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IP monetisation: a primer

Mark Anderson of Anderson Law provides an overview of IP monetisation and explains why it’s not suited to the under-capitalised amateur

IP overview

First, we need to understand the jargon. Intellectual property is a catch-all name for patents, copyright, trademarks, and various other types of intangible property that are recognised by national or international laws. Each of these IP types is different – different subject matter, different duration, different protection. The same type of IP (e.g. patents) may have subtly different protection in different countries.

In very simple terms, patents protect technical inventions and last for 20 years. Copyright lasts much longer and mostly protects creative output such as books, films, music and artwork. For slightly odd and historical reasons, copyright is often the main type of IP protection for computer software. Trademarks protect names, logos and other brands, and can last for ever.

Trade secrets, or confidential ‘know-how’, are often included in IP transactions, particularly technology-based deals. Their main protection may be under trade-secrets laws, which are generally considered a weak form of protection. Once the information becomes publicly known, the competitive advantage is lost.

Other items are sometimes treated in a similar way to IP in monetisation transactions, e.g. the benefits given to a holder of regulatory approvals. For example, a drug developer may have ‘data exclusivity’ in relation to its product licences that prevents a competitor from relying on that data for a period of time, typically six years.

IP transactions may grant rights to a package of benefits, including IP, confidential data and regulatory approvals.

Monetisation methods

Monetising IP refers to making money from IP, which can happen in different ways. Another word that means roughly the same thing as monetisation, and is sometimes seen in European IP transactions, is valorisation. The main ways of monetising or valorising IP are:

1.       Sell your IP. To sell the IP outright (known as assignment of the IP). News items about companies selling their IP portfolios for millions of dollars may give the impression that this is a popular source of generating revenue from IP. In the author’s experience, these types of deals are rare. Much more common are licensing deals, mentioned below.

2.       Sue infringers of your IP (secondary). There are two main types of organisation that might use legal actions against infringers as a source of income generation. The first is organisations that are commercialising products or services that are protected by the IP. Their primary source of revenue may be from the sale of the products or services. Suing infringers (or, sometimes, an explicit or implicit threat of suing) may be a way of preventing competing products or services from being on the market, and of recovering lost profits or damages from those competitors who do infringe. Of course, most litigation is settled by negotiation before a final court decision is reached. Payments made in settlement of claims are an alternative to court-awarded damages.

3.       Sue infringers of your IP (primary). Some IP owners are not involved in commercialising products and services that are protected by the IP. Their revenue generation comes from licensing the IP or suing infringers. This type of IP owner has acquired the unfavourable name ‘patent troll’, as if there is something disreputable about generating revenue in this way. In fact, many such IP owners are highly reputable, e.g. many of the world’s leading universities. What makes someone a troll is the aggressive way in which they pursue infringers, perhaps taking advantage of weaknesses in the legal system when doing so. A more neutral term is non-practising entity, or NPE.

4.       License your IP to others. There are many different business models that involve licensing IP to others. For a university technology transfer office, the task may be to find companies that are interested in developing university technology and bringing it to market. A route to doing this is to license the relevant IP to the company. Another route is to set up a new company to exploit the IP and find investors for that new company. Some IP owners will license the IP because the licensee is better placed than they are to commercialise it – e.g. a small biotech company licensing to a major pharmaceutical organisation. In other cases, IP licensing may be a way of finding additional sources of revenue – e.g. the business owner who franchises their business model to multiple, local outlets. Franchise agreements are often a mixture of trademark and know-how licensing. At the heart of all of these licensing transactions is a structure where the IP owner retains ownership of the IP but permits the licensee to use that IP, typically in return for lump sums and/or royalties.

5.       Sell products and services that are protected by your IP. For many organisations, IP rights are something that they have in reserve, in case an infringer appears. They generate income from selling products and services that are protected by the IP.

It can be seen from the above that some methods of deriving income from IP are more contentious than others. A monetisation strategy may combine litigation and commercial negotiation. An important issue for anyone monetising IP is whether they have a high-quality team whose members, between them, have all the necessary skills to make the most of their IP. A linked issue is whether they have sufficient financial resources to employ IP professionals and play the litigation game, which can be very expensive. IP monetisation is not suited to the under-capitalised amateur.

Are you monetising the IP or the product it protects?

In many cases, the real value is in the product, not the IP that protects it. IP is a tool to help you monetise your products, services, processes, etc. Although IP and other intangibles are sometimes valued in a company’s accounts, the value may be lost if the associated product is unsuccessful, or (in the case of trademarks) if the IP owner’s reputation is tarnished by a corporate scandal.

IP valuation

Accurate valuation of an asset depends on there being a ready market for that asset. In the case of IP, the market for the IP (as distinct from products protected by the IP) may be limited and may fluctuate depending on the commercial success of the underlying products.

Factors that affect value, and which are not always predictable, include the strength of patent claims and other IP, how much of a competitive advantage the IP brings, the size and profitability of the markets for products that are protected by the IP (and whether those products can be brought to market), how the IP will be used (e.g. to improve products, offensively to prevent competition, or defensively as a bargaining chip in pooling arrangements), how rich and determined other parties are that may wish to challenge the IP, and so on.

Different methods of valuation are used. Some of these relate partly to the market potential of the products that are protected by the IP as much as the IP itself. They include:

1.       Net present value. Professional investors in high-tech companies will assess the future revenue potential of the business over a period of years, then use a so-called ‘net present value’ calculation to convert that revenue into a lump sum today. After reducing that lump sum to take account of various risks – that the products will suffer from competition, that the IP will not protect the products, and so on – a valuation is reached. Some organisations have software that will perform this calculation. Ultimately, this method involves a lot of guesswork, and putting different assumptions into the software may product radically different results.

2.       Incurred costs. An IP owner may look at how much the IP has cost (filing fees, advisers’ fees, etc), add a mark-up, and value the IP accordingly. This is usually a poor way of valuing IP. The purchaser or licensee doesn’t care how much the IP cost; they are interested in how much money they can make out of it.

3.       Going rates. When pricing their IP deals, companies sometimes try to use information about similar deals to establish a ‘going rate’. If you have negotiated many IP deals in the past, you may have enough information to know what the going rate is. But there are two weaknesses with this approach. First, many companies have only limited experience of previous IP deals, and it is difficult to find reliable, public information on the financial terms of those deals. Companies that are listed on a US stock exchange typically have to disclose their ‘material contracts’ to the stock exchange, and the contracts are put on a computer system known as EDGAR. But the disclosing company has a right to redact (blank out) sensitive commercial terms from those contracts, which they often do. Some organisations offer to sell you information about prior deals, but it is difficult to know how reliable their information is.Second, any information that you have about previous deals may not be directly applicable to the current deal. The size and profitability of the market opportunity may be different, as may the strength of the IP, the likely competitors and their level of determination, and so on. Information about previous deals is useful but doesn’t always provide a reliable guide.

Risk and reward

IP monetisation can be a high-risk, long-term activity, particularly with unproven technologies. It also has the potential for large rewards. For example, life science companies spend large amounts of money on patent protection, but only a small proportion of their patented inventions reach the market in the form of products or processes. In the hands of well-informed, astute business people, and in support of a sound business strategy, investment in IP can produce good returns.

Mark Anderson is managing partner of Anderson Law, a firm based in Oxford, UK.

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