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Make vs. Buy: Patent Buying

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Companies have more options than ever before as they decide between investing in the development of a certain technological capability internally, licensing-in technology, or buying a patent or patents to obtain the freedom to operate. We and several other panelists discuss what IP lawyers both in-house and at law firms should bring to the table in these discussions.

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Make vs. Buy: Patent Buying

  1. 1. Richardson Oliver Law Group Perc ience Whenever IP is Central Make vs. Buy: Patent Buying Suzanne Harrison Erik Oliver Jim O’Shaughnessy April 2012 – IPO Webinar
  2. 2. 2 Topics Context The make vs buy decision • Diligence framework • Checklist • Ranking system Patent buying
  3. 3. 3 Is There Really a Patent Market? Yes! In 2011, the patent market was over $6B (includes Nortel deal) The naked patent transaction market is composed largely of high-tech and medical device portfolios, however pharmaceuticals are just beginning to enter the market Combined with the continuing corporate interest in Open Innovation, there is more willingness to bring in outside patents and technologies than ever before
  4. 4. 4 When Should Companies Consider the Make vs Buy Decision? Synthesize Opportunities Capture Value Manage Cost Defend Position Shape the Future Source: Edison in the Boardroom Revisited, John Wiley & Sons 2011
  5. 5. 5 The (Perfectly) Balanced Portfolio • Organic Innovation (55-65%) • Complementary Innovation (25-45%) • Purchasing (up to 15%) It comes from three sources Make vs. Buy teeters on foregoing metrics • Typically considered a buy strategy • Dovetails completely with make strategy Open Innovation (inbound) has a place Make Buy
  6. 6. 6 Sensible Strategic Goals Market Sector Relationships Control Manage Influence
  7. 7. 7 Decision Points • Product and technology roadmaps • Demonstrable threats Decision is keyed to It involves consideration of technology and IPRs It is rarely binary
  8. 8. 8 Decision Levers – Make • Internally resourced and IP harvested in ordinary course Organic Innovation • Typically internally sourced and IP harvested in ordinary course • May include outside human resources (e.g., industry experts/mavens) Complementary Innovation • Blends make and buy Joint Development
  9. 9. 9 Organic Innovation (OI) vs. Complementary Innovation (CI) This decision concerns make It’s almost always all about time Typical OI cycle time is months to years, depending on product and company knowledge Typical CI cycle time is weeks •Good for generating IP •Fill in gaps in patent portfolio •Hedging •Call options in a real option sense •Good for attacking pivotal problems in feature set or manufacturing •Not good for solving large-scale system problems •OI remains preeminent •That’s why CI is complementary
  10. 10. 10 Comparative Advantage Vantage Being able to make is necessary but an insufficient reason to do so Are there others who can provide the technology in a form (factor) suitable to my needs Am I better off devoting my resources to make something else because of • Efficiencies • Time
  11. 11. 11 Buying Patents • Could be opportunistic rather than the immediate threat • Could be purely defensive to avoid future threat • In either or both cases, primarily a cost-benefit analysis • In majority of cases, threat driven (now or later) Issue: Immediate or impending threat • Nothing in the existing portfolio to compensate or neutralize threat • Cannot “invent” due to prior art Problems • Buy… in reality, buying time Solution
  12. 12. 12 Common Corporate Buying Scenarios • Assertion against you or your customers • Need for patents time horizon: now • Your own—made—patents not aligned with asserting company’s business • Seek to buy specific patents to counterassert Handling an Operating Company Assertion • Moving into new space want to buy patents ahead of specific need • Need for patents time horizon: 24+ months • Your own—made—patents not well aligned with future operating space • Seek to buy patents and applications for strategic positioning Strategic (Pre-)Acquisition of Patents
  13. 13. 13 Primary Sources of Patents to Buy • Brokers pre-qualify willingness to sell • Brokers most likely to have prepared an evidence of use • Know how to manage seller expectations and close transactions Brokers • Patents may already be heavily licensed • Aggregator sell rationale different from operating company sell rationale Aggregators • Potential for needle-in-haystack search • Potential sellers not prepared on logistics, e.g. price, approvals Self-sourced • Often have restrictions on who can buy and how patents can be used Direct Corporate Sales
  14. 14. 14 Patent Market Rules of Thumb: Web Patents Mid-range targeted $250/patent Strategic $750/patent Bulk / Untargeted $50/patent Price per patent ($K) Standard deviation is large!
  15. 15. 15 Exemplary Diligence Process: Buyer’s Perspective • Goal: Understand why you would be interested • Preliminary screen of information against buying criteria (price, target markets) Triage • Goal: Business case for buying developed and a preliminary price • Develop specific business case for purchase around an EOU and specific markets • Initial VIP rank developed Business Case • Goal: Refine assessment based on detailed analysis and set bidding price • Deep dives into legal, technical, business and valuation issues • VIP rank refined • Set bid, fallback, and walk based on refined diligence Deep Dive • Goal: Acquire patent for target price • Legal negotiations for patents Buy
  16. 16. 16 Buyer (and Seller) Summary Checklist •Contact info for seller/broker •Summary of # of patent families and # of assets •Excel list of assets w/ families identified •Featured patents identified •Litigation, opposition, re-exam identified Basics •Historical context – inventors, company, invention(s), and the sale •Market information –TIM and SIM Context •Clean title – joint ownership, universities, and/or government funding addressed •Assignments – copies available of inventors to company, company to current holders •Liens and licenses – is a list available? What is the process to obtain? Title and Encumbrances •Is there a price range set? •Will pricing guidance be shared, if so when? Pricing
  17. 17. 17 Buyer (and Seller) Summary Checklist • Bidding process • What due diligence material does seller have available – EOUs, file wrappers, assignments • License-back needed? Sales process and timeline • Are EOUs available, what is the process to obtain? • Word for word match • Assumptions clearly articulated EOU • Verify whole patent family is being sold together • Standards applicability Other
  18. 18. 18 VIP Ranking System V – Volume (Markets) • What is the market for the products identified by “I”? Multiple markets may be identified • Ranking: Size of market(s) in dollars • Note, in the initial ranking the total impacted market (TIM) is usually evaluated. As the ranking is refined, the serviceable impacted market (SIM) is usually evaluated. I – Infringement • Can we generate an evidence of use (EOU) mapping each element of a claim to a product? • Ranking: • 1 – None • 2 – Future infringement likely • 3 – EOU likely • 4 – EOU complete P – Prior Art and Patent Process • Have we investigated and are prepared with answers to the questions licensees will raise about the patents (e.g., obviousness, prior art)? • Ranking: • 1 – Could not answer questions • 2 – Questions identified, but not answered • 3 – Questions answered • 4 – Litigated (patent has been successfully litigated)
  19. 19. 19 VIP System Advantages • No more “good” vs “bad” patents • Provides a shared terminology to describe the degree of qualification and amount of diligence done-to-date Common terminology unhelpful • Initial market data is refined throughout the diligence, e.g. generally move from TIM-to-SIM • As a package is evaluated and assumptions are tested, the rank should be adjusted Rankings are continually refined • Rank does not set price or address all diligence issues, e.g. encumbrances • Possible buying filters: • Minimum V, e.g. V > $1B • Only patents with an EOU, e.g. I = 4 Ranking serves to help filter decision
  20. 20. 20 Two Package Intake Problems Hodgepodges and Critical Mass • Costly to review • Interesting packages swamped by uninteresting ones • Difficult to filter out uninteresting packages Inconsistent data in too many formats • Lack of seller response to buyer format requests • Critical mass required for a common format Individually buyers cannot drive a common format
  21. 21. 21 Deal Consensus • Package checklist format • Patent asset list format Baseline common format • Defines minimum acceptable information • Higher tiers enable sellers to differentiate the offering Multiple tiers of package information Learn more: http://www.dealconsensus.com
  22. 22. 22 Summary • Organic Innovation (OI) or Complimentary Innovation (CI) • In time to meet roadmap or threat drivers • Entirely internally or using outside resources • Open Innovation/Joint Development • Does comparative advantage tip the scale Can I make? • Lack resources to make • Can’t make time Must I buy? • Diligence framework • Checklist • Ranking system How should I buy?

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