ACC Patent Law Committee Program Intangible Assets or a Corporate Goldmine? How Companies Can Recognize the Value of Their Patent Portfolios

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1 ACC Patent Law Committee Program Intangible Assets or a Corporate Goldmine? How Companies Can Recognize the Value of Their Patent Portfolios March 2014 Presented by John A. Squires, Partner jsquires@perkinscoie.com Erez Levy, Managing Director elevy@fortress.com William J. Plut, President will@patprofit.com

2 Historically, Patents An Invisible Asset (or, Dude, Where s my R (return))? Failure to Account for Value of IP Assets Accounting approaches generally overlook IP as a long term asset Patent with a 20 year life span If a company develops a patent worth more than the cost of development the added value does not show up on the company s balance sheet Because patents don t appear on company balance sheets investors and shareholders were generally unaware of these hidden assets 2

3 Under-Utilized Corporate Assets Companies Are Unaware of the Earning Potential of Their Patent Portfolios IP-savvy business leaders believe that, in a world where battles are increasingly being waged not for control of markets or raw materials but for the rights to new ideas and innovations, the management of intellectual property must become a core competence of the successful enterprise.... Therein lies one of the next great corporate challenges: figuring out how to unlock the hidden power of patents.... Yet most companies remain completely unaware of the earnings potential of their patent holdings. Corporate America is wasting a staggering $1 trillion in underutilized patent assets. Harvard Business Review, Discovering New Value in Intellectual Property 3

4 What Has Changed? Increasing Visibility of Patents As An Asset Corporate Acquisition Portfolio Acquisitions Patent Litigation Licensing $4.5B vs. $1.2B $12.5B $500M $1B Wall Street is taking notice 4

5 Trend Patent Deals: Now A $19B Industry The Wall Street Journal Online Edition Monday, July 11, 2011 as of 3:14 PM EDT CCTV.COM English Wall Street banks eye patent deals as way to grow business :52 BJT 5

6 The Patent Market Price Per Patent Reaching As High As $1.2M Date Buyer Seller # Patents Technology Portfolio Price Price Per Patent Sold 3/2011 CPTN Holdings LLC Novell 882 N/A US $450 million cash $510,204 5/2011 Apple Freescale 200 Computer hardware, wireless devices N/A N/A Semiconductor 7/2011 Rockstar Nortel Networks 6,000 N/A $ 4.5 billion cash $750,000 Corp 7/2011 Google IBM 1,000 Operating systems N/A N/A 9/2011 Google Mosaid 18 Semiconductors, data compression, $11 million $611,111 encoding, encryption 1/2012 Acacia Research Adaptix 230 4G technology $100 million $434,782 1/2012 Intel Real Network 190 Media video (?) $120 million $631,579 4/2012 Facebook Microsoft 650 Mobile, web, and instant messaging tech $550 million $846,154 4/2012 Microsoft AOL 925 Internet technology from AOL $1.05 billion $1,135,135 6/2012 N/A Vuzix Corporation N/A Tactical Display Group $8.5 million cash + $2.5 N/A million earn out 6/2012 Intel InterDigital G/LTE technology $375 million $220,588 7/2012 Universal Display Corp Fujifilm Corp 1200 OLED technology $105 million $87,500 10/2012 Wi LAN Inc. Alvarion N/A Wireless broadband $19 million N/A 11/2012 Apple Maya-Systems 18 Mobile and PC user interface Unknown, reported N/A multimillion dollar sale 12/2012 Intellectual Ventures LLC Kodak 1,100 Digital photography and web based photo $525 million $477,272 applications 8/2011-5/2012 Google Motorola Mobility 17,000 Mobile technology $12.5 billion $735,000 6

7 The 2013 Patent Market Date Buyer Seller # Patents Technology Portfolio Price Price Per Patent Sold 2/2013 Kodak Apple, Google, 1,100 Digital imaging $525M $477,272 Microsoft, Adobe, RIM, Samsung, HTC, Shutterfly, Fujifilm, Amazon, Facebook 3/2013 Network-1 Security Dr. Ingemar Cox 4 Patents Identifying media content $1M cash plus stock $200,000 Solutions 1 app 3/2013 StemCells NsGene A/S 45 US Neural cell patents, stem cell research tools N/A N/A Patents 250 Foreign Patents, plus active patent prosecution in 15 families and techniques 3/2013 Pendrell Corp Nokia 125 Memory technologies for electronic devices N/A N/A 5/2013 Network-1 Security Mirror Worlds LLC 14 Unified search and indexing, displaying & $3M cash plus stock $214,286 Solutions archiving documents in a computer system 9/2013 Spherix North South 224 Wireless communications, satellite, solar, Acquired entire company: N/A Holdings radio frequency, pharmaceutical distribution cost not disclosed 9/2013 Microsoft Nokia N/A N/A 1.65B (~ $2.8B) N/A 10/2013 Document Security Systems Undisclosed 2 Portfolios Semiconductor manufacturing and lowpower Bluetooth peripherals 10/2013 Acacia Research Corp. Undisclosed 20+ Power managed security system technology, market sales data, multiple coordinated viewing devices, progressive deletion $2.5M N/A N/A N/A 7

8 The Patent Market Date Buyer Seller # Patents Technology Portfolio Price Price Per Patent Sold 10/2013 Marathon Patent Group Undisclosed 4 Process automation and enterprise resource N/A N/A planning 11/2013 CopyTele Undisclosed 2 Portfolios (1) Multicast, Internet delivery of streaming N/A N/A data, media to large numbers of recipients within confines of specialized VPNs. (2) Integration of telephonic participation in web-based audio/video conferences via gateway between Internet and cellular/landline telephones 12/2013 Twitter Inc. IBM Corp. 900 Digital computing, video delivery, $36M $40,000 messaging technology 1/2014 Inventergy Panasonic Corp G and 4G communications N/A N/A 1/2014 Lenovo Google, Inc. 2,000+ (related to smartphones) Google sold Motorola Mobility to Lenovo for $2.91B 1/2014 Qualcomm Hewlett-Packard Co. 2,400 (1,400 US, 1,000 foreign) 1/2014 Spherix Rockstar Consortium 1/2014 Google Nest Labs, Inc. 38 US patents 40 US apps Possibly filed apps not yet published 2/2014 Facebook WhatsApp 1 published US app WebOS-related IP Undisclosed, likely $50-$100M 100+ N/A N/A N/A Self-learning thermostat, smoke alarm, and home automation Multimedia transcoding and formatting of data exchanged between mobile devices For acquisition of company: $3.2B cash For acquisition of company: $4B cash, $12B stock, $3B restricted stock Possibly $20,800- $41,000 N/A N/A 8

9 Trend Patents As A Mainstream Corporate Asset What the Stats and Experts Are Saying Patents are a tricky asset to trade. But there is clearly a huge amount of value in intellectual property. And I think what we re seeing is the beginning of a lot more monetization and trading of intellectual property rights. Josh Lerner, an economist at the Harvard Business School. Intellectual property as an asset class is one of the strongest pillars supporting the US economy: Intellectual property intensive industry was responsible for over 22 million jobs and 35% of US GDP in 2010, according to a recent Department of Commerce study. Roughly one-third of US IP value is the form of patents, over a third is in software and other copyrighted materials, and the balance is in trade secrets. In 2010 patents held by US companies were worth nearly $2 trillion. Former chairman of the Federal Reserve Alan Greenspan said that 75% of the value of companies today is in intangible assets, up from 40% in the 80s. 9

10 Trend Companies Are Noticing New Avenues for Generating Revenue and Financial Leverage Generate corporate revenue, add to bottom-line Recover IP investments (prosecution costs, maintenance fees) Finance new R&D and technologies Leverage to acquire new customers Access competitive technologies through cross-licenses and collaboration Bankruptcy fallback (Kodak & Nortel) Desire for alternative investment strategies Growing expertise in structure IP transactions 10

11 Finance Patents As Assets Per Se Ericsson Example Legal no longer a cost center but profit center Patent Valuation derives from enforceability Traditional choices: - Enforcement: (problems arise vs. end users/customers) - Sale: (but no longer own asset) A third way: Asset per se - Asset backed financing alternatives 11

12 Business Companies Unable to Monetize Patents without Risking Company and Patents Patent as Negotiable Instrument License / Assert Contingent Fee Lawyers / Enforcement Companies Time-Consuming Process High Cost Risk of Patent Loss and Countersuit Case Against Customers Sell Aggregators / Brokers Patent Loss Not Maximizing Patent or Company Value The Third Alternative: Asset per se - Asset backed financing alternatives 12

13 Business Intellectual Property Finance Product Offerings Intellectual Property Finance Group Monetization Program Finance IP Backed Loans 13

14 Business IP Backed Loans: Meeting Financing Needs of Innovative Companies Liquidity for Traditionally Unbanked Typical Borrower Profile Strong Patents Tired Equity Syndicate Slower Revenue Growth No Access to New Equity Little Access to Bank Debt Increased Flexibility for Bankable Strong Patents Supportive Investors High Revenue Growth Access to Bank Debt Access to New Equity Fortress Financing Solution Collateralize High Value, Core Patents to Provide an Attractive New Source of Capital Borrower Benefits Immediate Liquidity Retention of Core Patent Assets Lower Cost of Capital Increased Company Value Complement to Other Financing Monetization Potential Even in Default 14

15 Business Monetization Program Finance How it works Provide capital to ongoing or new patent monetization situations Debt like financing Capital provided as the case progresses Initial capital from outcome to be used to repay loan and associated cost of capital Moderate share of upside compared to contingency fee Underwriting Criteria Quality of patent and portfolio Monetization strategy Legal counsel Management Expected stage and timing An effective approach to fund IP Monetization 15

16 Finance The Business Case 1. When to monetize? 2. Goals 3. Sell or license? 4. Pitfalls to be wary of 5. Do s and Don ts 6. Putting it all together 16

17 Finance PPI Introduction Head Office: Silicon Valley, California Team in: Canada, Israel, Korea, other parts of U.S : Reviewed ~ opportunities each year Take only top portfolios to market each year 2014: Increase on all fronts by 5-10X William J. Plut Silicon Valley innovator: 50+ patents and apps Founded 3 StartUps; helped grow dozens 17

18 Finance 1. When to Monetize Abandoning Valuing asset at less than the cost of the maintenance fee Analogy: car at the side of the road Biz unit shut down Not using the patents Too many patents in a tech area 18

19 Finance 2. Goals Think like a business person: profit Sell for more than Cost = win 2X Cost looks good to bean counters 8X-20X cost is a normal selling price Expiring milk analogy Golf club analogy Turn Patent Department into a Zero Cost Center Have multiple clients who have achieved this 19

20 Finance 3. Sell or License? Depends on: Industry medical, pharma, hi tech, etc. Time Stomach Monetization Resources - $ and internal Quality of assets Goals financial; 10X ok? want 400X? Technology detectible? Market around technology growing, dying? Circumstances patent wars 20

21 Finance 4. Pitfalls to be Wary of Business Repercussions You choose who you sell to, and who you don t Competitors, supply partners, etc. Internal Stigmas Why did we patent this in the first place? Perception of Patents ONLY a legal asset Not meant to carry value of biz or biz unit Grant backs 21

22 Finance 5. Do s Use a small test case for the first time Use a pro Get all internal approvals before going to market Get expectations under control before the first meeting 22

23 Finance 5. Don ts Overpromise internally Wing it Underestimate the other side, or the field Have a short term focus 23

24 Finance 6. Putting it All Together Option A: Dispose of old assets in a field no longer important to the company that expire in 7 years for 10-40X Cost + New assets that expire in 20 years in an important field to the company and pocket the difference OR Option B: Keep old assets that are not being used and are technically losing money 24