect licensing can yield upfront cash payments in addition to percentage participation in gross recoveries or ownership in the venture.
- Enforcement. No one’s going to pay a licensing fee unless they know there’s a credible threat of enforcement – litigation – if they don’t pay. IPNav has sophisticated enforcement strategies that encourage companies to settle quickly rather than engage in lengthy and expensive litigation. Our track record speaks for itself: companies we negotiate with know that we mean business.
- Commercialization. Sometimes the best way to monetize a patent is by developing a product. IPNav provides funding to universities, companies, and individuals to develop commercial products protected by patents. We generally recover our investment through equity or licensing participation.
- Sale. IPNav isn’t a patent broker; we don’t generally sell patents directly. However, if the right strategy for a particular patent is an outright sale, we have close relationships with several brokers who offer this service at favorable rates to our clients.
Criteria used in selecting a monetization strategy
Each monetization method has costs and benefits. That’s why it’s important to work with an IP monetization company, such as IPNav, that’s comfortable with all of the methods.
When we work with our clients to select a monetization strategy, we ask the following questions:
- What are the client’s financial goals? Is cash up front important? Or is maximum return most important?
Sale and indirect licensing can bring in cash up front, but at the cost of reduced upside potential.
- How risk averse is the client?
Sales and indirect licensing can be lower risk than direct licensing, since these methods produce cash up front.
- How actively does the client want to be involved in the monetization process?
In a direct licensing campaign, since the client continues to own the patents the client must be more involved in making decisions about the monetization campaign.
- Is the technology part of the company’s core business? Does the company plan to develop additional technology in this area?
If the technology is part of the client’s core business, the client will need to retain ownership rights, or at least broad and irrevocable license rights.
- How many years does the patent have left to run?
A patent with only a short “shelf life” remaining must be monetized quickly, or its value will be lost.
As a general rule, enforcement (litigation) is never our first choice. We’ve found that a “litigation light” approach generates better returns, faster. But if an infringer refuses to engage in a licensing discussion, we shift to enforcement mode.
If a patent shows value, but no one’s infringing it (yet), we may recommend and participate in a commercialization strategy to develop products based on the patent.
We’ll also tell our clients when there’s no monetization potential for a particular patent. Patent maintenance fees are due 3 ½, 7 ½, and 11 ½ years after issuance and maintenance fees can be as high $4,730 per patent. In some cases, it’s not worth spending the money, and we’ll recommend that our clients abandon a patent. It’s well known that IBM gets more patents than any other company in the world. What’s less well known is that IBM also abandons more patents than any other company in the world. Not every R&D investment pays off, and maintaining a worthless patent is throwing good money after bad.
Choosing the Right Targets
Most patent monetization campaigns start with a patent that’s already being infringed. If the patent is infringed by more than one company, selecting which companies to target – and in what order – can be a complex task. IPNav’s decade of experience in patent monetization means we know how to select and approach targets in a way likeliest to generate the client’s desired results.
The “obvious” first target is the infringer making the most money from infringing products, since that infringer would have to pay the largest royalty. This isn’t always the best approach, however: the biggest firm in the business may also be the hardest (and most expensive) to fight. A big firm may also have patents of its own to use as ammunition in a countersuit.
Sometimes it’s better to target smaller players who may be likelier to agree to a quick settlement. This can generate some early revenue, set a precedent for pricing, and strengthen the perceived value of the patent by showing that others recognize that value.
When selecting specific targets, it’s important to understand the depth of infringement:
- Is the technology covered by the patent central to a product?
- Or is it something that the infringer could easily “design around”?
- Is a patented feature central to the value of the infringing product?
- Or is it a feature the infringer could give up with minimal loss of sales revenue?
For example, Apple won a significant patent battle when a court ruled that Google’s Android software used in Motorola smartphones infringed Apple’s patented “slide to unlock” system. Motorola promptly announced that it had implemented a new design for this non-core feature. A patent on a core smartphone feature – such as the touch-screen, for example -- would be far more significant.
This is why a deep technical understanding of infringing products is important. In addition to our team of technical experts on staff, IPNav has a worldwide network of subject matter experts we consult on specific technologies.
Even though our preferred monetization method is licensing, we often have to either file suit or at least threaten to file suit to get an infringer to the negotiating table. But there are occasions when it may be worthwhile to delay initiating litigation.
For example, if a company has a new infringing product coming to market, it may be better to wait until the product has significant sales and a customer base, making it more difficult and costly for the infringer to try to redesign the product to avoid infringement, and also helping to set a market value for the technology.
There may be strategic reasons why a client will put a potential target on the “do not sue” list. For example, the infringer may be an important customer or business partner and the client doesn’t want to jeopardize the relationship. But some companies proceed regardless: Yahoo sued Facebook for patent infringement on the eve of the latter’s giant IPO, even though the companies had introduced a new feature that integrated Yahoo news with Facebook and caused Yahoo’s daily traffic to more than triple.
Costs and Financing
A patent monetization campaign can be expensive. Evaluating a patent portfolio requires technical, business, and legal experts.
A licensing campaign will not succeed without at least a credible threat of litigation. Patent cases are notoriously expensive to litigate: the average cost is now over $1 million.
Many small companies and individual inventors lack the resources to finance monetization on their own. Large companies may lack the budget flexibility, or may not want to put money at risk, impacting short term results, with no guarantee of a return.
By providing 100%, no-recourse financing, IPNav makes it easy for clients to choose the monetization strategies that work best -- not just the ones that fit their budgets.
We also believe that financing is a key “best practice” in patent monetization because it also brings about a perfect alignment of interests. Unlike IP advisors and law firms that bill by the hour, IPNav doesn’t get paid until a monetization campaign is successful and generating revenue for the client. We have no conflict of interest when we make recommendations to our clients.
When it comes to patent monetization, one size doesn’t fit all.
Best practices that lead to successful patent monetization campaigns include a recognition that clients have more than one goal and that there are different methods available to accomplish these goals. Best practices also include engaging experts in technology, business, finance, licensing, and litigation, and aligning the interests of the client with the interests of the monetization firm.