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IP, IP Asset, Patent, Risk Mangement

The Inexact Science Of Patent Valuation

Last week, in response to news about Google acquiring a portfolio of mobile phone patents, I harshly criticized the move.  Others have been swift to point out that 1) the purchase price represents an extremely tiny fraction of Google revenues, and 2) the acquisition was primarily a defensive maneuver.  Both of these statements are likely true, but I stand by my opinion.  Even as a purely defensive purchase, Google’s acquisition of these patents is ill-advised.

Before I explain why, I’d like to explain why this news is interesting enough to merit a second blog post. Over the past several years, I have worked on a significant number of IP transactions in a variety of roles. I’ve reviewed countless portfolios, proposals, and RFQs.  On occasion, I’ve had a chance to prepare a few proposals as well, but I can honestly say its much more fun to buy than to sell.  However, these deals are always protected under attorney-client privilege and non-disclosure obligations.  And even when publicly traded companies like Acacia acquire patents, the public is often told nothing more than “a subsidiary has acquired 86 microprocessor and digital signal processing (DSP) patents from a major semiconductor company.”  A lot of these deals are not even material enough to disclose. The only reason anyone knows about Apple purchasing 200 patents from Freescale is that Dennis Crouch (or more likely, his research assistant) has been watching the USPTO assignment records.

Since patent and pricing information is difficult to come by, it’s important to pay close attention to what little data is made available.  So, when about 20 patents and a trail of pending applications is sold for $5 Million, the data point is far too interesting to ignore.  While $5 Million may not seem like much to a company like Google, it is usually a sign that the purchased assets carry significant value to the acquiring party.  In this case, however, it seems far more likely that the price tag represents desperation of the acquiring party.  In other words, Google had to pay the price because it is, well, Google.

The setup reminds me of an episode of The Adventures of Brisco County, Jr (created by writer Carlton Cuse, who would go on to write and produce Lost) that I watched recently, thanks to Netflix. In Episode 4, “Brisco in Jalisco,” the title character is sent to Mexico to retrieve a stolen shipment of rifles that its thieves intend to sell to one of two rival Mexican militias.  One is run by a wealthy Generalissimo, while the other is a rebellious group of farmers and laborers.  Naturally, the thief knows he can extract a higher than market price from the Generalissimo by threatening to sell the guns below market to the farmers (thus giving them a distinct advantage).

Google faces a similar dilema in that its unable to acquire IP at “fair market” value.  After all, if the IP owner is only interested in fair market value, the source of the money is irrelevant, meaning the patents could as easily fall into the hands of Google’s opponents.  Not wanting to let this happen, apparently, Google reached and overpaid for a set of patents that will otherwise prove useless.

I’m not criticizing the overall strategy. A few strategic acquisitions here and there can avoid some major headaches down the road.  If the sensible thing to do is stock up on Aspirin before the headaches set in, then so be it.  However, this particular purchase is a bit more like paying Oxycontin prices for Children’s Tylenol.

It was suggested that Google’s acquisition cost is on the order of defending a nuisance lawsuit or two, but at $5 Million, this suggests that a “nuisance” suit is one in which a company goes to trial and prevails.  This is not the touchstone of a “nuisance” suit, it’s merely the touchstone of an unsuccessful suit.  The difference between winning and losing at trial often has less to do with whether infringement is actually occurring and much more to do with whether the patent owner can prove infringement is occurring.  (Just so you don’t have to ask, these are not one and the same).  A true nuisance suit is settled well in advance of trial, either as a result of summary judgment (where a judge decides that no reasonable jury could agree with one party over the other), or through settlement or other motion practice costing significantly  less than $5 Million.

This also demonstrates another reason why RPX has been successful so far, and why new auction services from ICAP show so much promise.  The premium Google has to pay is significantly greater than the true market value for these patents, giving the aggregators and the auctioneers significant leeway to offer more favorable terms while still collecting considerable fees for themselves.  Google would be wise to consider these alternatives in the future, or at minimum to buy patents through a proxy buyer.

Nevertheless, the Modu portfolio likely wouldn’t represent one lawsuit for Google (nuisance level or otherwise).  Some commentators insist that patents falling into the hands of certain investors would be asserted against companies with no regard to whether the company is actually infringing.  Of course, experience suggests that this is simply untrue.  Even though patent owners typically make vague and barebones allegations when filing a lawsuit, the failure to conduct a good faith investigation in to the relevance of the patented technology to products or services associated with the defendant is a blatant violation of federal court procedure.  Despite popular misconception, the majority of attorneys involved in litigation take these obligations seriously, and I’ve never worked with a lawyer or firm that filed a lawsuit without conducting an independent analysis of the available facts.

Finally, I keep insisting that $5 M exceeds market value for the Modu patents without actually saying what I think the true value of portfolio is.  I may comment more specifically on that in the future, but in the meantime consider the fact that Modu’s mobile phone technology only reaches back to 2003.  By then, core smartphone technology had already been well developed.  The Blackberry had already been around for four years and companies like Nokia had been innovating in the area for over ten years.  Modu’s patents represent minor incremental improvements in smartphone technology that, while no less patentable than core technology, are significantly less valuable and easily designed around.

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