The patent management landscape is highly dynamic. Patents are evaluated using traditional financial management techniques as a firm’s strategic asset and integrated with business strategy practices. Patents help enhance the Return on Investment (RoI) and achieve stakeholder wealth maximisation objectives.

Patent owners have the option of commercialising their patents by integrating them into their products and services. They also can leverage their patents to achieve other strategic objectives of the firm by licensing, franchising, joint venture, technology standardisation, etc. They also could monetise their patents by liquidating them through sale, sale-and-leaseback, collateralisation, securitisation, etc. Generally, patent owners first try to commercialise their patents. If the product becomes successful, it creates and enhances opportunities for leveraging their patents through licenses, joint ventures and technology standardisation opportunities. If the market opportunity does not materialise, or if the market opportunity gets exhausted, then the firm may decide to monetise its patents as a salvage value of the project.

One patent examiner informed the author that the Indian patent office has started fixing aggressive targets for examining patent applications. Though this practice would enhance the number of patents granted by India, it would generally bring down the quality of such patents. With such policies, examiners and the patent office indirectly indicate its inclination to pass on the responsibility of determining the scope and value of the patent to the courts as part of litigation. With this, there is a high likelihood that India would see a substantial increase in patent litigation. But as a general approach to business strategy, producing entities are wary of suing others unless it is essential for the organisation’s survival. They believe that litigation detracts them from focusing on their core business and creates unnecessary hostility in the business environment. Instead, they prefer to license their patents to others to maintain healthy business relations and keep transaction costs low while generating additional revenues in the form of licensing revenues. However, such a strategy might not work always.

But with the public policy and the business environment pushing firms into litigation, business managers, instead of focusing on building a patent portfolio and creating technology leadership in the market, would be forced to apply traditional financial tools of RoI on research and development (R&D). Managers would strictly monitor R&D investment against returns from IP commercialisation and IP leverage strategies. If that does not yield acceptable RoI, the management might resort to an IP monetisation strategy.

There are many modes of implementing the IP monetisation strategy. One commonly adopted patent monetisation strategy by patent owning firms is to sell their patents to willing buyers, thereby foregoing its ownership and future usage rights. Other than the business as usual situations of selling patents, three other circumstances pose a fascinating motive for liquidating the patents held by practising entities: corporate divestiture, leveraged buyouts (LBO), and bankruptcy. In a corporate divestiture transaction, business divisions are sold/divested to others with all their assets (including its IP assets). In an LBOs, an insider like the management or the employees decides to buy out all the company’s shareholders using very high financial leveraging with the firm’s assets as collateral for such loans. In both these transactions, the key consideration for the new unit/entity managers would be to divest the IP assets, including patents, as they are the most sought after assets (mainly if they operate in critical technologies). Similarly, in a bankruptcy transaction, the resolution professional/official liquidator would also divest the IP assets of the firm under dissolution.

The other modes of implementing the IP monetisation strategy are sale and leaseback and sale and license back. Here the patent owner would sell to unlock the value in the patent and retain the usage rights on such patentsWhen a practising firm adopts an IP monetisation strategy, they prefer to maximise their sales revenue while selling their IP assets. Generally, the highest bidder in such transactions would be Non-Practicing Entities (NPE) or Patent Assertion Entities (PAE). NPE/PAE do not manufacture products associated with patents, but they are more interested in extracting economic rent from practising infringers. They generally acquire their patents from innovators and academic researchers/institutions, in addition to any of the earlier-mentioned processes/ techniques. With the cost of raising finances dropping precipitously, NOE/PAEs have access to cheap financial resources necessary for acquiring patents essential for building a patent war chest. They also have the necessary skill and resources to acquire patent assets and effectively enforce them against practising infringers.

A recent study found that NPE/PAEs initiate almost 84% of the patent litigation in the USA. Their demand would generally be in the form of settlement amounts closer to the cost of litigating (at about $100,000 to $200,000) but less than the costs associated with actual trial ($1 million to $3 million). Their intention is not to take the case to trial but to seek an early settlement. This motivates most defendants to settle the dispute with NPE/PAE, as it is economical rather than litigating the matter and going through a full trial on the case. Through this approach, NPE/PAEs have extracted economic rent from practising infringers, even though less than 1% of such suits by NPE/PAEs have upheld the validity of such patents or actual infringement. Also, the study noted that more than 50% of the lawsuits brought by NPE/PAEs against practising infringers were against companies with less than $10 million in annual revenue, which would qualify to be a small or a medium enterprise (SME) in India. Such SMEs do not have the necessary financial resources or expertise to counter them and defend themselves against NPE/PAEs. They would agree either to pay huge royalty settlements (in addition to taking a costly license on such patents) or to terminate their infringing activities and close their business activities. If the NPE/PAE decide to go into trial, the SME might file for bankruptcy.

Given such a high cost of patent litigation on SMEs, they need to have a strategy to protect themselves against patent disaggregation risks created by the actions of NPE/PAE. One possible strategy that has been implemented successfully in the USA and Europe is the License On Transfer (LOT). If a practising firm transfers its patents to an NPE/PAE, then any company that has entered into a contract with such firm also automatically get a license on such patents, thereby protecting it against any potential suit from NPE/PAE. Such agreements are generally contingent contracts and would get activated only on the transfer of ownership of patents to the NPE/PAE (either directly through sale or indirectly through bankruptcy/JV/divestiture, etc.). To protect themselves from IP monetisation activities of patent holders, SMEs can negotiate and finalise a bilateral LOT contract with patent holders. Alternatively, they can join an organisation/network that has negotiated such multilateral agreements for and on behalf of all its members. Many organisations are now facilitating such multilateral LOT licenses; LOT Network, Freedom, RPX Open are a few of them.

One such organisation, LOT Network, is a non-profit organisation started in 2014 by Google, Canon, Dropbox, and other leading technology companies like Microsoft, Visa, Disney, Salesforce, eBay, Cisco, Alibaba, Amazon, Daimler, and others. With the help of these companies, it has created a permanent pool of more than 3 million patents, which are available to SMEs to defend themselves against patent assertion suits. For SMEs with less than $25 million annual revenue, the membership is entirely free. But the upside potential of such membership could be substantial, given the expected increase in patent litigation and the costs associated with defending oneself against such litigation.

With the changing patent landscape in India, SMEs would fare better by having a LOT strategy, especially given that the costs associated with such strategy are virtually free with all the organisations that facilitate multilateral LOT licenses for and on behalf of their members. This article provides a quick overview of the rationale and the options available to implement an effective LOT strategy.