Patent value: but how do we understand the market?

Last week this Kat published a blogpost entitled “Have U.S. courts made patents less valuable?", here, which discussed aspects of the article by Terry Ludow, “Signs of the times: trends in technology IP licensing”. This article had been published in Intellectual Asset Management (IAM) magazine. The blog post engendered a lively discussion among Kat readers. In addition, it drew the attention of Katfriend Joff Wild, the editor of IAM, who published a long and thoughtful response to the post on the IAM website, here. Joff’s comments are worthy of attention to Kat readers. Accordingly, this Kat takes the opportunity to summarize Joff’s observations.

Joff accepts the assertion that monetization is not the sole reason that patent owners build patent portfolios. However, he takes the position that whether or not monetization is the primary mover for patenting,

“the price of a patent is ultimately a reflection of its overall value, not just its monetization potential. Although there are always exceptions, the ones that will generally generate the most money were they to be put up for sale are the ones that are of high quality and which read on key technologies that underpin products want to buy.” 

Joff then goes on to make a series of more specific points about patent value:

1. U.S. patent values have fallen in recent years, presumably for many of the reasons that Ludlow argued in his article.

2. On the other hand, we may be at the cusp of increasing patent values in Europe (and perhaps later down the line in China) The key is high-quality patents, more predictable court rulings and better enforceability.

3. While patent valuations will not return to the levels of a couple of years ago (e.g., Nortel’s auction generated $4.5 billion and Google paid $12.5 billion for Motorola Mobility) we will witness higher valuations for patents across a wider range of industries, including automotive, energy financial services and medical services. Previously, the highest valuations tended to focus on telecoms-related industries.

4. The current situation in the U.S., where it is harder to enforce patents, “is bound to play itself out. At that state a level of certainty will return to the market which will have an upward effect on prices.”

5. More than ever, quality is what will ultimately count regarding patent values. With higher quality patents, higher patent values as a function of litigation opportunities will spread to Europe and perhaps to China down the road.

Joff has raised some compelling points. However, in the view of this Kat, there is the unaddressed elephant in the room—the market for patents by which patent values are presumably set. But what exactly are the contours and structure of this market and how has it operated over time? Is it more akin the fine art market in the sense that no two assets are alike, it is subject to changes in tastes and it is dominated by a relatively small number of high rollers? Or is this market sui generis ex extremis?

The oversized amounts paid especially in 2011 and 2012 were, in this Kat’s understanding, due to an idiosyncratic confluence of factors, including large patent portfolios being flogged as a result of bankruptcy or like financial difficulties by the patent owners. The story still needs to be written about how these valuations came about, including what was the role of investment bankers and the criteria used by those who offered valuations for the portfolios. This Kat suspects that developments in the patent case law in the US had little impact on what happened to patent values in 2011 and 2012, but he would be delighted if Kat readers could point him to research to the contrary. If this Kat is correct, however, it becomes more difficult to explain why case law developments are, contrary to the 2011-2012 period, now taking on substantially greater importance in depressing patent values.

This Kat cannot stop thinking about two anecdotes in connection with patent values.

A well-known figure in the area in Silicon Valley recounted how, in the 1970s, patent negotiations were often conducted on the basis of which side could physically place on the table the larger bundle of patents. Mere bulk mattered and, to his view, it does so as well today. What has been happening in recent years is redolent of those earlier times.

Ah, you might say, with patents of greater quality, a better job can be made in better evaluating patents. Maybe yes, maybe no. A lawyer who was involved in one of the big mega-patent transactions of several years ago admitted to me that it was impossible to review even a fraction of the patents that were being offered for sale. What one tries to do is identify and evaluate the key patents. But key patents need not necessarily mean patents of higher quality (whatever exactly that means).

What these anecdotes say about the nature of the patent market is way beyond this Kat’s pay grade. At the least, however, they underscore that the most urgent need is for those involved in the “patent as a valuable asset” industry to provide a clearer explanation of this market and how it goes about setting the price and ultimately the value of patents.