Large companies likely to sell non-core patents in 2018, Chinese buyers shopping, market players say
Patent Office challenge procedures, U.S. courts’ patent eligibility decisions will continue to weigh on prices
The volume of deals in the U.S. patent market is likely to rise in 2018, although prices probably will remain stagnant.
U.S., Asian and European operating companies are looking to divest high-quality patents which are not core to their businesses to avoid paying maintenance costs, intellectual property dealmakers told Bloomberg Law. Chinese buyers looking to get into the U.S. market and defend against infringement threats are likely to open their purse strings.
Rapid research and development and mergers and acquisitions in fast-growing fields such as self-driving vehicles, next-generation wireless communication technology, and internet-connected consumer and industrial devices have kicked off a patent arms race that promises to match up eager patent sellers with buyers hankering for good-quality assets.
“I believe transactions will continue to pick up over the next year,” Kurt Brasch, who heads up patent transactions at ride-hailing service Uber Technologies Inc., said. “It’s still going to be a buyer’s market but I believe valuations will gradually start to increase a bit.”
An increase in the number of transactions would signal a possible turnaround in the patent market that has seen deal volumes shrink in recent years.
Patent assets for sale in the U.S. brokered market in the first three quarters of 2017 were packaged in 381 deals compared to 561 deals in the same time period in 2014, according to a Bloomberg Law analysis of Richardson Oliver Law Group LLP data. The brokered market, in contrast to direct company-to-company sales with no middleman, represents a small portion of overall patent sales between companies but can shed light on broader market trends.
To be sure, the market won’t fully recover until patent prices go up. Strict court decisions on what inventions can be patented, and the Patent and Trademark Office’s patent validity proceedings, which started in 2012, have led to the cancellation of hundreds of patents.
Large manufacturing companies and mature businesses in Japan, Europe and the U.S. that have expansive portfolios through licensing deals, acquisitions and heavy investment in research and development are now being tasked with monetizing them, David Pridham, chief executive of Dallas-based patent licensing company Dominion Harbor Group, said. They are spinning out patent assets or finding startups that could access their patents to defend against litigation in exchange for equity in the up-and-coming companies, he said.
“You will see more from Nokia and large Asian manufacturing companies doing a lot of selling,” he said.
Asian companies are also likely to be big patent buyers in 2018. Chinese companies will emerge as voracious buyers, Erich Spangenberg, managing director of Luxembourg-based patent asset management company SK14 Advisors, said. Chinese smartphone makers Xiaomi Corp. , ZTE Corp. and others trying to break into the U.S. market will need patents to defend against litigation threats, he said.
High interest in emerging technology areas, including 5G wireless connectivity, and semiconductor memory storage, is giving rise to mergers and acquisitions, Edmund Fish, managing director of investment bank Houlihan Lokey’s technology and IP advisory practice. That activity is often followed by intellectual property sales either as “tuck-ins” spurred by larger deals or stand-alone patent transactions, Fish said.
“Patent deals are starting to flow and that will extend into 2018 because it always lags a bit behind front line M&A, and overall the patent sector is picking up,” Fish said. “The pendulum is moving back a little, but that’s not to say we are out of the woods.”
Patents Galore on the Market
Supply has exceeded demand in the patent market, which has been flooded with low-quality patents. That’s given buyers more leverage in price negotiations.Patents come with costly renewal and maintenance costs, which push companies to unload patent assets that are no longer crucial to their operations. Large companies such as Nokia and semiconductor maker Broadcom Corp. with expansive portfolios, including higher-quality assets, will likely list assets for sale in 2018 and drive more deals than last year, deal makers said.
The negative legal environment is also pushing individuals and established companies to sell patents, according to Russell Binns, chief executive of Allied Security Trust, a non-profit group that buys patents to safeguard its members from infringement suits.
“They can see more value in disposing and selling the assets than trying to license or monetize them,” Binns said.
Amid the uncertainty, patent sellers will be pushed to be more selective in 2018 in what they are offering for sale, Binns said. Sellers will have to work extra hard to offer marketing materials, evidence of use and patent claim charts that are used to show how a product or service could infringe a patent.
Creative Deal Strategies
Not all deals will be straight cash-for-patents arrangements. Patent market players foresee sellers and buyers crafting creative and strategic deals in 2018.Companies are now willing to sell patents at lower prices in hybrid deals that also involve joint technology development and exchange of talent and know-how, Matt Larson, a Bloomberg Intelligence analyst, said.
Assets that promise to drive licensing revenue could go at higher prices. Public intellectual property companies and technology companies, such as Qualcomm Corp, that rely on patent licensing revenue could be willing to pay for assets that can add to their product lines and licensing campaigns to offset declining revenue from litigation, Larson said.
All Eyes on Oil States
A rebound in patent prices depends largely on the market’s view on how susceptible patents are to validity challenges that can kill them.All eyes are on the U.S. Supreme Court, which that is reviewing the constitutionality of the PTO’s Patent Trial and Appeal Board proceedings allowing parties to challenge patent validity. The court heard arguments Nov. 27 in Oil States Energy Services LLC v. Greene’s Energy Group LLC and should rule on the administrative patent challenges by June.
A defeat for the PTAB, however, could boost patent prices with patent owners only having to fight alleged infringers on one front—federal district court—instead of two, making them less vulnerable to cancellation and potentially lowering litigation costs.
“I hope we see an uptick in the value of patents,” AST’s Binns said, adding that how Oil States and the White House nomination of new patent office director Andrei Iancu pan out is being closely watched.
Regardless of whether prices remain low, however, deal volume is likely to jump.
“With the right patents coming to the market, we’ll see better patents on the market and the number of transactions increase,” Binns said.
To contact the reporter on this story: Malathi Nayak in Washington at firstname.lastname@example.org
To contact the editor responsible for this story: Mike Wilczek at email@example.com