Tangible IP’s Latest Market Update

August 28, 2018 

Mid-Year Review

Now that we have firmly closed the first half of the year and are mid-way through Q3, it is a good time to look at some indicators that tend to explain current and future market trends. Whenever I search for influencers of the IP marketplace, I generally look for the following clues:

• Noticeable change in the supply & demand chain;
• New case law that may have a long-lasting impact;
• Changes in the regulatory environment;
• Recent large damages awards against infringers;
• Health scorecard of publicly traded IP companies (PIPCOs);
• Statistical trends regarding patent enforcement and validity;

All the above are susceptible, especially when taken together, to move the market one way or another. So, let’s look at those factors for the first half of 2018 and whether they should affect the market positively or negatively. So let's play the game and see what comes out.

Supply/Demand:

2018 was the year several Fortune 500 companies tip toed into patent monetization via sales through brokers while, on the other hand, many have largely phased out their corporate patent purchase program. In other words, they are shifting gradually from being buyers to sellers. This does not mean they won’t acquire patents but will search more so for opportunistic reasons vs. a budgetary requirement for IP spending. Look also at the bellwether Intellectual Ventures, who went from being the largest acquirer to probably the largest seller of patents. As long as this trend continues, it will remain a buyers’ market. This does not mean really good patents won’t sell at a decent value, but it suggests that many patents will simply not sell at all as buyers can afford to be extremely selective. Net: negative

Case Law:

This was a busy first half year on the judicial front and we discussed the most important decisions in previous columns. Go here if you would like to refresh your memory. Some cases were favorable to patentees, others not so much. Overall, it is a mixed bag. For instance, it is now more difficult to sue in a pro-plaintiff district but it can lead to larger awards if you are victorious. And while patentees can still be challenged through an IPR, 101 rejections (Alice doctrine of abstract idea) are below 50% for the first time in years since the recent Berkheimer decision. Net: neutral

Regulatory Environment:

Although most bills that pertain to changing the current patent laws will likely never be adopted, they are a good barometer of the prevailing narrative within the current administration and elected officials. In this regard, the tone has definitely moved from “patent trolls are bad” to “inventors are good”. The next step, which we saw just last week (see below) is to push a more aggressive discourse that “efficient infringers are bad”. If this becomes the new credo, we will find ourselves exactly at the opposite end of the spectrum from where things stood just a little while ago. Net: positive

Damage Awards:

We recently saw several damage awards in excess of $100M, many of which were not overturned. This is something we had not witnessed for a while. Equally important is that the companies on the receiving end of those awards are large operating technology companies who usually fight each case tooth and nail. It will be interesting to see if this changes their attitude towards patent owners. Net: positive

PIPCOs:

These are the canaries in the coal mine. They are the gladiators of patent litigation (though not by choice) and should normally have a better track record than most patent owners who have to resort to assertion. Yet, the latest quarterly results for the most part are not encouraging, with the likes of Acacia, Interdigital, Xperi, Rambus, Immersion, ParkerVision, Wi-LAN (their big win against Apple came in Q3) all down from the previous quarters. Only Finjan seems to buck the trend and reported better results. Net: negative

Statistical Data on Invalidation:

As everyone knows, one of the largest contributors to lower patent valuations has been the relative ease by which one can challenge the validity of a patent in the US, namely via the PTAB (mostly based on the presence of prior art) or by alleging in court that it does not cover patentable subject matter (aka Alice). We just saw that Alice rejections dipped below the 50% mark for the first time in Q2. This by itself is big news. As to IPR rejection rates, they are inching down as well, but too slowly to really make an impact yet. This should change soon though as the Supreme Court decision in SAS makes those challenges riskier and, very soon, more expensive (see below). A couple of recent cases (see below) will also create some restrictions to petitioners who want to file an IPR, while the proposed rules by the USPTO to reconcile the burden of proof used in court should eventually works its way in and reduce the rejection rate of issued patent claims. Net: positive

Net-Net: Many of the factors above have a direct impact on business decisions made when confronted with a request to take a patent license. Who wants to pay a $1M licensing fee if the odds of invalidating a given patent are 75% and the cost hovers around $250K? Simple math. So, anything that makes the alternative more expensive should make a transaction more likely, assuming rational actors.

Many of the developments so far in 2018 should contribute to making challenges to patents less certain and more expensive. Also, many plaintiffs are now exporting their assertion campaigns to China and Germany where they are completely immune to those challenges. This further increases the cost of litigation for the defendant, without the same tools at their disposal to stall a case or rapidly make it disappear. 

Therefore, in view of the above, it is fair to say that while competing forces will continue offsetting one another, there are probably more positive than negative news in the past 6 months if you are a patent owner. It does not mean by any measure that we are back to the hey days of 2012, but as the patent inventory trickles down gradually, the other factors at play should in our opinion help patent transactions and values inch up steadily.

Before we move to our usual short stories, I really encourage those who want to stay abreast of the market on a more daily basis to follow my posts on LinkedIn (or Twitter). I also want to commend the excellent work that the Patent Investor does to go in depth on a lot of what is happening in this world. Go check it out!

Buyers & Sellers:

Recent records disclose Seiko Epson’s largest ever patent divestment. The Japanese firm transferred nearly 2,000 patents in total to entities linked with Longitude Licensing in a series of assignments stretching back to last December. Assignment records also reveal that Google’s parent Alphabet assigned 139 patents it had acquired through Motorola to the China-based company Amperex Technology Limited (ATL), a Hong Kong-based maker of lithium-ion batteries. NPE Dominion Harbor keeps acquiring patents from various sources, including Intellectual Ventures and, more recently, from Wi-LAN. It is rare that we see inter NPE transactions like this, but these reflect the change of business strategy of the latter who are either divesting their portfolio (IV) or simply diversifying their activities (Wi-Lan’s Quarterhill). Interestingly, Quarterhill in parallel has recently acquired patents from both MagnaChip and Panasonic, while Texas-based NPE LongHorn IP recently picked up patents from Japan-based Sharp. We also learned that China-based Xiaomi recently acquired over 350 patents from Philips. Finally, it would appear that Fortress has taken over the monetization efforts of NPE Uniloc. At the same time Fortress, announced a $400M new fund directed at patent assertion. 

 Winners & Losers:

The uncontested winners these past weeks were without a doubt Canadian NPE Wi-LAN, IBM and Cisco respectively, who all emerged victorious from their law suit against infringers and raked in significant awards on their way out. Wi-LAN, who has had a good run lately, won a $145M damages award against Apple, in a case that backfired on the iPhone maker who had initiated the suit by filing a motion for declaratory judgement that the Wi-LAN patents were invalid and non-infringed. During the trial, Apple’s attempt to paint Wi-LAN as a soulless patent troll found no sympathetic audience, confirming once again that the patent troll myth is now on life support. It was a bad argument to start with as the very patents that Wi-LAN asserted had been developed in-house as part of their own R&D efforts (not that is should make any difference). This continues Apple’s bad streak in 2018 and should increase pressure on its management to revisit its perceived “scorched-earth” policy when it comes to defending patent claims.

IBM rarely sues for patent infringement and, when it does, it expects to win. Groupon found this to their own demise and will now have to pay IBM $83M for having encroached upon Big Blue’s patents.

The biggest winner though was Cisco after Arista agreed to pay $400 million to Cisco to settle all pending district court and U.S. International Trade Commission litigation between the parties.

The main losers, besides the ones named above who lost their case, were several PIPCOs, as we just discussed, security-based Finjan being once again the exception to the rule after another strong quarter. This has caused Finjan to retain an investment bank and look for a strategic acquirer while it is riding high.

There was also an interesting case (and huge award of $315M), against Scientific Games Corp. which was accused by Shuffle Tech and 3 other companies of initiating sham litigation to assert invalid patents and keep its automatic card-shuffler competition out of the market. The countersuit was based on antitrust grounds, i.e. that the suit amounted to an abuse of monopoly power. The court agreed, and the judge went so far as trebling the damages initially awarded by jury. This is a great example that the court system is perfectly capable of singling out “bad actors” who use their patents to support specious claims. Thus, there is no need for sweeping “reform” to water down patent rights of other patent owners who innovated directly or those who rewarded such innovation by acquiring their patents.

Finally, Intellectual Ventures, who has been almost completely dismantled and is selling large blocks of its own portfolio, including a recent sale to an Indian Tribe,  suffered yet another blow in court when a ITC judge called into question its ability to get an injunction against several car manufacturers and industry suppliers in what is a key case in the firm's attempts to license much of the sector. Of all NPEs that we have been tracking over the years, IV must have the worst track record before the courts. No one knows if this is because of poor patent quality, poor representation, or both.

 Handshakes:

This past month, several current or potential litigants decided to bury the hatchet and go camping instead. Publicly traded Rambus announced that Socionext, had signed a patent license agreement. Under the terms of the agreement, Rambus will license Socionext a broad range of innovations related to memory controller and security technologies.  TiVO, which makes a point to let everyone know that it is exploring strategic options, reported that it renewed its IP license with Altice Portugal for an amount in line with its EMEA (Europe Middle East and Africa) licensing rates. Blackbird Technologies LLC, a Boston patent litigation company founded by former WilmerHale and Kirkland & Ellis LLP partners, announced it had settled a patent dispute with Lenovo over whether the Chinese telecom company infringed a computer display patent.  Finally, Qualcomm notched a victory in its effort to preserve its patent-licensing business, as it reached a settlement with the Taiwanese government that revokes a previous finding against the chip maker and saved the company nearly $700 million in fines. This should help put some balm on the wounds of the US chipmaker, as it recently had to call off its merger with NXP due to the Chinese government dragging its feet to approve the transaction, and pay a $2B break up fee to Netherland-based NPX.

I'll See You in Court:

The last month saw its normal slew of new law suits in the US, in addition to several new assertion campaigns started in China and Germany (who now host 2/3 of all patent litigation in Europe). While it would take pages to list all of them (there are 5000 new patent law suits each year in the US only), here are a couple of notable ones: 3M filed a patent infringement lawsuit in federal district court against South Korea-based Tovis Co. Ltd. (and its subsidiary Tovis North America) and Scientific Games Corporation over metal mesh conductor technology used in touch screens, while the battle between USAA and Wells Fargo ratcheted up with a second suit by USAA and a counter lawsuit by Wells Fargo. In what could be a sequel to the Supreme Court decision in Oil States, audio device maker Advanced Audio Devices has urged the U.S. Supreme Court to consider whether patent claims canceled in America Invents Act reviews are regulatory takings by the government, such that patent owners are owed compensation on constitutional grounds, particularly those whose patents were filed or issued before 2011.

 From the Bench:

There were a couple of decisions worth mentioning in the past weeks, as the Supreme Court is in recess and other courts operate on a reduced summer schedule. First, the Federal Circuit ruled three indexing software patents are invalid for claiming nothing more than an abstract idea, upholding a ruling from a judge in the Eastern District of Texas. This is interesting in that the court did not seem to follow its own recent precedent in Berkheimer where it suggested that Alice-related arguments (i.e. whether an invention is claiming patentable subject matter) should be left to trial.

In another case, the same court decided that patent suits that are voluntarily dismissed trigger the one-year window for filing an inter partes review petition, which should increase pressure on accused infringers to challenge patents and may restrict settlement options, if an alleged infringer knows that the clock is ticking.

Around the world:

Japan recently stole the show on the international front by reporting a record surplus of IP trade, partly fueled by its pharmaceutical licensing activities. It is interesting to see how it has managed to stay outside the current tariff wars (mostly caused by the US perception of an unfair trade deficit with other countries) while performing so well. It might not last… the JPO also announced its intention to extend its design patent protection from 20 to 25 years. The policy change has a dual aim of making Japanese companies more brand-conscious and enhancing coverage for innovations that combine visual and technical features, such as user interfaces.

Meanwhile, it was reported that Germany now accounts for two thirds of all patent litigation in Europe. The two main factors for this are the fact that, besides being the largest European economy, Germany’s patent system allows a patent owner to obtain an injunctive relief in case a patent is found to be infringed, even if the court has not yet adjudicated upon its validity, which is exactly the reverse of what we now have in the US.

Finally, a new study is trying to dispel the myth that what Chinese patents lack in quality they make up for in sheer number and that patent quality should not be underestimated.

 On the Legislative Front:

Surprisingly for this time of the year, there was a flurry of legislative activity on the Hill and at the USPTO. A few weeks ago, Rep. Dana Rohrabacher (R-CA-48) introduced the Inventor Protection Act (“IPA”) (H.R. 6557) which now sits before the House Judiciary Committee for further consideration. Its main objective is to procure additional benefits before the law to inventor-owned patents, in which case it goes much further compared to the current state of the law. While some of these benefits would be indeed great to level the playing field, I personally believe any attempt to distinguish between the original assignee of a patent (i.e. the inventor) and those who come after, plays into the narrative that patents are not real property rights. This would lead to situations where the only way to leave value in a patent is to have the inventor retain ownership thereof, which flies in the face of the way innovation is funded and most companies work.

The USPTO also took advantage of the summer lull to discretely sneak in some proposed significant fee hikes, including what would come up to a drastic 525% increase in the fee for maintaining a patent if paid during the so-called maintenance fee grace period. In parallel, it has proposed levying annual fees on all registered patent attorneys, which could vary depending on whether a person has taken continuing legal education (CLE) during the year. Finally, the USPTO plans a 25% fee hike for petitioners who file an Inter Partes Review (IPR) before the PTAB, apparently due to the added work that the recent Supreme Court Decision in SAS is forcing them to undertake. Let’s hope all this new money will help pay to invest for better servers, since the USPTO suffered a 5-day catastrophic outage last week that saw applicants resorting to fax machines to get their filings in!

Finally, if anyone needs proof that the pro-inventor lobby has found its voice after years of remaining largely silent, the Alliance of U.S. Startups and Inventors for Jobs, a coalition of more than 30 startups and affiliated executives, inventors and investor who depend on stable and reliable patent protection to protect their businesses and investments, asked the US Federal Trade Commission (FTC) to rein in the predatory and unfair trade practices of large companies who use their market power to acquire new technologies invented and patented by third parties and systematically and intentionally infringe patents and refuse to pay for a license (aka as “Efficient Infringers”). This would have been unthinkable even a year ago.

On the Move:

Summer is not only for vacations; many people take advantage of the slow season to turn to new opportunities.

In this regard, TiVo saw of lot of movement in its ranks recently as Enrique Rodriguez, who had just joined as CEO in November, left in June to take a position as chief technology officer of Liberty Global PLC. Rodriguez was replaced on an interim basis by Raghu Rau. TiVo's IP licensing division is led by Chief IP Officer Arvin Patel, who was recruited in July 2017 from Technicolor. Also, last week, Courtney Quish, who had been vice president of strategy (M&A) left to join the IP finance group of Fortress Investment Group.

In the automotive industry, Jeff Risher has left his post as Tesla’s head of IP to join rival electric car manufacturer Faraday Future as vice president, technology and IP. He had spent the last two years at Tesla as its chief IP and litigation counsel.

Immersion Corp., the haptics or touch technology and licensing company, said Tom Lacey was appointed interim chief executive officer and director, replacing Carl Schlachte, who is resigning.

In other cases, people moved out as a result of being fired or laid off. Acacia continued its recent purge of the old guard by replacing two of its board members in a rather acrimonious fashion. The fact that its stock has been down more than 40% while the NASDAQ index appreciated by 36% in the same period probably did not help to assuage investors to extend their confidence to the current team.

ParkerVision (PRKR), another beleaguered PIPCO, was forced on its part to lay off 30 employees, including that of John Stuckey, chief marketing officer.

Happy reading!