As intellectual property (IP) practitioners and pundits can attest, the days of generating windfall revenues from patent deals are increasingly in the rear-view mirror. A few reasons for this. First, companies have become far more sophisticated on IP and, therefore, are less prone to overpaying for IP rights. Second, the IP litigation climate has swung favorably toward defendants, who have learned from the Apple v. Samsung global patent battles, among others, that it can pay to put up stiff resistance rather than willingly shell out multi-year IP royalties for a license to the other party’s patent portfolio.
What does this mean for companies seeking to secure value for their patents? It means IP owners that treat patent licensing as a blunt instrument - i.e., doing little more than handing alleged infringers the equivalent of an invoice and expecting payment – are in most cases setting themselves up for failure. Worse yet, they may find themselves in an entrenched patent war with no viable plan for exiting.
How to avoid this fate? Set a solid foundation for the discussion by establishing two critical components, at the outset: (1) your company’s credibility as the owner of a quality patent portfolio; and (2) the value the other side will gain from a license to your IP. The below diagram sets out how best to accomplish this.
When negotiating a patent license with another company, you will optimize your credibility as the owner of a valuable patent portfolio by demonstrating your company’s heritage of pioneering innovation in its relevant area(s) of patented technology. Auto makers might point to trail-blazing inventions that flowed from deep R&D investments around safety (anti-lock brakes, air bags, sensor-based anti-collision systems); tech companies may illustrate innovations in security for internet-enabled devices (authentication, automatic update protocols); and either might demonstrate how their investments in solving complex problems around navigation-sequence instructions delivered safe, innovative and differentiated navigation services. Whatever it may be, tell your innovation story.
Quality Patent Portfolio:
There is no getting around it – to establish and maintain credibility that you possess a highly-valued patent portfolio, you must be willing to submit your key patents to substantive technical review and discussion with the other side. Any company asserting its patents against you that is resistant to such a review should be met with caution. It is industry-standard for a patent owner to demonstrate the differentiating appeal of its inventions and patents – typically through rigorous debate among engineers from both companies. Where substantial royalty payments are being sought, you should assume it will be demanded.
Third Party Validation:
While there are various mechanisms and approaches for doing so, you should conduct your own analysis to gauge the value of your portfolio. Some methods are based on the number of times your patents have been cited by other patent applications or reference materials; others use a balance sheet methodology based on their value as a corporate asset; others still set valuations based on the cost of filing, maintaining and managing the patents; while others rely on a blend of methods. For most large organizations, your CFO likely will require this.
Beyond your evaluation, you should become familiar with the work of third party organizations that conduct qualitative assessments of corporate patent portfolios. For example, the IEEE (Institute of Electrical and Electronics Engineers), which describes itself as "the world's largest technical professional society,” publishes an annual Patent Power Scorecard that stack ranks the quality of corporate portfolios grouped by technology and industry. Your ranking, or the ranking of the company seeking a license from you – or the lack thereof – can and should become a part of your valuation discussions.
You also may consider hiring a patent analysis firm (there are many out there) to conduct a valuation study of your portfolio – or even key patents - using industry-accepted methodologies. While opposing companies might question its objectivity (as a work paid for by your company) it may point to compelling industry benchmarking comparisons that can prove helpful in your negotiations.
Lastly, when you approach potential licensees, having an established licensing program that includes a number of successfully-concluded licensing deals can serve as valuable precedent and validation of the quality of your patents and your standard royalty rates. A program with, say, 40 licensees sends a message that your patents have been scrutinized, if not battle tested, by other sophisticated companies and have passed muster.
While it’s unlikely these items on their own will be sufficient to compel the other side into signing a license, they will complement your innovation pitch, adding strength and heft to your overall credibility and quality story.
Ascribing your own valuation to your patents is one thing. But if you want to land a deal, you must articulate and demonstrate the value the other side will gain from taking a license.
In the book How to Become a Rainmaker, the author powerfully illustrates the art of value selling. He writes:
Rainmakers don’t sell fasteners or valves or washing machines or double-paned windows or tax audits or irrigation systems or training programs or golf clubs. Rainmakers sell money! They sell reduced time, fewer repairs, better gas mileage, higher deposit interest, increased output, decreased energy usage, more wheat per acre, more yardage per swing.
The same is true in patent deals. Your audience needs to see value to their organization in voluntarily striking a license deal. If they don’t, the job gets harder and tension and impasse will set in.
The trick is you must inform yourself about the wants, needs and even weaknesses of the other side to sell them on the benefits of a deal. You may learn, for example, that they are focused on an IP deal to help clear the path for product expansion into new geographies. Perhaps, they are after positive PR with a large IP owner. Or maybe they are looking for peace of mind (the absence of legal risk), or want a deeper partnership with your company. You must ask questions, do research, assemble other stakeholders within your company and build out a value story for the other side. And then, you have to sell it.
Here is an example of an IP pitch that might be appropriate from a US IP owner to a Chinese company looking to expand its product offerings into developed markets:
There is nothing more exciting in business than being part of a company that is growing. Growth creates opportunities only made possible through global reach. It allows for more hiring, more investment, more R&D, and better products and services. It also brings greater accountability. Embracing the global norms of IP is one such responsibility. Consider the IP landscape and the examples set by those that are aligning their IP practices with global requirements versus those that are not. Press clippings and legal journals are filled with the repercussions that await companies that try and cut corners. Legal risk includes not only money damages, but product shipments being blocked at the border.
Even more concerning is the long-term reputational harm, which can be halting, if not devastating, to a company on the rise. An IP deal between your company and a marquee IP owner will send a message that your company is serious about its growth; that it will not fall victim by sacrificing the long term for the short term; that it is a sophisticated, global player on IP; and that it is ready to compete in the vital US market.
The work you put in to painting a picture of success for the other side will pay dividends, and put you on a path to landing your deal. More importantly, defining – and expanding – the value pie, will put you in the best position to capture the greatest possible value for your company.
Please comment on your own experiences in maximizing value in IP licensing deals. And if you liked this article, please share it.
[Nick Psyhogeos is the author of Confessions of a Global Negotiator. How I Learned to Close Large Deals and the 5 Rules for Business Development Professionals to Do the Same, which will be published by Authority Publishing in February 2017]