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The News is Out: We Now Have an Intangible Asset-Based Corporate Economy

(Ed. Note:  A family emergency has been keeping me away from the office.  The good news is that I have been catching up on my RSS feeds and reading some really interesting stuff, albeit a bit late.  One of these interesting reads is a David Brooks piece dealing with corporate intangible assets.  Since this was published Christmas week, others may have missed it, too.  And, when pundits pick up on what you have been talking about for years, I means that the public is finally “getting” it!)

David Brooks’ Op-Ed in the December 22, 2009 New York Times raises some interesting points about our new intangible economy.  In this piece, entitled “The Protocol Economy,” Brooks recognizes that we have moved from an economy that makes “stuff” –that is, a physical goods economy—to one that deals in “protocols.”  (I think it would be more appropriate to call our evolving intangible economy a “process-oriented economy,” but I will go with Brooks’ characterization for this post.)  The point of Brooks’ piece is to highlight the need of economics to transform its models in order to deal with this new reality.

Brooks’ states:

Protocols are intangible . . . .[A] nation has to have a good operating system:  laws, regulations and property rights.”  He goes on to say, in relation to the high cost of entry and often miniscule cost of copying a product that is the embodiment of an intangible idea, “[y]ou’re only going to invest the money to make that first [product] if you have a temporary monopoly to sell the copies.  So a nation has to find a way to protect property rights while still encouraging the flow of ideas.

As an IP Strategist, I concur wholly with Brooks that laws have to be in place to allow those who invest in the intangible economy to recoup their investment.  However, I believe that Brooks’ argument begs the question of what is needed for this new “protocol economy” because, in my experience, relatively few business professionals even recognize that the rules of economic engagement have changed so markedly in recent years.  Breaking down Brooks’ assertion, he is advocating for detailed rules of the road when most people are still walking on dirt pathways.

Experts today agree that most, if not virtually all for some companies, of corporate value is in the form of intangible assets, which can exist in the form of intellectual property—patents, trade secrets, copyrights, trademarks– or as other, less recognized forms, such as contractual relationships, specialized employee knowledge and others.  These assets do not exist just because experts say they do; rather, they must be identified, captured, protected and leveraged in order for any value embedded in them to be realized.  Or, put another way, intangible assets cannot be measured unless they are managed.

So, while I agree with Brooks that the US and other countries need to focus more on intellectual property protection, I will choose to spend my time trying to demonstrate to people why and how they need to understand where their organization’s value lies and how to successfully capture it.  In other words, experts and pundits can say it is so—I intend to make it so.  Here’s looking forward to the Year of the Intangible Asset!

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Guest Blogger: How Patent Vulnerability Impacts Valuation by David Wanetick of IncreMental Advantage

(This week, David Wanetick, Managing Director of IncreMental Advantage provides readers if the IP Asset Maximizer Blog with an excellent overview of the various factors that he believes affect patent valuation.  Please let me know if you would like to be a Guest Blogger.)

How Patent Vulnerability Impacts Valuation by David Wanetick of IncreMental Advantage

Many things can affect the value of patent rights

Many things can affect the value of patent rights

As I often tell business leaders who attend my course on Valuing Early-Stage Technologies, valuing patents isn’t rocket science. It is much more difficult. Or to paraphrase Winston Churchill, valuing patents is a riddle, wrapped in a mystery, inside an enigma.

Measuring even a well-delineated permanent entity is much more difficult than may be imagined. As Neil deGrasse Tyson (a renowned astrophysicist) and Benoit Mandelbrot (the father of fractal geometry) have discussed, no one really knows what the circumference of the coastline of the United Kingdom is. The tides will cause varying degrees of erosion on the coastline depending on the hour of measurement while the cumulative affect of choosing which rock formations to measure around will have a dramatic impact on the final assessment of circumference. Patent valuation is infinitely more difficult to determine than the measurements of a given land mass due to the interminable variation of underlying technologies, legal issues, business issues, and context in which patent valuations are conducted.

Companies that have patents often attempt to achieve a more attractive valuation by boasting about their patent portfolio. This is often a successful gambit as many investors, customers and media figures are impressed when a company reports a relatively large number of patents or pending patents in its portfolio. Thus, it is no surprise that many entrepreneurs and venture capitalists have admitted to me that they view patent preparation and filing costs akin to marketing expenditures.

However, valuation analysts should not reflexively assign a higher valuation to companies that own patents or are applying for patent protection. Companies can have a patent on a technology for which there is no possibility of commercializing or selling. Patents pending are particularly specious. Pendency (the length of time it takes the US Patent and Trademark Office to make a decision on a patent application) is now an average of 32 months. In some industries—such as semiconductors and electronics—pendency is more on the order of four to five years. Thus, the market targeted by a patent could become obsolete before the USPTO makes a decision. In fact, only between 2% and 5% of patents generate any royalties and another 45% to 50% don’t even have any strategic value. Further, two out of every three patents lapse because of failure to pay fees, most often because their owners believe that the thousands of dollars in maintenance fees exceeds the value of the patents. Continue reading →

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A New Framework for IP Strategy Conversations: Ex Post vs. Ex Ante (from IP P®OSPE©TIVE)

(Editorial Note:  I have gotten some great feedback from my recent post 9 Out of 10 Patents are Worthless:  Here’s Why and How to Keep it Happening from You (Part 1 of 4).  I am working on the next installment, so be on the look out for more of my thoughts on this meaningful topic.)

Readers of the IP Asset Maximizer Blog will probably enjoy this very smart post from Ian McClure of IP P®OSPE©TIVE entitled “A New Legal Landscape for IP:  Ex Ante will Join Ex Post Services“.  (While the post says some very flattering things about me, this is not why I am recommending it:  the IP P®OSPE©TIVE blog is consistently good, and Ian “gets” IP business issues.)  In this post, Ian frames IP Strategy in terms of “ex post” and “ex ante”–that is, instead of dealing with IP issues after it exists (i.e., ex post), IP Strategy addresses IP prior to its development in the course of developing value within the corporation as it relates to IP and intangibles.

Ian McClure explains:

[T]he IP legal profession has perhaps relied on [a post ante business model] to an even greater degree [than other lawyers], as the general lack of comprehension with respect to intellectual property in the business setting has resulted in the tendency of businesses to throw IP in the corner, put up fences, and send the dogs after anybody that seems to be an intruder. . . . This cause-and-effect business model relied upon by IP lawyers and law firms has been easy going – IP assets have been viewed as a necessary cost center which deserves a litigation budget to protect their prohibitive nature, i.e. monopoly power.  IP lawyers have gotten very good at protecting IP, sending cease and desist letters, prosecuting patents and trademarks, drafting non-competes and confidentiality agreements, and taking other ex-post or preventative measures.  This business model has not met its demise, as the demand for ex-post legal services will always exist. . . .[But a] shift in IP legal services has begun. Enter the decade of ex-ante IP legal services.  It is, after all, the decade of the intangible asset, and with this proclamation comes the announcement that strategic IP management services will become just as coveted as IP protection and prosecution.

Ian and I agree that consumers of legal services will be increasingly demanding IP legal services directed toward value creation, not just problem solving, but we may disagree on who will be able to provide those services, in that I think that IP Strategy is not necessarily a job for IP lawyers–but that is a conversation for another day.  Those of you interested in this topic (and anyone interested in the future of IP legal services) should read the rest of Ian’s post.

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9 Out of 10 Patents are Probably Worthless: Why and How to Prevent this from Happening to You (Part 1 of 4)

If 90% of patents are worthless as business assets, then most patent spends are wasted.

If 90% of patents are worthless as business assets, then most patent spends are wasted.

I decided to start 2010 with a controversial premise:  what if 9 out of 1o patents–or 90 %– issued in the US were worthless?  Believe it or not, but this probably is not too far off the mark.  By “worthless,” I mean that it is likely that only 10% of patents in force today meet each (and every) of the below criteria:

1)  The patent directly or indirectly protects a product or technology that is being sold in the market today;

2)  The patent covers a product or technology where there is or likely will be viable competition in the marketplace such that a patent is needed to legally restrain competition; and

3) The patent owner is ready, willing and able to bring a patent infringement suit against an infringer or it is likely that your competitor believes that it will possibly do so.

Unless each and every criteria stated above are present, it is my strong opinion that the patent (or pending patent application) is effectively worthless as a business asset.

If you are someone who views the world of patents from a business or corporate perspective, you might recognize where my 90 % figure comes from.   For most people with such experience, an objective assessment would likely elicit a frank response that you saw more money wasted on patent filings than was actually seen as creating value for the organization.  But, far too few people enter the patenting process with such a realistic assessment of the actual likely worth of their efforts and, if they did, there would likely be significantly less patents filed every year. Continue reading →

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Must Read Post on Innovation from Blogging Innovation: Steve Shapiro of Innocentive on Three Distinctions of Innovation

(Happy belated Holidays to readers of the IP Asset Maximizer blog.  The dearth of postings on this blog lately is due not only to my hectic holiday schedule, but also the death of my aged Grandfather.  Thanks everyone for your patience–we’ll be up and running on a regular schedule after the New Year.)

I just came across this post from the Blogging Innovation blog, hosted by Braden Kelley.  (Anyone interested in innovation MUST subscribe to Braden’s blog.)  The post, entitled “Part 1:  Three Innovation Distinctions” is by Steve Shapiro of Innocentive, distills what innovation is down to words which are placed in counterbalance with the standard model of product and technology development.  Specifically, Steve contends that innovation is about:

  1. Challenges not Ideas
  2. Process not Events
  3. Diversity not Homogeneity

As I posted in a comment, I believe that this is a remarkably simple way to highlight the why many of the corporations, law firms and clients for whom I have worked over the years are currently or will soon be failed institutions.   Moreover, the 3 statements seem to transcend outside of the business world:  my husband is a professor at a Top 20 US university, and they operate using ideas, events and homogenity, even while they go around seeking “innovative ideas” from the faculty.  (Interestingly, the university thinks they are “diverse” because they are “liberal” in their hiring policies.  Nonetheless, once hired, most of these “diverse” people end up marching to the same drummer.)

Steve’s post goes onto elaborate on the first bullet point in this Part 1:  Challenges not Ideas.

About ideas, Steve says the issue is the “signal to noise” problem:

Organizations do not have a shortage of ideas. They have a shortage of good ideas that matter.  In innovation, the signal is comprised of the good ideas.  The useful ideas.  The ideas that can and will ultimately be implemented in such a way that they create value.  The noise is made up of all of the other ideas.  Useless suggestions.  Solutions to problems that don’t matter.  Ideas that will never come to fruition.

In contrast to ideas:

With challenges you assign owners, resources, evaluators, evaluation criteria, and funding up front. We know that the solution to a challenge will be relevant to the needs of the organization, so if a solution is found we know it will be valuable. Also, because of the nature of challenges, we have better tools to evaluate the amount of time spent on finding solutions. We can truly measure the ROI of each challenge and the overall challenge-based program.

There is much more to the post in regards to the ideas vs. challenges paradigm, and I invite you to read and let me know what you think.  (In later posts he will discuss the other 2 bullet points.)

Happy New Year!

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Success in Innovation Requires IP Counseling on the Front End: Here’s How to Make it Happen

The 2009 Open Innovation Summit was held in Orlando two weeks ago.  The event was attended by corporate practitioners of Open Innovation, including people from P&G, GSK Consumer, Cisco, Whirlpool, J&J, HP (here are Phil McKinney’s slides), Clorox, and many others.  Leading consultants in Open Innovation also attended, including Stefan Lindegaard of Leadership+ Innovation, Braden Kelley of Blogging Innovation and Robert Brands of Innovation Coach.  A number of vendors of services were there, too.  I thought this was a great knowledge share event, and a must do for folks wanting to learn more about Open Innovation.  Another Summit is planned for August 201o in Chicago.

At the Summit, we spent much of the 3 days hearing how the attending companies, many of which include those in the Fortune 100, view Open Innovation as a critical aspect of sustainable growth and profits.  We also heard about successes and lessons learned.  Anyone interested in obtaining a sense of the discussion should check out the Twitter feed from the event.  A table of bloggers including Braden Kelley, Andrea Meyer, Hutch Carpenter, Adam Hansen and myself live blogged the event, which serves as a record of the event for posterity.  The Twitter feed is #ois09.

To me, a striking aspect of the Summit was the fact that none of the highly accomplished innovation professionals discussed how their respective companies including patents and intellectual property generally in Open Innovation processes.  Indeed, for all of these companies, I was left with the distinct impression that no company substantively addressed IP in the front end their otherwise highly disciplined Open Innovation processes.  This initially surprised me until my turn came to speak about how patents can be used to jump-start Open Innovation to, for example, lower costs, increase speed to market and reduce the risk of new product development.  At that time, I asked for a show of hands of how many attorneys were in the audience; the answer–in a room of over 100 people from some of the leading corporations in the country–was 1 other than me. Continue reading →

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Guest Poster David Boundy: A Detailed Examination of What the Proposed First to File Legislation Means to Business

(Editorial Note:  Last week, I posted my thoughts on the proposed changes to the US patent laws from a first to invent to a first to file system.  In response to my post, I received an exceedingly detailed and substantive comment from David Boundy, Vice President, Ass’t Gen’l Counsel, Intellectual Property at Cantor, Fitzgerald.  (David wanted me to say that this post his personal view, and does not reflect the views of Cantor, Fitzgerald.)  David’s viewpoint on what the proposed legislation will mean to business deserves a forum, and he has graciously allowed me to post his comment in total on the IP Asset Maximizer Blog.  Anyone who works with business to generate patent assets should be concerned about the proposed changes.)

David Boundy of Cantor, Fitzgerald

David Boundy of Cantor, Fitzgerald

About guest poster David Boundy:   David Boundy has spent over a decade on Wall Street, first in several of New York’s most prominent law firms, now as in-house counsel at one of Wall Street’s largest investment banks.   In several years of his career, David as one single lawyer moved more money around based on patents than the entire federal judiciary combined.   David believes that litigation costs and damages should be irrelevant to the current patent reform debate; what matters is the effect on investment flows.

David Boundy’s views on the proposed First to File legislation:

I concur with Jackie on the narrow points of her last paragraphs from her post of last week:  IF the proposed legislation simply changed § 102(g) from “before such person’s invention thereof” to “before such person’s effective filing date,” and IF the currently-pending legislation left in place §§ 102(a) and (b) so that an inventor can “swear behind publications” (don’t forget prior use and sale!), “but not [behind] previously filed patent applications that claim the same or similar invention,” then I think the new statute and first-to-file might work.  As Director Kappos wrote in his blog, IF that were the proposal, the number of affected applications would be small. Continue reading →

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A Closer Look at the Patent Office’s New Conversation about Adoption of a “First to File” Rule and a Proposal for a Win-Win for the Patent Office and Inventors

(Editorial Note:  Regular readers of the IP Asset Maximizer Blog might find this post an departure from the usual topics discussed on this blog.  In the almost 2 years I have been blogging, I have consciously avoided talking about specific aspects of patent law, both in the form of case law, patent reform efforts and the US Patent Office itself because I believe there are many great blogs that do a great job that frequently discuss these topics and that I can likely add little to the already substantive discussions occurring elsewhere.  However, given the great significance of the so-called “first to invent” system to the interests of individual and corporate inventors alike, I felt it appropriate to weigh in on the conversation.  Put simply, any changes in the first to invent rule must clearly flesh out and respond to the resulting effects to businesses of all sizes, as well as unintended consequences that might occur to the operations of the US Patent Office.  I think my business-focused approach to this topic may provide a perspective not seen on the other blogs discussing this topic.  I welcome your comments.)

The first to invent rule is arguably the "third rail" of the US patent system.

The first to invent rule is arguably the "third rail" of the US patent system.

The new Patent Office Administration has hit the ground running.  In just a few months at the helm, David Kappos and his crew have rescinded the controversial continuation rules that had the patent community in an uproar for 2 years, advised the examiner ranks that patent quality does not equate to rejection of applications and has started realigning patent examiners’ workplace incentives so that they are less inclined to reject otherwise allowable applications.  These are all good signs that Mr. Kappos, as well as his boss Commerce Secretary Gary Locke, are serious about fixing the often-Kafkaesque bureaucratic mess that the US Patent Office has been over the past several years.  But, like many things we have seen from the folks in the Obama Administration, these efforts–which only 2 years ago would have seemed almost revolutionary–appear modest now that the Patent Office seems to be reaching for the “third rail” of the US patent system:  the first to invent rule. Continue reading →

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Seeking to Sell Your Patent to a Big Company? Think About These Negotation Tips

Ask the right business questions to succeed from a position of lesser bargaining power

Ask the right business questions to succeed from a position of lesser bargaining power

Over the past year of so, I have become friends with Victoria Pynchon, an accomplished California litigator and ADR expert.  She is a great source of information for people seeking advice in the area of ADR and negotiation, whether IP or otherwise. 

Victoria has just posted some information that I think will be of great use to any entrepreneur or start up that is seeking to sell their patent(s) to a larger entity.  Except for very rare circumstances, these IP owners will be at a significant disadvantage in comparison to the company to which it seeks to sell.  This post, entitled “More on Bargaining from a Position of Weakness” should be the first step before any small IP owner approaches the possible purchaser to help them understand how to succeed in the typically highly uneven bargaining process.

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For Inventor of 21 Patents, Patent Troll Litigation Not Very Lucrative

 

Patent litigation is likely not a viable business model for inventors

Patent litigation is likely not a viable business model for inventors

Recently, I wrote a post on why I think that patent litigation is not a viable business model for inventors.  Given a realistic deconstruction of the costs and possible damage awards, I concluded that, in most situations, it is not realistic for an inventor to presume that she will “hit the jackpot” by suing infringers and extracting settlement or damage awards.  I obtained some pushback from this post, mostly from patent litigation lawyers, who contend that I am wrong in my view that patent litigation does not pay for inventors.  Of course, everyone is entitled to their opinion, and I respect the views of others, however, no one who objects to my (somewhat) negative view of patent litigation as a business model, has provided me with numbers to discount my economic analysis of patent litigation. 

This recent post from The Prior Art blog entitled “Revealed! How Much Money a “Patent Troll” Makes” provides some insight into usually confidential inventor returns when dealing with a patent licensing program.  The underlying patents related to GPS technology and were asserted against several prominent technology companies.  The post gives a rare look into the numbers involved obtained in sending “patent licensing letters” to technology companies.  In sum, the inventor, who obtained 21 patents, has garnered $748K from the total $2.17MM settlement with 4 leading technology companies. 

While $748K is certainly nothing to sneeze at, it does not seem like a huge return on an investment when the patents probably cost $10-$20K each to obtain and took several years of effort on the part of the inventor.  Of course, there is likely much more to the story–especially given the fact that the inventor is currently encarcerated in a Federal Prison–but it nonetheless provides a “peek behind the curtain” of the usually highly confidential settlements involved in patent litigation. 

This Prior Art blog post is definitely a fun read for those who wish to know more.  The key takeaway for me, however, is that there are likely better ways to make money than being an inventor involved in patent troll litigation.  Maybe if you were the law firm or aggregator, that would be a different story, but for 21 patents, this does not seem like a lot of money.  As a friend of mine who is a prominent IP valuation expert said:  “It certainly doesn’t seem to generate income commensurate with the investment or risk.”  

If anyone has non-confidential numbers that would confirm or refute my ongoing belief that patent litigation is in all likelihood a bust for most independent inventors.   As it stands now, the absence of information about what an inventor can make by suing infringers makes it impossible for inventors to generate a realistic view of what they can hope to make by bringing suit against companies.  It may be that the numbers are better than it now appears to me.  But, as someone who works with inventors to provide them strategic and pragmatic business advice, I cannot in good faith recommend that they hope that patent litigation can be a viable source of income for them.

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