Selling Patents and Intellectual Property Part 1

February 24, 2010 at 9:17 am Leave a comment

In connection with our restructuring services, our firm recently sold certain assets of a fabless semiconductor company. The sale included physical assets as well as intellectual property (“IP”). As can be expected from technology companies with significant expenditures on research and development, the majority of the value was embedded in the intellectual property: the design database and the patents.

The project reminded me of how much the landscape of acquirers of IP has changed in recent years as the market for buying, selling, and licensing IP becomes more mature. There are a host of different players with very distinct interests and operating models.

In this first of two blogs, I will describe some of the main types of participants in more detail. In a second post, I will touch on the implications for the patent strategies of high-tech start ups.

Who’s out there?

In a broad sense, potential buyers of IP assets can be divided into operating and non-operating entities. Operating companies intend to use the patents to support (or defend) their operating business; non-operating entities are companies with no substantial operations other than enforcing intellectual property claims. They acquire patents for offensive (trying to license the IP or receive damage awards from infringers) or defensive purposes (trying to prevent others from seeking damage awards).

In the last decade, there has been a lot of development in the area of non-operating entities. The category may have started out as the derogatory “patent trolls”, but at this point has matured into an industry with a number of players with distinctly different strategies:

– Enforcing Entities: these companies seek to offensively enforce their patent rights vis-à-vis current or potential users that may have an interest in licensing the IP or are suspected of infringing upon the rights. These entities can be structured in a range of ways: some are structured as a fund; some were formerly operating entities that sold off the operating business to focus on patent right enforcement; and others started out as individual inventors with a successful track record of enforcing their prior inventions.

– Defensive Trusts: these entities are a relatively recent development. Large, operating companies band together to form trusts that acquire patent rights for defensive purposes. The rights will be licensed to some or all of the member companies as a “protective shield”. Depending on the trust, the patents may be sold after the initial round of internal member licensing to provide cash flow back to the trust as well as to keep the threat of litigation alive with non-members.

– Aggregators: whereas Enforcing Entities usually aim for an immediate and targeted activity, aggregators take a broader and more patient approach: Their aim is to amass a large patent portfolio in certain areas that will represent a critical mass for later enforcement.

– IP Development Companies: as public and private research organizations have become more skilled in their efforts to monetize their inventions, they have also become more active in seeking to round out their own IP portfolio through acquisitions. Some will have their own enforcement activities, while others may license a more complete set of IP to third parties.

– Buy-side, sell-side brokers: as the players in the intellectual property get more specialized and mature, so do the related intermediaries. A lot of operating companies and several non-operating companies do not want to openly engage in IP transactions, but rather do so indirectly through third parties. This preserves confidentiality for competitive and pricing considerations. By keeping the “need” for certain IP confidential, the buyer also does not provide any clues about their strategy, or legal Achilles’ heel.

Each of these entities may have its own focus on certain industries and may have its own process with its own timeline. For example, defensive trusts will necessarily focus on the industries of their member firms, and will likely only bid on a patent portfolio once they receive interest from their member firms. This may take a while and they may not be as responsive as other entities capable of making faster decisions.

Knowledge of the different strategies is essential in executing a successful IP sale. However, an awareness of the different strategies of these companies may also lead to a re-thinking of the IP strategy of start-up companies that intend to maximize the value of their intellectual property either in an ultimate sale, or in additional revenue from licensing agreements along the way.

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Gunther Hofmann is a Vice President of The Brenner Group and has done extensive work in valuations, M&A, venture capital, and corporate finance with significant international experience in small firms as well as global corporations. Gunther earned a Masters Degree in Electrical Engineering and Business Administration from Darmstadt University of Technology in Germany, and was a Visiting Scholar at UC Berkeley. He is a holder of the Chartered Financial Analyst (CFA) designation and an Accredited Valuation Analyst (AVA/NACVA). Gunther is a Member of the Board of the German American Business Association (GABA).

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