October 3, 2019, by Nicole Shanahan
ClearAccessIP sponsored IAM’s 5th annual Patent Licensing conference in San Francisco yesterday. Much of the conversation surrounded challenges in win-win deal-making, with leadership from top corporations speaking candidly about how they are approaching strategic deal-making. Our major take away: flexibility is key to success.
During the panel on cross-industry licensing, I took the opportunity to share with the audience the Patent Ownership Distribution Curve, which highlights where the largest opportunities for deal-making exist today, but where most deal-makers struggle to connect.
There are 235 organizations that own more than 10,000 active assets. However, there are over 4M organizations with between 1-50 active assets. The majority of transactions still occur in the short-tail of the 235 top organizations. These are considered by our industry as the “sophisticated” players. When you consider the fact that there are only about 45,000 active patent professionals in North America, it becomes abundantly clear that many IP owners face challenges related to accessing adequate representation.
At ClearAccessIP, we have uncovered that much of the trading appetite exists in the long tail. Consider who is most invested in building out portfolios to cover new operating activity and product sales. There are millions of SMEs and start-ups that are quick to introduce, pivot and bring innovation to the market. They view IP coverage as a necessary check box, but rarely do they understand the enormous exposure and complexity of their activities in the worldwide IP landscape. Current professional IP guidance is to prosecute filings of origin. They have little to no access to or guidance into the world of acquisitions.
What holds up a deal?
The panelists debated this extensively. But ultimately, it came down to the fact that the patent transaction has historically been a process for the sophisticated and experienced. Participants seek partners who are as knowledgeable and skilled as they are with realistic expectations. When much of the long tail does not have adequate access, it becomes challenging to both deal effectively and close.
Setting realistic pricing expectations at the outset around a portfolio price is one of the hardest aspects of patent transaction. Partners who are unsophisticated often run the risk of mispricing, often too high. Licensors that are used to charging royalties in one industry where their IP component is core, find themselves at a loss when they apply the same logic to those in a non-core industry and wonder why they cannot command the same rates. And depending on who anchors on price first, the estimates can vary dramatically because of the nature of the transaction and the needs and desires of each party.
Solution 1: Third Party Pricing Discovery
One way to obviate significant conflict around price is to use an objective valuation benchmarking method from which to construct a “first offer” or “stalking horse bid.” This can take into account data about the IP owner, their level of investment in acquiring and capturing the IP, the nature of the technology, the competitive landscape, and the industries that may find application. Using these metrics, both a buyer and seller can establish a baseline and a range within which to effectively deal and negotiate.
Solution 2: The Fully Paid-Up Perpetual License
The fully paid-up perpetual license is often not talked about enough in transactions circles. This license simplifies the terms and the transaction, making it possible for buyers and sellers to exchange value and go their separate ways after the transaction.
One of the biggest value drivers of this type of license is its low transaction cost nature. Simpler contract terms mean fewer professionals and less time needed to review and sign off. It also means less administrative overhead after the fact, because royalty payments do not have to be tracked and audited on a multi-year basis.
This approach is gaining momentum, and one day ClearAccessIP hopes that it becomes more mainstream. If so, there is the opportunity for a more liquid market of transactable IP rights, one where all can participate on a level-playing field.