The return of Shark Tank to ABC has captured the interest of patent attorneys (among others) from around the country, fascinated about the ingenuity of the average Joe and the courage to translate their ideas into products and, occasionally, money. This also offers another rare spot of sunshine into the normally opaque world of intangible asset valuation (since the sharks are bidding on potential, not an established revenue stream). The irony is, however, that patents play a very small role in the sharks’ decision-making process, which a would-be patent attorney inadvertently discovered recently.
The Budding Patent Lawyer’s Perspective blog, run by a recent law school grad wrote about a recent episode where entrepreneur Mark Cuban acquired a company that plans to sell a patent pending hose fastener for $1.25 M. (See How to value a patent). According to the author, the owner represented to the sharks that he possessed strong patent protection, despite the fact that the patent has yet to be examined. Among the assumptions made in the post, are statements that “many of these businesses [on Shark Tank] involve IP as a major component” and “In order to make a correct valuation, the nuts and bolts of the patents must be assessed to see how much the business is really worth.”
I’m going to attempt to correct these misconceptions constructively, because the Budding Patent Lawyer will be able to better advise his clients in the long run the sooner he learns how much businesses think (or rather, don’t think) about patents. While the budding lawyer thinks that the sharks got played in this situation, they really didn’t, for at least two reasons.
First, for the sharks (and for Cuban in particular), it really doesn’t matter if patent protection is good, bad or non-existent. Cuban is the type who is much more interested in a guy with a good idea and the skills to execute it, than the legal rights to exclude competition. I’ve never spoken to him, but I suspect that he would much rather rely on his ability to outperform the competition than his lawyer’s ability to stiff-arm the competitors. Cuban has publicly stated that money spent on patents is “wasted” (see also here), and that a patent does you “no good” if it consumes all your money. (Cuban is actually wrong about this last point, but that’s a subject for another post).
Second, any offer thrown out on Shark Tank is almost certainly subject to due diligence. Assuming the unlikely scenario that Cuban was only interested in the company because of the patent protection, it takes no more than a few minutes of diligence to discover the truth about the patent application status. Any misrepresentations made during the pitch can be fleshed out, giving the sharks “every opportunity to get out.”
IP Strategist Jackie Hutter commented on the propensity of patent lawyers to grossly overvalue intellectual property:
90 % or more of patents are worthless. Of the remaining 10%, most are worth only a little. But a very small fraction of patents–probably less than 1%–are worth a lot. The key is knowing the difference. But the vast majority of patent lawyers assume that every patent they are working on is either in the 10 % or, far too often, the small fraction. Our lack of credibility on the value of patents to business is the reason why business people like Mark Cuban think patents don’t matter at all.
In the context of acquisition, Hutter said previously, “acquirers buy business models, not patents. … [A] patent is worthless unless it covers a viable business model–either yours or one you want to own.” Granted, the budding lawyer is correct that in the very early stages of a business, the majority of the value is intangible. But it does not follow from this that the patent protection forms the basis for the entire business.
Because a patent lawyer is a hammer, every asset looks like a nail. In other words, so patent attorneys inherently assume that if the majority of the value is intangible, the patent value dominates the business value. This tail-wagging-the-dog mentality leads to ridiculous claims like suggesting GroupOn’s $6 B+ valuation was due to the existence of a confusingly worded patent bought on the secondary market and a handful of applications. This ridiculous statement by McAndrews’ attorney Patrick Arnold was openly mocked on Gametime IP and harshly criticized by Hutter:
Mr. Arnold’s view is not only narcissistic, it is so ridiculous that it voids any credibility he might have to provide an opinion about how the presence or absence of patents affect (0r do not affect) the value of M&A or other transactions.
So, to the budding lawyer, I suggest that you don’t follow in the footsteps of Mr. Arnold. Patents have value. They can, in some instances, have enormous value. But patent value is wholly different from business value. Business people don’t factor patents in when acquiring businesses, mostly, because they can’t find someone they trust to provide an honest valuation.
- A Patent Does Not Protect Your Products (patentcalls.com)