Getting Bang for Your IP BuckGetting Bang for Your IP Buck

Especially given the economic downturn, medical device, diagnostic, and other biomedical companies cannot afford to ignore alternatives for extracting value fromintellectual property (IP) assets. These alternatives go beyond the traditional invent-develop-manufacture-sell business model, and beyond traditional monetization models such as licensing and patent litigation. Furthermore, biomedical companies must optimize opportunities to profit from their IP holdings by developing and supporting progressive and effective IP portfolio management strategies. Companies should pursue these opportunities through traditional or nontraditional monetization models.

While not abandoning traditional licensing and IP enforcement initiatives, i.e., litigation, information technology, pharmaceutical, and biotechnology companies long have realized the importance of developing and supporting alternative IP monetization programs. Such alternatives can raise immediate capital and generate ongoing revenue streams outside the traditional IP monetization business models.These sources of revenue can sustain an enterprise, especially during the lean times when capital markets are dry.
This article provides an introduction to the value and types of such strategies. It also offers basic guidance to medical device companies that want to develop and implement alternative IP monetization strategies and programs.
What Makes IP Valuable? At least one research firm has estimated that, in 2008, intangible assets (including IP) accounted for 75% of the market value of S&P 500 companies.¹ This value is based primarily on the ability, or right, to exclude others, typically competitors, from using the IP. This right-to-exclude ideally results in better protection of the IP holder's market share. It also can force a competitor to increase production costs to the extent that it must incorporate one or more costly noninfringing alternatives. Value is also derived from the ability to do business with others in the market or technology space. Such value can be gained through licenses or cross-licenses, joint ventures, or sales of IP assets.
It is not just the potential of an IP portfolio that defines value. It is also how that portfolio is developed and maintained. For example, a company could file 100 patent applications each year, but if only one or two applications result in issuance by the U.S. Patent and Trademark Office, then the value is diminished. A company also could file too few applications surrounding a key technology, omitting coverage of potential noninfringing alternatives (commonly referred to as design-arounds), which may be adopted by a competitor or potential licensee. A company also could have deficient practices that cause it—intentionally or unwittingly—to abandon certain IP because the applications were not prosecuted with diligence or because the company failed to implement a system of timely payment of maintenance fees (or annuities).
An additional element of value—and to some the most significant element—is how the IP has been used to generate revenue in the past—whether successfully licensed out or successfully tested through litigation involving questions of infringement, validity, and enforceability of the IP. Ideally, these activities provide less-speculative evidence of value and, in some instances, can serve as strong precedent for assessing value when considering alternative opportunities.
Alternative Models
A survey of just a few recent presentations on the topic of IP monetization reveals that at least 20 IP monetization business models have evolved.² Of these, the most relevant models for alternative IP monetization by medical device and technology companies are the following:
•Patent licensing and enforcement entities (PLECs) own patent portfolios or rights to portfolios and systematically enforce those patents through licensing programs or patent litigation.
•Institutional patent aggregators or patent investment funds are composed of general partners of a limited partnership. They raise money in orderto purchase patent portfolios to be licensed or otherwise leveraged.
•IP and technology development companies support research-and-development activities for new technologies and then license the patents or know-how to manufacturers. Sometimes these companies also provide consulting services to facilitate the use of the IP in the manufacturer's products or processes.
•Licensing agents work as intermediaries to help IP holders find potential licensees. While law firms often help patent owners find potential licensees, other types of firms facilitating this model include technology transfer and IP management firms.
•Litigation financing firms are a hybrid of patent investment funds and PLECs to the extent that they invest in ownership of patent portfolios to be monetized through licenses or patent litigation. This is a model that has worked in various plaintiff recovery contexts.•IP brokers are similar to licensing agents except that they are seeking buyers or sellers instead of seeking licensees.
•IP-based advisory firms advise IP holders in technology-driven mergers and acquisitions, earning fees based on the value of the deal or the portion of the deal attributable to IP.
•IP auction houses model themselves after traditional auction houses by offering live auctions of patents.
•Online IP exchanges and portals can be used by IP holders to advertise their IP online, much like a classified advertisement in exchange for front-end or back-end fees.
•IP-collateralized lenders provide loans to IP holders secured, in part or whole, by IP assets. Unlike a traditional bank or lender that backs loans with tangible assets, these lenders typically have developed expertise in the potential value of intangible assets such as IP.
•Royalty stream securitization firms assist patent holders with financing transactions secured with patents. Services can include selling the patents to a bankruptcy remote entity, which insulates companies in a corporate group from insolvency of the “remote” company in that group) or special purpose entity with a license back to the original patent holder. The original patent holder can then seek licensing arrangements with a flow of royalties back to investors in the thirdparty.
•Defensive patent pools, funds, and alliances have cropped up largely in response to efforts by PLECs and patent aggregators asserting patents against certain industries or sectors. These defensive entities acquire patents so that such patents cannot be asserted against their members, which share the acquisition and administrative costs.
•IP or technology spin-outs are mechanisms to exploit noncore or underutilized core IP assets through a separately owned and funded company. This can be a joint venture to commercialize the technology by generating licensing revenues or by offering an IPO.
According to Ron Laurie, managing director of Inflexion Point Strategy LLC, there are both winners and losers among the numerous models above.³ Noted winners are PLECs, patent aggregators, litigation financiers, and brokers. Among the losers are online exchanges, live auctions, and securitization and collateralization models.
Setting the Right Plan in Motion
The most appropriate strategy for successful IP monetization depends on the IP holder's business model and objectives. The IP holder may seek only to invent and leave it to others to develop, market, and sell—or otherwise monetize. Or, more traditionally, the IP holder may intend to invent, develop, market, and sell products. Along the way, the IP holder systematically amasses IP to defend differentiating technologies integrated into key products and thus market share.
Regardless of the model, IP-driven companies and managers increasingly must consider not only what their monetization objectives are but also how the company will achieve such objectives. Understanding the steps for success is critical. A crucial component is a commitment to treat IP portfolio management as more than a numbers game. Otherwise, there is the risk that while the number of patents may be climbing, the associated expense escalates exponentially with a potentially flat or negative return. A company focused just on the quantity of issued or pending patents as opposed to their quality may be squandering company assets on technology that cannot be exploited, regardless of the business model adopted.
To avoid such waste, cross-functional teams should be tasked with routinely auditing, evaluating, and reevaluating the IP portfolio. These teams must be prepared and empowered to make hard decisions about what does and does not matter—i.e.,what are core and noncore assets given the chosen business model. They should then focus resources accordingly to best position core and non-core assets for monetization. This also means culling certain assets from the portfolio (along with their prosecution and maintenance fees) if those assets are unlikely to be monetization candidates. Failure to do so may also leave investors or potential acquirers left to wonder why funds are being spent on such fees when there is no return. In many cases, just one patent application pursued within the United States and then abroad in just a handful of countries can quickly exceed $250,000 in application, translation, maintenance, and legal fees.
In sum, medical device and technology companies must prioritize development and implementation of active and inclusive technology and patent portfolio management processes. Executive management must invest in and support meeting this enterprise-critical need, including working directly, at least on a periodic basis, with patent lawyers and engineers.
The First Step
Management's first step is realizing the need to devote resources to develop the strategy, policies, processes, and priorities in line with enterprise objectives and global market perspectives. These resources include the institutional and market knowledge of a collaborative and actively participating team of stakeholders. Key participants should include a mix of product management, marketing, finance, technology, and legal experts. It is critical that the team members be familiar not only with the invented technologies and inventors but also the target market and market conditions, e.g., potential for adoption of the inventions under discussion. It is equally critical that the team understands the costs to secure and maintain patents in the United States and other countries to participate meaningfully in strategic IP portfolio management discussions.
For these reasons, strategic teams members should include marketing experts who can help assess whether the technology at issue has value to the extent it is marketable by the company or a third party. The team should also include a patent attorney who can help to assess whether the technology is patentable, or the degree to which the patent may be avoided by a design-around or would be susceptible to a successful attack if asserted. Business leaders or product managers who understand where the technology and value fit with the mission or vision of the company must also be part of the team. And, if there is ongoing litigation or the potential for litigation, consider including a technology or patent litigator on the team in order to minimize exposure or the risk of failure in executing the monetization strategy.
It also is essential that executive management develop a meaningful and objective process to optimize the potential return on IP assets while also minimizing waste. Whether conducted as a formal IP audit or instituted as a routine procedure, the process should include systematic product and technology review coupled with a review of whether the portfolio is achieving the objective of protecting the assets.
This process must also identify high-, medium-, and low-priority assets as well as candidates for alternative monetization models or possibly abandonment. High priority typically would be assigned to those assets relevant to the core business and thus conclusively capable of being monetized in one or more ways. Medium typically refers to those the team believes have potential or require additional time to assess. Low is assigned to those that the team has concluded are irrelevant to the core business; it can also be used for differentiating technologies that may be candidates for monetization through a third party.
Abandonment is reserved for those IP assets that the team concludes have no redeeming value and for which investment of other corporate assets in alternative IP monetization efforts makes little sense. Corporate assets can be redirected to more worthy patents, associated technologies, and additional (and hopefully more fruitful) research-and-development efforts. An important element of the process, and a sign of a mature process, is purging from the portfolio IP that serves no function or is unlikely to yield a monetization opportunity.
When an enterprise assembles an objective team, it is much easier for the team to come to a fiscally prudent decision on whether to hold or fold a particular technology or patenting endeavor. It is also easier to earmark certain IP for auction, license, litigation, and the like. Otherwise, the risk remains that the decision makers are less than fully informed of the global perspective or financial implications of their decision—or lack of a decision—and thus default to the maintain position, i.e., a waste of corporate assets.
Timing Is Critical
Timing is another critical component of the process, including meeting early in the life cycle of a developing concept or technology and at regular intervals to make initial assessments, revisit assumptions, and strategies, and determine the best road to optimization. Failure to meet at key decision points also risks waste of company assets. IP may not be adequately protected, or a company may be inadvertently authorizing continued protection of an essentially worthless asset.
It is essential that the right people are at the table and informed decisions are made as to priorities and the optimal use of accumulated IP assets. Only then can the company adopt appropriate monetization options, such as assignment, enforcement, license, auction, aggregation, or spin-offs.
Once the enterprise elects a monetization strategy for a particular IP asset, it is just as important to audit each monetization effort periodically to ensure success. Common issues to audit include ensuring prompt and appropriate payment (especially in the models involving licenses such as milestones or royalty streams), ensuring that terms and conditions remain equitable over time, and ensuring that new IP assets, products, or markets are included in the monetization program.
References

1. “Ocean Tomo 300 Patent Index,” [online], [cited 28 May 2009]; available from Internet: www.oceantomo.com/index_ot300.html.

2. Raymond Millien and Ron Laurie, “A Survey of Established & Emerging IP Business Models,” Sedona Conf. J. 9:77, 2008; Ron Laurie, “Current Developments in Patent and Technology Monetization,” presented to the Practising Law Institute: IP Monetization 2009, San Francisco, May 2009; Jose A. Esteves, “Overview of IP Monetization Techniques,” presented to the Practising Law Institute: IP Monetization 2009, San Francisco, May 2009.

3. Ron Laurie, “Current Developments in Patent and Technology Monetization,” (presented in the Practising Law Institute online seminar, San Francisco, May 13, 2009).

Karen A. Gibbs is a partner of Crowell & Moring LLP. Based in Orange County, CA. Gibbs handles a variety of matters for medical technology companies. Before joining Crowell & Moring, Gibbs was senior corporate counsel of Applied Medical, where she managed a team of IP attorneys and was responsible for the company's transactional, litigation and other legal affairs worldwide. She can be reached at [email protected].

© 2009 Canon Communications LLC