This week, I got a call out of the blue from a very senior business development person at a Fortune 10 technology company “wanting to know more” about patent licensing and monetization. This was a bit strange: his company has literally dozens of patent professionals on staff, files 100′s of patents a year and, as I found out, has 35 or so business people working on patent licensing and monetization efforts for the organization. So, why would he (let’s call him “Bob”) need to talk to me these topics? Certainly, there is a veritable army of highly-paid smart people to answer IP and patent questions at his beck and call, and I was interested in finding out what Bob sought to find out from me that he could not get from his own people.
I was not surprised to find out that Bob did not want to learn more about buying and selling technology on behalf of his company. Rather, Bob’s interest was personal: he wanted to find out more about patent licensing and monetization because he believes that patent marketplaces are the wave of the future and he wants to participate in what he sees as wide-open business opportunity. He couldn’t talk about his entrepreneurial plans to the corporate IP types at his Fortune 10 technology company, so he called me for some free advice.
I told Bob that I agree that patent monetization is the wave of the future, but not for the reasons most people perceive. That is, in the last few years, a limited market for patents has grown up where patent brokers serve as intermediaries for patent owners who wish to sell patents on behalf of their owners. Patents in this venue are primarily technology-based and primarily serve as freedom to operate. In other words, the company seeking to acquire these patents have already designed a product, but there are patents that prevent or restrict their ability to bring the product to the market. The corporate innovator will then purchase the patent to allow it to sell its product without patent infringement liability. Alternatively, a non-practicing entity (“NPE”)–pejoratively called a “patent troll”–will buy a patent to extract license fees from a company that is selling a product covered by the patent. If the company refuses to license, the NPE will bring a lawsuit against the company either to force a license to eliminate the cost and distraction of the lawsuit or to win a damage award from a court.
People believe this existing patent monetization market is “normal” because it is the prevailing model in existence today. However, with a few exceptions, the established marketplace for patents has existed for less than about 15 years. (In fact, as a young litigation attorney, I represented one of the first NPE’s–AudioFax–in 1997.) As with any nascent business model, the patent monetization market has a lot of growing up to do. Put simply, the existing marketplace is far from “normal.”
I explained to Bob that technology patents represent only a fraction of the number of patents granted every year. So, only a small proportion of the classes of patents are thought of as readily “monetizable” under the existing paradigm. Of this group of patents, only a very small number are considered for sale by their owners. This small percentage of patents in the marketplace today, means that the potential market for patent monetization is almost totally untapped today.
The question is why corporations do not seek to purchase patents today for reasons other than freedom to operate. The products and technology disclosed and claimed in patents by companies are often well-fleshed out and, indeed, likely formed the basis of considerable corporate R&D investment with an eye toward getting the subject matter to market. As Bob acknowledged, companies invest huge sums of money on bringing new things to market, but for any number of reasons, the products may never get there. Some examples include:
- The company may change its business focus;
- The VP support the project may leave the company; or
- There may be no discernible reason at all that a product fails to make it to the market.
If the company is not selling the product or technology disclosed and claimed in its patent, it makes sense that it might be willing to sell it to another company to recover some of the sunk costs or, better yet, to generate an ongoing licensing stream.
In truth, most unused patents effectively lie fallow today even if they cover potentially valuable products and technology. The problem is that there are many more potential sellers of unused patent rights than there are buyers today. I believe that the market for patent licensing and monetization is poised to explode, however, as Open Innovation becomes the de facto management philosophy at more and more US companies. Rather than “baking” products and technology “from scratch” inside their own organizations, we will soon see more companies adopting an externally-facing innovation acquisition strategy. As a result, we will see more companies searching for “half-baked” ideas that can be brought into their organizations and “cooked” to their company’s specifications.
Bob and I spent some time discussing my predictions about the upcoming explosion of the patent monetization market. He then somewhat excitedly said he was thinking about establishing a website where companies could list their patents and inventions for sale. I said “you and a bunch of other entrepreneurs” and recited a laundry list of websites existing today that purport to provide a marketplace for patent sellers, but, in fact, few patent sellers have succeeded in selling their rights in these venues.
To date, I believe that lack of alignment between patents for sale and the number of willing corporate buyers is primarily due to the fact that there has been little reason for corporate innovation professionals to go outside of their organizations to purchase new product and technology ideas. Change is coming, though: corporate downsizing has reduced the number of employees available to develop new products and technology but innovation is recognized to be the way corporations can build sustainable profits. As I told Bob, I strongly believe that as the economy improves and people increasingly seek to buy new innovations after limiting their buying for the past few years, there will simply not be enough people at corporations to generate the number of products needed to satisfy consumer demand. Corporations will then have no choice but to adopt Open Innovation as a significant source of new product and technology development.
I told Bob that there is much opportunity for an entrepreneur like him to develop better ways to bring patent buyers and sellers together. Right now, the existing marketplaces are fractured and confusing. If I was an innovation professional seeking to execute on my management’s mandate to go outside to find ideas, I would find it very difficult to know where to start and would be very willing to pay someone to help me navigate the world of patent monetization. I am hopeful that someone–perhaps it will be Bob–will figure out how to have an “E-Harmony” to match patent buyers and sellers. I think anyone who develops the “killer app” for matching Open Innovation professionals with with patent sellers will be sitting pretty for quite a while.