Jul 232011

I love “This American Life” by Ira Glass. Yesterday’s program featured a story on “patent trolls.” First, some captivating and tug-at-the-heartstrings stories, making you feel sorry for people who are being manipulated by the patent system. Next, a story about the notorious Intellectual Ventures. A virtually unknown company, Oasis, was enforcing its patent rights without practicing the invention. Then after a series of riveting and suspenseful sequences, you find out that IV actually gets paid a royalty from Oasis. Connection! They then interviewed a guy from IV and he seemed caught and contradicted. You then feel good to yourself because the bad guy was unearthed in the end.

But just as the program was wrapping up, it started discussing the Nortel auction. I knew where they were going. Google wanted to buy these patents “purely” to defend itself against lawsuits, but then the Apple consortium snatched it up for an unprecedented amount. Then Alex Blumberg started his conclusion.

Think of that. $4.5 billion on patents that these companies almost certainly don’t want for their technical secrets. That $4.5 billion won’t build anything new, won’t bring new products to the shelves, won’t open up new factories that can hire people who need jobs. That’s 4.5 that adds to the price that adds to the price of every product that these companies sell you. 4.5 billion dollars essentially wasted. Buying arms for an ongoing patent war. (Emphasis mine)

I don’t even know where to start with this segment. I guess I could say a lot. Most importantly, I don’t understand how because Google said that they wanted this portfolio purely to defend itself (a claim I am skeptical on), does that mean that all members of the winning consortium also had such plans? So the 6000 patents are junk? I’ve heard the argument before that patents are worthless. I recently ran into a statistic in the blogosphere that I found interesting:

90 percent of all patents are worthless. And of the remaining 10%, most are worth very little. Then only 1% are very worthwhile.

I think I know what this statistic is trying to get at, but recent patent acquisitions have made me question this proposition. True, a patent by itself and taken out of context of what the business does will rarely monopolize an area and prevent others from making work-arounds. Very rarely will a company be able to leverage an invention solely on the language of a patent. But does that mean that the patent is worthless if it is not one of these blockbuster patents?

The ability to raise venture capital shows that a patent brings non-intuitive value. My experience is that having a patent portfolio increases your credibility as a business. This is not only referring to the quality of patent portfolio, but the quantity of patents in the portfolio. Whether you are in a competitive area or more of a niche area, if you’re a small business and you want to go out and raise money, one factor that will come up is your patent portfolio. Otherwise, what is preventing the goliath corporations from snatching up your idea and making it their own?

The next value of a patent is the certain peace of mind that comes when your invention is patented. Not only do you have to worry less about getting sued, you don’t have to worry about as many license offers from those who might sue you.

Finally, patents give you additional muscles to flex. Taking a look at the recent Nortel auction, if 90% of those patents were junk, why did the winners of the auction not fragment the patents into those that they deemed were worthwhile? Either Nortel was the exception to the rule of obtaining junky patents, or there is some value in flexing your patent muscles (especially to NPEs).

Oh yeah, then there’s the value of the actual patent itself–allowing the owner to exclude others using the technology. But apparently, that has become just an afterthought!

 Posted by at 7:55 am
May 172011

If you’ve never watched Shark Tank, I highly recommend it even if reality TV is not your thing. On the show, different entrepreneurs take their turns to get in front of a group of five sharks, high-profile investors. The entrepreneur then gives a business presentation and offers a stake in the company for a certain amount of money. The sharks are not nice people and will only invest in the idea if they think they will get money out of it. A shark can accept the offer or make a counter offer. As you can imagine, many of these businesses involve IP as a major component of the business. I have found that this intangible component is often the most important component to value, however it is often egregiously simplified. For instance, one of the more recent episodes really highlighted this simplistic determination approach in the worth of a firefighter’s patent.

In last weeks’ episode (8), a firefighter presented a hose fastener that is the world’s fastest way of attaching to a hydrant. The sharks were not too interested until he presented another device that hooks on to a hose. Then some eyebrows were really raised. Both were protected under his “patent.” (While he made this claim, I looked up his patent and it is only in the application stage, being filed April of 2010 under patent application number 12661780) The firefighter initially requested 500k for 40% equity in his company. Keep in mind that he had only received purchase orders and no licenses to use the patent.

Mark Cuban immediately threw him a tempting offer. For $1.25M, Cuban would get 100% of the company, hire the firefighter for 3 years at $100k, and give him a royalty on all sales. The firefighter accepted the offer after a little finagling with another shark. The firefighter then walked out the room grinning ear to ear. I don’t know what will happen with this deal. Maybe the show will showcase the developments in a future episode, but there’s a good chance that Cuban got handled because he and the others weren’t asking the right questions.

Every one of the sharks knew (or should have known) that the patent was key to this business. Other than the patent, his business had very little (little or no name recognition, little business). The invention couldn’t be kept as a trade secret as it could be easily reverse-engineered. Without a patent protecting his invention, one of the established hose companies would easily swoop in and copy his idea. So when Cuban offered over a million and a half he was basically buying the firefighter’s patent. Why weren’t any of the questions addressed to the strength of his patent? It beats me. The patent hasn’t even issued yet. There is no protection at this stage because the claims have not cleared novelty, obviousness and 112 requirements. It’s possible that the claims will not pass the patentability threshold at all. Maybe the patentee will have to narrow the claims for patentability-sake. But the more narrow the patent becomes, the less it protects another company from coming in and working around it. Finally, assuming the patent does issue, who is to know that the patent when issued won’t be vulnerable to invalidity. These are all considerations to make when looking at the value of a patent. It should entail thoughtful and deliberate research of the specification, the claims, and the prior art. He could have had one of the strongest patents ever issued. But he also could have had a garbage patent. I just thought it was funny how once the firefighter said that he had a patent, the sharks all gave him the benefit of the doubt that he had a great patent.

I’m not saying that Shark Tank is unrealistic because of the simplification of patent valuation. More likely than anything, it shows what happens when business people assess business deals. They may get caught up in the glamor of the invention and the excitement of the technology without looking deeper into what the particular patent protects. This is risky, especially when the business is the patent. In order to make a correct valuation, the nuts and bolts of the patents must be assessed to see how much the business is really worth.

 Posted by at 10:37 am