Tactics for Coping with New Realities of Monetizing Innovation

Over the last several years the market for monetizing patents has taken a dramatic hit. Perhaps no single event has hurt the industry more than the Supreme Court’s decision in Alice v. CLS Bank. Over the last year since that watershed event, district courts and the Federal Circuit have routine found software innovations ineligible for patent protection. This has led the market for software patents to bottom out, although not completely dry up.

Deals are still being done in the software patent world, but patent valuation is significantly less than even just a few years ago. Certainly, there are areas where there is more interest, for example anything in the so-called “Internet of Things” space seem hot. According to Tim Schnurr, Chief Operating Officer of ICAP Patent Brokerage, the Internet of Things auction ICAP held in April was extremely successful. In fact, so successful was that auction that ICAP Patent Brokerage will host a second Internet of Things auction at the end of July and is already preparing for a third IoT auction later this year. “We experienced significantly more sales volume relative to auctions in the past,” Schnurr explained. “We saw a large spike in buyer interest which gave us a sense that the market is in an upswing it hasn’t seen in several years.”

Not all areas are seeing the same level of interest in this climate though. The Internet of Things space has the benefit of relating to tangible devices (i.e., watches, kitchen appliances, entertainment systems) being connected through the Internet. To the extent there is any safe harbor space generally speaking it has to be in the device area. But still, much of what will power the Internet of Things relates to those things that could potentially (and inaccurately) be described as abstract by a judge unfamiliar with how software operates. Still, the estimates of a $7 trillion market by 2020 have a lot of people stocking up on patent portfolios and searching for new innovations to exploit.

Not all sectors can dangle a $7 trillion market combined with a direct tie to tangible devices. While some in the industry have run from those more amorphous areas there are others who are running in. To a large extent those rushing in where others are rushing out are applying the philosophy of an 18th century British nobleman named Baron Rothschild who is famously quoted as saying: “The time to buy is when there’s blood in the streets.” This contrarian philosophy is based on the realization that when things hit bottom they can’t get any worse, and can only get better. Many in the patent monetization field believe that we are at or near the bottom, at least if we are going to continue to have a patent system things simply can’t get much worse.

Indeed, new business realities have led forward thinking business strategists to look for new ways to monetize innovation in spite of the popularly held belief by many in the U.S. that patents are worthless. Not surprisingly, these new strategies for monetizing innovation focus on tried and true business strategies for building tech companies from the ground up. It is back to business basics.

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Generally speaking, those exploring the new business strategies to monetizing patents and innovation are sophisticated industry insiders. What we are seeing in the industry is akin to what we saw after the rug was pulled out from under investors when the dot com bubble burst. For a time anyone who had a catch URL could raise hundreds of millions of dollars. Attributing the dot com bubble to irrational exuberance was being generous. There were a lot of people making huge money who didn’t know anything about technology or markets. But when things turned those who were just along for the ride were lost. The easy money was gone and they never really understood the industry in the first place.

As patents have become harder to get and even harder to keep, there is no longer a viable business strategy for those who were simply buying a patent or portfolio and rushing to the nearest patent litigation firm as a monetization strategy. The fact that easy money cannot be made by those who are unfamiliar with patents, innovation or the industry as a whole does not mean that there is no money to be made. The path to money is longer, more difficult and requires thoughtful business knowledge and industry acumen.

No one believes that this market swing against patents will last forever, or really for very much longer. If you look at the law of software patents over the last four decades the one constant has been change. Indeed, there has not been a period of longer than three years during which patent attorneys have been able to give clients the same advice relative to seeking patent protection. Thus, most attorneys who operate in this space anticipate there will be further refinements in terms of what software is considered patent eligible.

Simply stated, it stretches the imagination to believe that software will not ultimately be patent eligible given that the Patent Statute specifically and unambiguously states that at least certain software is patent eligible. Thus, the quest over the next 3 to 5 years will be to figure out under what circumstances software innovations will be patent eligible and what level of description will be required in order to achieve strong, valid software patents. In the meantime business must go on.

In January 2015, Michael Gulliford, a former patent litigation partner at Kirkland & Ellis and current Managing Principal of Soryn IP Group, explained: “It has become harder to sell patents for all the same sorts of reasons, but I think it has opened up a window, an opportunity for people that have been in the trenches and really understand the ongoings of the market and patent law, to come up with innovative ways to create, and introduce innovative mechanisms in today’s patent market.” Gulliford would go on to tell me that he works to create companies by crafting their portfolios from day one. “Essentially, my partner and I work to insource a very sophisticated patent operation for a company that ordinarily wouldn’t have had that capability,” Gulliford explained. As an important component of this strategy Gulliford works with a handful of patent prosecution firms that have given him favorable terms because of the bulk work he sends them from the various companies he works with. He works closely with with the investment bankers at an entity called Liquid Venture Partners, which prefer an early IPO strategy to seeking capital from venture capital firms.

At this time of uncertainty now is not the time to try and sell a patent or a patent portfolio. Now is time to hunker down and build, and one viable strategy is the path being pursued by Gulliford, who works with companies of all sizes.

For a long time money could be made with software patents relatively quickly. The business model employed for much of the last decade no longer works to produce any meaningful revenues. Worse, the favored business model employed of the last decade include tremendous risk, both associated with losing the asset and being on the hook for paying the attorneys fees of the alleged infringer. Given the changes in the law over the last several years those easy money days are gone. Those with industry familiarity are shifting is to a historically prudent business responsible approach to growing a company. From early stage innovation to carving out patents from a large portfolio to create new opportunities, there are many options to monetize innovation.