Consortium wins Nortel patent auction—and now the real battle begins

Nortel, the bankrupt Canadian telecom company, came closer to disappearing this past week with the sale of 6000 patents to the consortium that includes Apple, EMC, Ericsson, Microsoft, RIM, and Sony. This consortium had a lot of money to throw at the auction.  But Bob Cringely (Cringely on Technology) feels that the consortium felt this was a must-win situation, at any price.

After withdrawing his firm from bidding after the initial round, RPX Chief John Amster also agreed. ‘It’s clear this was something big companies with humongous balance sheets had decided was strategic for them,”  he said. 

Google was a losing bidder here, even though they have less IP in the mobile and telecom field and probably need this IP more than their other competitors.  While the consortium’s win can be perceived as a death knell for Google’s Android, IPVW strongly agrees with Cringely—Google has the inevitable anti-trust lawsuit, and other routes, to delay and defer restrictions on their growth in this market. 

Cringely also alerts IPVW readers to a story that has yet to be told: how will the IP spoils from the patent auction be divided. He’s got a good point—the benefits of “sharing” this IP vary by participant and likely mean:

• Some consortium members will surely get patents
• some royalties
• others freedom from having to pay royalties
• some get tax breaks from their investment in the consortium
• some strengthen their partnerships with other members of the consortium

—all creating different opportunities, competitive threats, and perhaps future lawsuits.  In other words, Nortel’s IP, at least, will live on long after the company is a footnote to business history.

Bankers still don’t get IP financing—but we’re not helping them as much as we could

You don’t have to look far to find evidence that, despite the bailout, most banks remain reluctant to use IP or intangibles as collateral for lending to finance development, early stage companies, or emerging technologies.   IPVW would go further than this platitude: even though 60% to 80% of most company’s value and sources of revenue lie in intangibles, and our economy depends on IP, bankers essentially won’t go near them.   Less than $10 million in EBITDA?   They’ll show you the back door as quickly as possible, and then go play golf.   

So, no excuses for the bankers and private capital folks who haven’t learned about intangibles.   Still, we can be our own worst enemies.  If you look at your own financial documents, you’ll quickly see two reasons why ill-prepared banker’s would be frightened:

1. intangibles are not accurately reflected on company balance sheets, and  
2. those responsible for meeting with capital providers lack confidence in their methods for quantifying the value of intangibles.  

Paul Flignor of DLA Piper makes an important third point in his new paper Intangible Asset and Intellectual Property Valuation: A Multidisciplinary Perspective.   IPVW spoke with him earlier this week about this subject. Flignor sees that IP and intangible asset “stakeholders” each have their own legal, regulatory, and practitioner history.   Until these perspectives are standardized, bankers will have yet another excuse to reject loan applications to develop great assets. 

IPVW would like to think that receptivity to asset-backed lending increases as the private capital markets learn more about IP and intangible asset intensive firms.   Sadly, though, it doesn’t feel like they’ve made a wit of progress from their baseline awareness of inventories, accounts receivable, and stable cash flows. Frankly, their eyes glaze over when by the time you get below those rows on most balance sheets. 

Ultimately, to help resolve this dilemma, Dr. Kenan Jarboe, president of Athena Alliance (www.athenaallinance.org) and a long standing expert on intangible assets, says we need

1. clearer underwriting standards
2. better understanding how to value IP, and
3. clarity on where secondary markets exist and how they work if/when lenders need to sell the IP in case of default.

New survey provides insight how companies view IP—and the risks associated with it

Liberty International Underwriters and Marsh released their 2011 Intellectual Property Survey Report recently.  Matthew Hogg, the report’s lead author and a VP at LIU, says “the topic of IP and intangible assets is becoming more prominent to businesses around the globe and it will be interesting to see if IP becomes the subject of more risk management planning.”

The Report demonstrates that IP and intangibles are increasingly important to businesses for innovation, regardless of size. IPVW believes it can help readers better understand:

1. the thought processes of companies regarding how they view IP, and
2. how they view risks associated with IP in the current economic environment.

Brands can disappear…or can they…and is that partially our fault?

24/7 Wall St published its annual list of brands predicted to soon disappear June 22. This year’s list leads with MySpace. Ironically, the June 23d edition of the Wall Street Journal reported Justin Timberlake and Specific Media joined forces to purchase MySpace (for a reported $35M) and exploit it as a music-oriented social media site connecting artists with their fan base.

A report from comScore shows that at its height of popularity in December 2008, MySpace had nearly 76 million unique visitors. In May of this year that number had plummeted to less than 35 million. Could this be a new valuation metric? $1 per unique visitor per month is simple at least?

All of this reinforces the position that we’re still far from logical and systematic brand valuation methods.  This obvious point was confirmed by Jonathan Salem Baskin, in his June 27th Dim Bulb blog post titled “Do Brands Disappear.” He confirms there are many ways to measure brand strength, but most methodologies are introspective, and provide little or no data to make future business decisions. He’s skeptical 24/7 Wall St’s list, therefore, no matter what Justin Timberlake thinks!

At least we need to be systematic about considering all aspects of brand value.   Here’s a great new list on that subject from James Gregory, CEO, CoreBrand.  Gregory lists ten ways brand adds value at the Board or strategic level.  These top ten reasons all should be valued.  He says a strong brand:

1. legitimizes investment
2. provides an objective measure of effort
3. creates accountability
4. aligns leadership
5. identifies growth opportunities
6. predicts market shifts
7. identifies competitive opportunity and advantage
8. informs M&A or strategic alliances
9. creates licensing opportunities, and
10. helps define the value of other intangibles. 

No argument here.

Willful blindness, a new standard for patent infringement and more IP due diligence

The US Supreme Court brought clarity recently to Section 271(b) of the Patent Act in its 8 to 1 ruling in Global Tech Appliances, Inc. v. SEB S.A. (U.S., No. 10-6, 5-31-2011).  

This case drew attention from the U.S. software industry because a lower court had applied the ‘deliberate indifference’ standard which they warned would be bad for innovation.

This case involves the French company SEB which developed a ‘cool touch’ deep fryer for which a patent was issued in 1991.  They began selling it in the U.S.  A Hong Kong based firm Pentalpha (a wholly owned subsidiary of Global Tech) purchased one of the deep fryers and promptly developed a ‘knock-off’ version but proceeded to commission a right-to-use study without informing counsel it had copied the design. Global Tech (defendant) began selling its fryers to companies that resold them in the U.S.  A jury found Global Tech liable for inducing infringement based on the ‘know or should have known the actions would induce infringement’ standard.

At issue before the USSC was whether the ‘knew or should have known’ standard remained appropriate. The court rejected that standard and replaced it with a concept with roots in criminal law known as ‘willful blindness’ which has two requirements.  So, the risk of patent infringement is now higher if

1. the infringer believed that there was a high probability that a fact (patent) existed, and
2. they took deliberate actions to avoid learning of that fact.